CA Surendra Agrawal(M.com,LL.B,ACA)ICAI FacultyPh-9313336776

CA Final audit Amendments for Nov 2014 Exam

Chapter IX – Accounts of Companies Chapter IX comprises Sec.128 to Sec.138. The relevant Rules are called Companies (Accounts)

Rules, 2014.

The Companies Act, 2013 The Companies Act, 1956128 Books of account, etc., to be kept by

company209214

Book of account to be kept by companyRights of holding company's representatives and members

129 Financial statement 210211

Annual accounts and balance sheetForm and contents of balance sheet and profit and loss account

132 Constitution of National Financial Reporting Authority

210A Constitution of national advisory committee on accounting standards

133 Central Government to prescribe accounting standards

211A Form and contents of balance sheet and profit and loss account

134 Financial statement, Board's report, etc 215

216

217

Authentication of balance sheet and profit and loss accountProfit and loss account to be annexed and auditors' report to be attached to balance sheet Board's report

135 Corporate Social Responsibility _----- _136 Right of member to copies of audited

financial statement219 Right of member to copies of balance

sheet and auditors' report

137 Copy of financial statement to be filed with Registrar

220 Three copies of balance sheet, etc., to be filed with registrar

138 Internal audit ------ - ■

OVERVIEW

(1) Part 1

(2) Part 2

(3) Part 31. Books of Accounts

2. Financial Statement3. Re–opening of Accounts4. Voluntary Revision of Financial

Statement / Board’s

5. NAFRA6. Prescribed Accounting Standards7. Financial Statement

Approval / Authentication8. Board’s Report

9. Corporate Social Responsibility10. Circulation of Audited Fin.Statement11. Filing Financial Statement with ROC12. Internal Audit

List of abbreviations used: A/c = Account, BOD = Board of Directors, MD = Managing Director, WTD = Whole TimeDirector, CFO = Chief Financial Officer, ROC = Registrar of Companies, NAFRA = National Financial Reporting Authority, CFS= Consolidated Financial Statements, SFS = Separate Financial Statements, CSR = Corporate Social Responsibility.

1. Books of Accounts [Sec.128]

Particulars Description

Items to be kept

1. Books of Accounts,2. Other relevant Books and Papers,3. Financial Statements for every Financial Year.

Basic conditions as to Books

1. True and Fair view of the state of affairs of the Company (and its Branches if any),2. To explain the transactions effected at Registered Office and Branches,3. Accrual Basis, and4. Double Entry System of Accounting.

Place ofKeeping

1. Registered Office,2. Any other place in India as Board of Directors may decide.Note: In case of (2) above, a written notice shall be filed with ROC providing full address of other place.

BranchAccounts

1. For Local or Foreign Branches: [as per Sec.128](a) Proper books of accounts relating to Branch’s transactions shall be kept at the Branch.(b) Proper Summarised Returns shall be sent periodically to the Registered Office, or

other place where books are kept.2. For Foreign Branches [As per Rules]: Summarised Returns of the Books of

A/c kept and maintained outside India shall be sent to the Registered Office at quarterly intervals, which shall be kept and maintained at the Registered Office, and

ElectronicForm

1. Books of Account and other relevant books and papers maintained in electronic mode shall – (a) remain accessible in India so as to be usable for subsequent reference.(b) be retained completely in the format in which they were originally generated, sent

or received, or in a format which shall present accurately the information generated, sent or received and the information contained in the electronic records shall remain complete and unaltered.

(c) be capable of being displayed in a legible form.

2. Information received from Branch Offices shall not be altered and shall be kept in a manner where it shall depict what was originally received from the Branches.

3. There shall be a proper system for storage, retrieval, display or printout of the electronic records as the Audit Committee, if any, or the Board may deem appropriate and such records shall not be disposed of or rendered unusable, unless permitted by law.

4. At the time of filing of Annual Financial Statements to the ROC, the Company should provide the following information in relation to maintenance of the Electronic Records –(a) Name of the Service Provider,(b) Internet Protocol Address of Service Provider,(c) Location of the Service Provider (wherever applicable),

Particulars Description

Period

1. Normal Period: Books of Accounts along with vouchers shall be kept by every Company for 8 preceding Financial Years.

2. Shorter Period: The Company in existence less than 8 years, shall maintain books in respect of all such preceding years.

3. Longer Period: If the Central Government has ordered an investigation on the Company, it should maintain the books for such longer period as directed in this regard.

Inspection ofBooks of A/c– GeneralPoints

1. Items: Books of Accounts, and the other books and papers maintained.2. Inspection: By any Director.3. Place: Registered Office or other place where they are kept.4. Time: During Business Hours.

Inspection ofBooks of A/c– SpecialPoints

1. Foreign Financial Information: The conditions in this regard are –(a) Written Request is required from the Director, not by or through his Power of Attorney Holder or

Agent or Representative.(b) The Request shall set out the full details of the financial information sought, the

period for which such information is sought.(c) Details relating to Financial Information maintained outside India should be

produced for inspection within 15 days from the date of receipt of request.2. Subsidiary Books: Inspection in respect of any Subsidiary of the Company shall be

done only by the person authorized specifically by BOD’s Resolution.3. Others: Officers and Employees of the Company shall give all reasonable

assistance for the inspection, which the Company can be reasonably expected to give.

Non Compliance of Sec 128

1. Persons covered:(a) Managing Director,(b) Whole Time Director in charge of Finance, (c) Chief Financial Officer,(d) Any person authorised by Board of Directors to ensure compliance with Sec.128

2. Punishment:(a) Imprisonment of maximum 1 year, or(b) Fine of Minimum ` 50,000, Maximum ` 5,00,000, or(c) Both.

2. Financial Statement [Sec.129]

Particulars Description

Financial Statements [Sec.2(40)]

“Financial Statement” in relation to a Company, includes – (a) A Balance Sheet as at the end of the Financial Year,(b) A Profit and Loss Account or an Income and Expenditure Account (in the case of a

Company carrying on any activity not for Profit) for the Financial Year,

(c) Cash Flow Statement for the Financial Year,(d) A Statement of Changes in Equity, if applicable, and(e) Any Explanatory Note annexed to, or forming part of, any document referred to above.Note 1: The Financial Statement, with respect to One Person Company, Small Company and

Dormant Company, may not include the Cash Flow Basic Requirements as to Financial Statements

1. Give a true and fair view of the state of affairs of the Company(ies),2. Comply with the Accounting Standards notified u/s 133, and3. Be in the form(s) provided in Schedule III.4. Items contained in Financial Statements shall be in accordance with the Accounting Standards.Above Basic

requirements, not applicable to

1. Any Insurance Company, or2. Any Banking Company, or3. Any Company engaged in the Generation or Supply of Electricity, or

Particulars Description4. Any other Class of Company for which a form of Financial Statement is specified

under the Act governing such class of Company.

Disclosure Exempted under Specific Acts = True and Fair

1. Where the disclosure of certain matters in Financial Statements are not required under the

Governing Act (as listed below), then –

2. Financial Statements shall not be treated as not disclosing a true and fair view of the state of affairs of the Company.

Insurance Company Insurance Act, 1938, or Insurance Regulatory and Development Authority Act, 1999Banking Company Banking Regulation Act, 1949

Company engaged in the Generation or Supply of Electricity Electricity Act, 2003Any other Class of Company, governed under separate Act, for which a form of Financial Statement is specified under that Act

That relevant Act

Transitional Provisions with respect to Accounting Standards

1. Accounting Standards specified under Companies Act, 1956 shall be deemed to be the

Accounting Standards until Accounting Standards are specified by the Central Govt u/s 133.

2. Till NAFRA is constituted u/s 132, the Central Government may prescribe the Accounting Standards or any addendum thereto, as recommended by ICAI in consultation with and after examination of the recommendations made by the If

Fin.Statements do not comply with applicable Accounting

The Company shall disclose in its Financial Statements –1. The deviation from the Accounting Standards,2. The reasons for such deviation, and3. The financial effects, if any, arising out of such deviation.

Presentation atAGM

At every AGM, the Board of Directors shall lay the Financial Statements for the Financial Year, before such AGM.

Consolidated Financial Statements in respect of Subsidiaries

1. A Company having one or more Subsidiaries, shall, prepare and lay at AGM– (a) Its Own Financial Statements (Separate Financial Statements=SFS), and(b) a Consolidated Financial Statement(CFS) of the Company and all its Subsidiaries.

2. CFS shall be in the same form and manner as that of its own, i.e. SFS.3. The Company shall also attach along with its Financial Statement, a separate

Statement containing the salient features of the Financial Statement of its Subsidiary(ies) in Form AOC–1.

4. For this purpose, Subsidiary shall include Associate Company and Joint Venture.Particulars

CFS to be made in accordance withRequired to prepare CFS under AS Sch III and Applicable ASNot Required to prepare CFS under AS

Only Sch III

6. The provisions applicable to the preparation, adoption and audit of the Financial Statements of a

Holding Company, shall equally be applicable for Consolidated Financial Statements.

Power of CG toExempt

• The Central Government may,• on its own or on an application by a class or classes of Companies,• by Notification,• exempt any class or classes of Companies,• from complying with any of the requirements of Sec.129 or the Rules,• if it is considered necessary to grant such exemption in the public interest, and• any such exemption may be granted either unconditionally or subject to such

conditions as may be specified in the Notification.

Non Compliance of Sec.129

1. Person covered:(a) Managing Director,(b) Whole Time Director incharge of Finance, (c) Chief Financial Officer,(d) any person authorised by the BOD to ensure Compliance with Sec.129 (e) All Directors, in case of absence of any of the Officers in point (a) to (d).

Particulars Description2.

Punishment:(a) Imprisonment of Maximum 1 year, or(b) Fine of Minimum `50,000, Maximum ` 5,00,000, or(c) Both.

3. Re–opening of Accounts on Courts’ or Tribunals’ order [Sec.130]

Particulars Description

No Re–opening / Re– casting of Financial Statements

1. Rule: A Company shall not re–open its books of account or not recast its financial statements.

2. Exception: Re–opening of Books/ Re–casting of Financial Statements can be done only if an order is made by a court or Tribunal.

Grounds for re–opening / re–Casting

1. The relevant earlier accounts were prepared in a fraudulent manner, or2. The affairs of the Company were mis–managed during the relevant period,

thereby casting a doubt on the reliability of Financial Statements.

Person Eligible to apply for Reopening / Recasting

1. Central Government,2. Income–Tax Authorities,3. Securities and Exchange Board of India (SEBI),4. Any other Statutory Regulatory Body or Authority, or5. Any person concerned.

Order by Court / Tribunal

1. Court or Tribunal shall give notice to above Persons [1 to 4 (not 5) above] and shall take into consideration the representations made, if any before passing an order.

2. The accounts so revised or re–cast pursuant to the order shall be final.

4. Voluntary Revision of Financial Statements or Boards’ Report [Sec.131]Particulars Descriptio

nGrounds forRevision[Sec. 131(1)]

If it appears to the Directors of the Company that –(a) The Financial Statement of the Company, or do not comply with the provisions of

Sec. 129 or Sec.

Restrictions / Conditions for Revision[Sec. 131(2)]

1. Revision can be in any of the 3 preceding financial years.2. Revised Financial Statement or Report shall not be prepared or filed more than once in a

Financial Year.3. Reasons for revision of such Financial Statement or Report shall also be disclosed in the

Board's report in the relevant financial year in which such revision is being made.If the copies of the previous Financial

Statement or Report have already The revision must be confined to –

(a) Sent out to Members, or(b) delivered to the Registrar, or(c) laid before the Company in General

Meeting

(a) The correction in respect of which the previous Financial Statement or Report do not comply with the provisions of Sec. 129 or Sec. 134, and

(b) The making of any necessary consequential alternation.

Procedure

1. The Company shall apply to the Tribunal for its approval.2. Tribunal shall give notice to (a) the Central Government, and (b) Income Tax

Authorities, and shall take into consideration the representations, if any, made.3. Tribunal shall pass an order thereon.4. A copy of the Tribunal’s order shall be filed with the ROC.5. Board shall effect the revision in Financial Statement / Report as per above order.

Power of CG to make Rules [Sec. 131(3)]

Central Government may make Rules as to the application of the Act in relation to Revised FinancialStatement or a Revised Director's Report, covering the following–1. make different provisions according to which the previous Financial Statement or

Report are replaced or are supplemented by a document indicating the corrections

(a) Investigation

• NAFRA have the power to investigate, either suo motu or on a reference made to it by the Central Government, for specified class of Bodies Corporate or Persons, into the matters of professional or other misconduct committed by any Member or Firm of Chartered Accountants, registered under the CA Act, 1949.

• Where NAFRA has initiated an investigation, no other Institute or Body shall initiate or continue any proceedings in such matters of misconduct.

(b) Civil Court

Powers

NAFRA have the same powers as are vested in a Civil Court under the Code of Civil Procedure,1908, while trying a suit, in respect of –• discovery and production of books of account and other documents, at the

place and time specified by it,• summoning and enforcing the attendance of persons and examining them on oath,• inspection of any books, registers and other documents of any person at any

(c) Punish for professional misconduct

Where professional or other misconduct is proved, NAFRA have the power to make order for –ƒ Imposing penalty of –

(i) Minimum ` 1,00,000, Maximum five times of Fees Received, in case of Individuals, and(ii) Minimum ` 10,00,000, Maximum ten times of Fees Received, in case of

Particulars Description2. make provisions with respect to the functions of the Company's Auditor in

relation to theRevised Financial Statement or Report,

3. require the Directors to take such steps as may be prescribed.

5. National Financial Reporting Authority (NAFRA) [Sec.132]1. Constitution [Sec.132(1)]: The Central Govt may, by notification, constitute a National Financial Reporting Authority

(NAFRA) to provide for matters relating to Accounting and Auditing Standards under the Companies Act 2013.

2. Members [Sec.132(3)]: NAFRA shall consist of –(a) A Chairperson, who shall be a person of eminence and having expertise in Accountancy, Auditing,

Finance or Law to be appointed by the Central Government, and(b) Other Members not exceeding fifteen, consisting of part–time and full–time Members as may be prescribed.

3. Conditions as to Members of NAFRA [Sec.132(3) Provisos]:(a) Terms and Conditions: Terms and Conditions and the manner of appointment of the Chairperson

and Members shall be prescribed by Central Government.(b) Independence / Conflict of Interest: Chairperson and Members shall make a declaration to the Central

Government regarding no conflict of interest or lack of independence in respect of his or their Appointment. (c) No Nexus with Audit Firm: The Chairperson and Members, who are in full–time employment with NAFRA, shall

not be associated with any Audit Firm (including related Consultancy Firms) during the course of theirappointment and two years after ceasing to hold such appointment.

4. Scope of NAFRA’s Duties [Sec.132(2)]:(a) Make recommendations to the Central Government on the formulation and laying down of Accounting and

Auditing Policies and Standards for adoption by Companies or class of Companies or their Auditors, (b) Monitor and enforce the compliance with Accounting and Auditing Standards in prescribed manner,(c) Oversee the Quality of Service of the Professions associated with ensuring compliance with such

Standards, and suggest measures required for improvement in Quality of Service and such other related matters as may be prescribed, and

(d) Perform such other functions relating to the above points (a), (b) and (c) as may be prescribed.Note: The above areas shall be NAFRA’s duties, notwithstanding anything contained in

any other law.5. Investigation and Other Powers of NAFRA [Sec.132(4)]: Notwithstanding anything contained in any

other law, NAFRA shall have the following powers –

Note: “Professional or Other Misconduct” shall have the same meaning as u/s 22 of the CA Act, 1949.

Approval Before submission to the Auditor for his report, the Financial Statement, including Consolidated FinancialStatement, shall be approved by the Board of Directors.

Signing

The signing requirements of Financial Statement are as below –(a) By the Chairperson of the

Company, where he is authorised by the Board, or

(b) By two Directors out of which one shall be Managing Director,

AND

(a) The Chief Executive Officer, if he isa Director in the Company,

wherever (b) The Chief Financial Officer, and they are (c) The Company Secretary of the appointed

CompanyNote: In case of a One Person Company, the Financial Statement shall be signed only by one Director.

6. Appeal against NAFRA’s Orders [Sec.132(5) to (9)]:(a) Constitution

[Sec. 132(6)]The Central Government may, by notification, constitute, an Appellate Authority consisting of a Chairperson and not more than two other Members, to be appointed by the Central Government, for hearing appeals arising out of the orders of the NAFRA.(b) Appellant

[Sec. 132(5)]Any person aggrieved by any order of the NAFRA u/s 132(4)(c), may prefer an appeal before the Appellate Authority constituted u/s 132 (6).

(c) Appellate Authority [Sec. 132(7)]

The Central Government shall prescribe –• qualifications for appointment of the Chairperson and Members of Appellate Authority,• manner of selection,• terms and conditions of their service,• requirement of the supporting staff, and• procedure (including places of hearing the appeals, form and manner in which

the appeals shall be filed) to be followed by the Appellate Authority.(d) Fees [132(8)] The Fee for filing the appeal shall be prescribed by the Central Government.

(e) Annual Report

[Sec. 132(9)]

• The Officer authorised by the Appellate Authority shall prepare its Annual Report giving a full account of its activities.

• He shall forward a copy thereof to the Central Government.• Central Govt shall cause the Annual Report to be laid before each House of Parliament.

7. NAFRA’s Working and Administration [Sec.132(10) to (15)]:(a) Procedure

[Sec. 132(10)]

NAFRA shall meet at such times and places and shall observe rules of procedure in regard to the transaction of business at its meetings in such manner as prescribed.

(b) Secretary and Employees [Sec.

• The Central Government may appoint a Secretary and other Employees as it may consider necessary for the efficient performance of functions by the NAFRA.

• The terms and conditions of service of the Secretary and Employees shall be prescribed by the Central Government.(c) Head Office

[Sec. 132(12)]

• The Head Office of the NAFRA shall be at New Delhi.• NAFRA may meet at such other places in India as it deems fit.

(d) Books[Sec. 132(13)]

NAFRA shall maintain books of account and other books in relation to its accounts, in the form and manner prescribed by the Central Government, in consultation with the C&AG of India.

(e) Audit[Sec. 132(14)]

• NAFRA’s accounts shall be audited by the C&AG at specified intervals.• The accounts as certified by the C&AG, together with the Audit Report

thereon shall be forwarded annually to the Central Government by NAFRA.

(f) Annual Report

[Sec. 132(15)]

• NAFRA shall prepare its Annual Report, giving a full account of its activities during the

Financial Year.• NAFRA shall forward a copy thereof to the Central Government.• The Central Government shall cause the Annual Report and the Audit Report given by the

6. Central Government to prescribe Accounting Standards [Sec.133]The Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted u/s 3 of the Chartered Accountants Act, 1949, in consultation with and after examination of the recommendations made by the NAFRA.

7. Financial Statement Approval / Authentication [Sec.134]

1. Signing of Financial Statements [Sec. 134(1)]:

2. Circulation of Financial Statement [Sec. 134(7)]: A signed copy of every Financial Statement, including

Consolidated Financial Statement, if any, shall be issued, circulated or published along with a Copy each of– (a) any Notes annexed to or forming part of such Financial Statement,(b) the Auditor’s Report, and(c) the Board’s Report referred u/s 134 (3).

Note: Auditors’ Report shall be attached to every Financial Statement. [Sec. 134 (2)]

8. Board’s Report [Sec.134]To the statements laid before a Company in General Meeting, a Report by its Board of Directors shall be attached. The provisions in this regard are –

1. Basis = SFS [Rules]:(a) The Board’s Report shall be prepared based on the stand–alone Financial Statements of the Company.(b) The Report shall contain a separate section wherein a report on the performance and financial

position of each of the Subsidiaries, Associates and Joint Venture Companies included in the Consolidated Financial Statement is presented.

2. Signature of Board’s Report [Sec.134(6)]: The Board’s Report and any annexures thereto shall be signed by – (a) Chairperson of the Company if he is authorised by the Board,(b) where Chairperson is not so authorised, by atleast two Directors, one of whom shall be a Managing Director, or(c) by the Director where there is one Director.

3. Contents [Sec.134 (3)]: This Board’s Report shall include the following – (a) the extract of the Annual Return as provided u/s 92 (3),(b) Number of Meetings of the Board,(c) Directors’ Responsibility Statement, [See Point 4](d) a Statement on Declaration given by Independent Directors u/s 149(6),(e) in case of a Company covered u/s 178(1), Company’s Policy on Directors’ Appointment and

Remuneration, including criteria for determining qualifications, positive attributes, independence of a Director and other matters provided u/s 178(3),

(f) Explanations or Comments by the Board on every Qualification, Reservation or Adverse Remark or

Disclaimer made–(i) by the Auditor in his report, and(ii) by the Company Secretary in practice in his Secretarial

Audit Report, (g) Particulars of Loans, Guarantees or Investments u/s 186,(h) Particulars of Contracts or Arrangements with Related Parties referred to u/s 188(1) in Form AOC–2, (i) the state of the Company’s affairs,(j) the Amounts, if any, which it proposes to carry to any Reserves,(k) the Amount, if any, which it recommends should be paid by way of Dividend,(l) Material Changes and Commitments, if any, affecting the Financial Position of the Company

which have occurred between the end of the Financial Year of the Company to which the Financial Statements relate and the date of the Report,

(m) the Conservation of Energy, Technology Absorption, Foreign Exchange Earnings and Outgo, [See Point 5],(n) a Statement indicating development and implementation of a Risk Management Policy for

the Company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the Company,

(o) the details about the policy developed and implemented by the Company on Corporate Social Responsibility

initiatives taken during the year, as per Annexure attached to Companies (CSR) Rules, 2014,(p) in case of a Listed Company and every other Public Company having Paid–Up Share Capital of `

25 Crores or more, a Statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its Committees and individual Directors,

(q) such other matters as may be prescribed. [See Point 4]

4. Directors’ Responsibility Statement [Sec.134(5)]: The Directors’ Responsibility Statement referred u/s 134(3)(c)

shall state the following –(a) in the preparation of the Annual Accounts, the applicable Accounting Standards had been followed

along with proper explanation relating to material departures,(b) the Directors had selected such accounting policies and applied them consistently and made

judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the Financial Year and of the Profit and Loss of the Company for that period,

(c) the Directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities,

(d) the Directors had prepared the annual accounts on a going concern basis, and(e) the Directors, in the case of a Listed Company, had laid down Internal Financial Controls to be followed by the

Company and that such Internal Financial Controls are adequate and were operating effectively.

(f) the Directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

Note: “Internal Financial Controls” means the policies and procedures adopted by the Company 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.

5. Information u/s 134(3)(m): The Board’s Report shall contain the following information and details –(a)

Conservation of Energy

• Steps taken or impact on Conservation of Energy,• Steps taken for utilizing alternate sources of Energy,• Capital Investment on Energy Conservation Equipments.

(b) TechnolgyAbsorption

• Efforts made towards Technology Absorption,• Benefits derived like Product Improvement, Cost Reduction, Product Development or Import

Substitution,• In case of Imported Technology (imported during the last 3 years reckoned

from the beginning of the financial year) –(i) Details of Technology imported, (ii) Year of Import,(iii) Whether the Technology has been fully absorbed,(iv) If not fully absorbed, areas where absorption has not taken place, and reasons thereof.(c) Foreign

Exchange Earnings and Outgo

• Foreign Exchange earned in terms of actual inflows during the year,• Foreign Exchange outgo in terms of actual outflows during the year.

6. Information u/s 134(3)(q): The Board’s Report shall also contain the following – (a) Financial Summary or Highlights,(b) Change in the nature of Business, if any,(c) Details of Directors or Key Managerial Personnel who were appointed or have resigned during the year,(d) Names of Companies which have become or ceased to be its Subsidiaries, Joint Ventures, or

Associate Companies during the year,(e) Details relating to Deposits, covered under Chapter V of

the Act – (i) accepted during the year,(ii) remained unpaid or unclaimed as at the end of the year,(iii) whether there has been any default in repayment of Deposits or payment of Interest thereon

during the year and if so, number of such cases and the total amount involved –• at the beginning of the year,• maximum during the year,

• at the end of the year,(f) Details of Deposits which are not in compliance with the requirements of Chapter V of the Act,

.

(g) Details of significant and material orders passed by the Regulators or Courts or Tribunals impacting the Going

Concern Status and Company’s operations in future,(h) Details in respect of adequacy of Internal Financial Controls with reference to the Financial Statements.

7. Other Points:

Punishment for Contravention of Sec.134 [Sec.134(8)]

1. For Company: Fine of Minimum ` 50,000, Maximum ` 25,00,000.2. For every Officer in Default:

(a) Imprisonment of maximum 3 years, or(b) Fine of Minimum ` 50,000, Maximum ` 5,00,000, or(c) Both.

For One Person Company [Sec.134(4)]

In case of a One Person Company, the Board’s Report u/s 134 shall mean a Report containing explanations or comments by the Board on every Qualification, Reservation or Adverse Remark or Disclaimer made by the Auditor in his Report. [Note: No other detailed contents required.]

9. Corporate Social Responsibility – CSR [Sec.135]

CORPORATE SOCIAL RESPONSIBILITY (Sec. 135 of the Companies Act, 2013)

1. Applicability (a) Sec. 135 applies to a company (including a foreign company) only if it satisfies one or more of the following criterion during any financial year:(i)The net worth of the company is Rs. 500 crore or more.(ii)The turnover of the company is Rs. 1,000 crore or more.(iii)The net profit of the company is Rs. 5 crore or more.(b) Every company which ceases to fulfill the above criteria for 3 consecutive financial years shall not be required to -(a)constitute CSR Committee; and(b)comply with the provisions contained in Sec. 135, till such time it meets the criteria specified above.

2. Constitution of CSR Committee

(a)Every company to which Sec.135 is applicable, shall constitute a Corporate Social Responsibility Committee of the Board (CSR Committee).(b)The CSR Committee shall consist of 3 or more directors.(c)Out of the 3 directors, at least 1 director shall be an independent director.(d)An unlisted public company or a private company which is not required to appoint an independent director (as per Sec. 149 of the Companies Act, 2013), shall have its CSR Committee without any independent director.(e)A private company having only 2 directors on its Board, shall constitute its CSR Committee with 2 directors only.(f)In case of a foreign company, the CSR Committee shall comprise of at 2 two persons of which one person shall be a person resident in India authorised to accept on behalf of the foreign company service of notices and other documents, and the other person shall be nominated by the foreign company.

3.Duties of the CSR Committee

(a)The CSR Committee shall formulate and recommend to the Board, a CSR Policy. CSR Policy shall indicate the activities to be undertaken by the company as specified in Schedule VII.(b)CSR Committee shall recommend the amount of expenditure to be incurred on the CSR activities to be undertaken by the company.

.

(c)CSR Committee shall monitor the CSR Policy of the company from time to time.(d)The CSR Committee shall institute a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken by the company.

4. Duties of the Board

(a) The Board shall, after taking into account the recommendation made by the CSR committee, approve the CSR Policy for the company(b)the board shall ensure that the activities as are included in csr policy are undertaken by the company.(c) The Board shall ensure that the company spends in every financial year, at least 2% of the average net profits of the company made during the 3 immediately preceding financial years, in pursuance of its CSR Policy. 'Average net profit' shall be calculated in accordance with the provisions of Sec. 198. The company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities.

5. Disclosures in Board's report

The Board's report shall disclose -(a)the composition of the CSR Committee;(b)the contents of CSR Policy; and(c)the reasons for not spending the amount of 2% in pursuance of its CSR Policy (in case the company fails to spend such amount).

6. Definition of CSR

Rule 2 of the Companies (Corporate Social Responsibility Policy) Rules, 2014 defines CSR as follows:'Corporate Social Responsibility (CSR)' means and includes but is not limited to -(i)Projects or programs relating to activities specified in Schedule VII to the Act; or(ii)Projects or programs relating to activities undertaken by the board of directors of a company (Board) in pursuance of recommendations of the CSR Committee of the Board as per declared CSR Policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act

7. Activities not amounting to CSR

As per Rule 4 and Rule 6 of the Companies (Corporate Social Responsibility Policy) Rules, 2014, following shall not amount to CSR Activities for the purpose of Sec. 135:(a)The CSR projects or programs or activities undertaken outside India.(b)The CSR projects or programs or activities that benefit only the employees of the company and their families.(c)Contribution of any amount, directly or indirectly, to any political party u/s 182 of the Companies Act, 2013.(d)Any activity undertaken in pursuance of normal course of business of a company.

8. Manner of implementing CSR Policy

Rule 4 of the Companies (Corporate Social Responsibility Policy) Rules makes the following provision with respect to manner of implementation of CSR Policy:(a)The CSR activities shall be undertaken by the company, as per its stated CSR Policy.(b)A company may undertake CSR activities through a

.

registered trust or a registered society or a company established by the company or its holding or subsidiary or associate company, subject to fulfillment of the following 2 conditions:(i)If such trust, society or company is not established by the company or its holding or subsidiary or associate company, it shall have an established track record of 3 years in undertaking similar programs or projects.(ii)The company has specified the project or programs to be undertaken through theseentities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism.(c)A company may also collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR Committees of respective companies are in a position to report separately on such projects or programs.(d)Companies may build CSR capacities of their own personnel as well as those of their Implementing agencies through Institutions with established track records of at least 3 financial years but such expenditure shall not exceed 5% of total CSR expenditure of the company in one financial year.

9. CSR Reporting Rule 8 of the Companies (Corporate Social Responsibility Policy) Rules, 2014, makes the following provisions with respect to CSR Reporting:(a) The Board's Report pertaining to any financial year commencing on or after the 1st day of April, 2014 shall include an annual report on CSR.(b) In case of a foreign company, the balance sheet filed u/s 381 of the Companies Act, 2014 shall contain an Annexure regarding report on CSR.

10. Display of CSR policy on the website

The Board shall place the contents of CSR Policy on the company's website, if any, in such manner as may be prescribed.As per Rule 9 of the Companies (Corporate Social Responsibility Policy) Rules, 2014 and Rule 6 of the Companies (Accounts) Rules, 2014, the CSR Policy and its contents shall be displayed on the company's website, if any, as per the particulars specified in the Annexure to the Companies (Corporate Social Responsibility Policy) Rules, 2014.

11. CSR Activities to be in accordance with Schedule VII

The Board shall ensure that activities included by a company in its CSR Policy fall within the purview of the activities included in Schedule VII.

Schedule VII contains such activities which may be undertaken by the companies in pursuance of their CSR Policy. The activities specified under Schedule VII are as under:(i)Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water(ii)Promoting education, including special education and

.

employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects(iii)Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups(iv)Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water(v)Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts(vi)Measures for the benefit of armed forces veterans, war widows and their dependents(vii)Training to promote rural sports, nationally recognised sports, paralympic sports and Olympic sports(viii)Contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women(ix)Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government(x)Rural development projects.

10. Right of Members to Copies of Audited Financial Statements [Sec.136]Particulars Descriptio

n

Items to be circulated

1. Copy of the Financial Statements, including Consolidated FinancialStatements, if any, which are to be2. Auditor’s Report, and laid before a

Company in its3. Every other document required by law to be annexed or attached to General Persons entitled to receive above

1. Every Member of the Company,2. Every Trustee for the Debenture–holder of any Debentures issued by the Company, and3. All Persons other than such Member or Trustee, being the person so entitled.Time Limit Not less than 21 days before the date of the Meeting.

Inspection A Company shall allow every Member or Trustee of the Holder of any Debentures issued by theCompany to inspect the above documents at its Registered Office during business hours.Punishment for

Non–Compliance1. For Company: Penalty of ` 25,0002. For every Officer in Default: Penalty of ` 5,000

.

Special Points forListed Companies

1. Copies of above documents should be made available for inspection at its Registered Office during working hours for a period of 21 days before the date of the Meeting.

2. Unless the Shareholders ask for full Financial Statements, the Company may circulate as under, not less than 21 days before the date of the Meeting –Items to be sent To whom sent?

(a) A Statement containing the salient features

of these documents in Form AOC–3, or(b) Copies of the documents,

as the Company may deem fit.

(a) To every Member of the Company, and(b) To every Trustee for the Holders of any

Special Points for Circulation in certain cases

In case of all Listed Companies and Public Companies which have a Net Worth of more than ` 1Crore and Turnover of more than ` 10 Crores, the Financial Statements may be sent –1. By Electronic Mode to Members whose Shareholding is in Demat Form, and whose

email ids are registered with the Depository for communication purposes,2. By Electronic Mode to Members who have positively consented in writing to

receiving by electronic mode, where the Shareholding is not in Demat Form,3. By Despatch of Physical Copies through any recognised mode of delivery u/s 20, in all Website

Hosting by Listed Companies

A Listed Company shall also place its Financial Statements including Consolidated Financial Statements, if any, and all other documents required to be attached thereto, on its Website, which is maintained by or on behalf of the Company.

Particulars Description

For HoldingCompanies

Every Company having a Subsidiary or Subsidiaries shall –1. place Separate Audited Accounts in respect of each of its Subsidiary on its Website, if any,2. provide a copy of Separate Audited Financial Statements in respect of each of its

Subsidiary, to any Shareholder of the Company who asks for it.

11. Copy of Financial Statement to be filed with Registrar [Sec.137]

Particulars DescriptionDocuments

to be filed with ROC

Following documents duly adopted at the AGM of the Company, should be filed with ROC –1. Copy of the Financial Statements, including Consolidated Financial Statement, if any, along with2. All the documents which are required to be or attached to such Financial Statements Time Limit Within 30 days of the date of AGM.

Manner 1. Fees or Additional Fees as may be prescribed within the time specified u/s 403, shall be paid.2. Company shall file the Financial Statements with ROC, together with Form AOC–4.

If Financial Statement not adopted at AGM

1. Where the Financial Statements are not adopted at AGM or adjourned AGM, such Unadopted Financial Statements along with the required documents shall be filed with the ROC within 30 days of the date of AGM.

2. The Registrar shall take them in his records as provisional till the Financial Statements are filed with him after their adoption in the adjourned AGM for that purpose.After

adoption at adjourned AGM

Adopted Financial Statements shall be filed with the Registrar within 30 days of such adjourned AGM, with fees or additional fees.

If AGM not held [Sec.137(2)]

If the AGM for any year has not been held, the following shall be filed with the ROC within 30 days of the last date before which the AGM should have been held, along with prescribed fees –1. Financial Statements and other documents as normally required, duly signed,2. Statement of Facts and Reasons for not holding the AGM.

For One PersonCompany

A One Person Company shall file a copy of the Financial Statements duly adopted by its Member, along with all the documents which are required to be attached to such Financial Statements, within 180 days from the closure of the Financial Year.

Subsidiaries outside India

Along with its Financial Statements to be filed with ROC, a Company shall attach the accounts of its Subsidiary or Subsidiaries which have been incorporated outside India and which have not established their place of business in India.

.

Punishment for Contravention [Sec.137(3)]

1. Act / Omission: Failure to file the copy of Financial Statements u/s 137(1)/(2), within the period specified u/s 403, i.e. 270 days from the date on which it should have been filed.

2. Persons punishable:

(a) Company itself,(b) the Managing Director and the Chief Financial Officer of the Company, if any,(c) in the absence of the MD and CFO, any other Director who is charged by the

Board with the responsibility of complying with the provisions of Sec.137,(d) in the absence of any such Director, all the Directors of the Company.

3. Punishment:(a) For Company: Fine of ` 1,000 per day during which failure continues, Maximum ` 10,00,000. (b) Other Persons in Default:

• Imprisonment of maximum 6 months, or• Fine of Minimum ` 1,00,000, Maximum ` 5,00,000, or

12. Internal Audit [Sec.138]The provisions relating to Internal Audit are as under –

Particulars Description

Companies required to appoint Internal Auditor

1. Every Listed Company2. Every Unlisted Public Company, during the preceding Financial

year having – (a) Paid Up Share Capital of ` 50 Crores or more, or(b) Turnover of ` 200 Crores or more, or(c) Outstanding Loans or Borrowings from Banks or Public Financial Institutions exceeding ` 100

Crores or more at any point of time during the preceding financial year, or(d) Outstanding Deposits of ` 25 Crores or more at any point of time during the

preceding financial year.3. Every Private Company having –

(a) Turnover of ` 200 Crores or more during the preceding financial year, or(b) Outstanding Loans or Borrowings from Banks or Public Financial Institutions exceeding ` 100Existing

CompaniesExisting Company covered under any of the above criteria shall appoint Internal Auditor within the month of Sep 2014 (i.e. 6 months from the commencement of this section).

Conditions asto appointment

1. Internal Auditor may be an Individual or a Firm.2. Internal Auditor, shall either be a Chartered Accountant or a Cost Accountant, or

such other Professional as may be decided by the Board to conduct internal audit of the functions and activities of the Company.

3. The term Chartered Accountant shall mean a CA, whether engaged in practice or not.4. The Internal Auditor may or may not be an Employee of the Company.

Other Points1. The Audit Committee or the Board shall, in consultation with the Internal Auditor,

formulate the scope, functioning, periodicity and methodology for conducting the internal audit.

2. Manner and Intervals of Internal Audit shall be prescribed by the Central Government.

.

Chapter X – Audit and Auditors

Chapter X comprises Sec.139 to Sec.148. The relevant Rules are called Companies (Audit and Auditors) Rules, 2014.

The Companies Act, 2013 The Companies Act, 1956

139 Appointment of auditors 224, 619 Appointment and remuneration of auditors

Application of sections 224 to 233 to Government companies

140 Removal, resignation of auditor and giving of special notice

225 Provisions as to resolutions for appointing or removing auditors

141 Eligibility, qualifications and disqualifications of auditors

226 Qualifications and disqualifications of auditors

142 Remuneration of auditors 224(8) Appointment and remuneration of auditors

143 Powers and duties of auditors and auditing standards

227, 228

619

Powers and duties of auditors

Audit of accounts of branch office of company

Application of sections 224 to 233 to Government companies

144

_________...............

Auditor not to render certain services - -

145 Auditor to sign audit reports, etc 229 230 Signature of audit report, etc.

Reading and inspection of auditor's report

146 Auditors to attend general meeting 231 Right of auditor to attend general meeting

147 Punishment for contravention232 233

Penalty for noncompliance with sections 225 to 231

Penalty for non-compliance by auditor with sections 227 and 229

148 V . . . .........................................................................................................

Central Government to specify audit of items of cost in respect of certain companies

233B Audit of cost accounts in certain cases

.

OVERVIEW

(1) Qualifications (2) Appointment (3) Removal, Rights, Misc, etc.1. Qualifications of Auditors2. Disqualifications of Auditors3. Auditor not to render Certain

Services4. Remuneration of Auditors5. Audit of Branches

1. Appointment of First Auditors2. Appointment of Auditors of Govt

Companies

3. Appointment of Auditors at AGM4. Manner & Procedure for

Selection & Appointment of Auditors

5. Casual Vacancy6. Re–appointment of Retiring

1. Removal of Auditors before expiry of term

2. Removal of Auditors at AGM3. Change of Auditors based on

Tribunal’s Direction

4. Resignation of Auditors5. Rights of Auditors6. Duties of Auditors7. Punishment for Contravention

1. Qualifications

1.1 Qualifications of Auditors [Sec.141(1), (2)]

1. A person shall be eligible for appointment as an Auditor of a Company only if he is a Chartered Accountant.2. A Firm whereof majority of the Partners practising in India are qualified for appointment, as

aforesaid, may be appointed by its Firm Name to be the Auditors of a Company.3. Where a Firm (including a LLP) is appointed as Auditor of the Company, only the Partners who are Chartered

Accountants are authorised to act and sign on behalf of the Firm.

1.2 Disqualifications of Auditors [Sec.141(3), (4) and Rules]1. Disqualifications [Sec.141(3)]: The following persons are not eligible for appointment as an Auditor of

a Company – (a) a Body Corporate other than a Limited Liability Partnership,(b) an Officer or Employee of the Company,(c) a Person who is a Partner, or who is in the employment, of an Officer or Employee of the Company, (d) a Person who, or his Relative or Partner –

(i) is holding any security of or interest in the Company or its Subsidiary, Holding or Associate Company or a

Subsidiary of such Holding Company. (Note: A Relative may hold security or interest in the Company of FaceValue not exceeding ` 1,00,000.)

(ii) is indebted to the Company or its Subsidiary, Holding or Associate Company or a Subsidiary of such Holding

Company, in excess of ` 5,00,000, or(iii) has given a guarantee or provided any security in connection with the indebtedness of any

third person to the Company, or its Subsidiary, Holding or Associate Company or a Subsidiary of such Holding Company, in excess of ` 1,00,000.

(e) a Person or a Firm who, whether directly or indirectly, has business relationship with the Company, or its

Subsidiary, Holding or Associate Company or Subsidiary of such Holding Company or Associate

.

Company,(f) a Person whose Relative is a Director or is in the employment of the Company as a Director or Key

Managerial Personnel,(g) a Person who is in full time employment elsewhere or a person or a Partner of a Firm holding

audits of more than 20 Companies on the date of appointment or re–appointment as Auditor,(h) a Person who has been convicted by a Court, of an offence involving fraud, and a period of 10

years has not elapsed from the date of such conviction,

.

(i) any Person whose Subsidiary or Associate Company or any other form of Entity, is engaged as on the date of appointment, in consulting and specialised services as provided in Sec.144.

Note: For the purposes of Point (e) above, Business Relationship shall be construed as any transaction entered into for a commercial purpose, except –(a) Commercial Transactions which are in the nature of Professional Services permitted to be rendered by an

Auditor or Audit Firm under the Companies Act or CA Act and Rules / Regulations thereunder(b) Commercial Transactions in the ordinary course of business of the Company at Arm’s Length

Price, like sale of products or services to the Auditor, as Customer, in the ordinary course of business, by Companies engaged in the business of telecommunications, airlines, hospitals, hotels and such other similar businesses.

2. Subsequent Disqualification = Casual Vacancy: If an Auditor, after his appointment, becomes subject to any of the above disqualifications, he shall be deemed to have automatically vacated his office and that vacancy shall be considered to be a Casual Vacancy. [Sec.141(4)]

1.3 Auditor not to render Certain Services [Sec.144]1. Only Approved Services: An Auditor of the Company can provide only those Other Services as

approved by the Board of Directors or the Audit Committee.2. Prohibited Services: The following services shall not be provided by an Auditor directly or

indirectly to the Company or its Holding Company or Subsidiary Company –(a) Accounting and Book Keeping Services, (b) Internal Audit,(c) Design and Implementation of any Financial Information System, (d) Actuarial Services,(e) Investment Advisory Services, (f) Investment Banking Services,(g) Rendering of Outsourced Financial Services, (h) Management Services,(i) Any other kind of Services as may be prescribed.

3. 1 Year Timeframe: An Existing Auditor which renders any of the non–audit services, shall comply with Sec.144 before the closure of the first financial year after the date of commencement of this Act.

4. Meanings: The term “directly or indirectly” includes rendering of services by the Auditor –In case of Auditor being an Individual In case of Auditor being an Audit Firm

(a) either himself, or(b) through his Relative, or(c) any other person connected or associated with such

Individual, or

(d) through any other Entity, in which such Individual has significant influence or control,

(a) either itself, or(b) through any of its Partners, or(c) through its Parent, Subsidiary or Associate Entity, or(d) through any other Entity, in which the Firm or

any Partner of the Firm has significant influence or control, or whose Name or Trademark or Brand is used by the Firm or any of its Partners.

1.4 Remuneration of Auditors [Sec.142]1. The Remuneration of the Auditor shall be fixed by the Members – (a) in its General Meeting, or (b) in

such manner as may be determined at the Meeting.2. Remuneration of the First Auditor may be fixed by the Board of Directors.3. Remuneration includes –

(a) Fees Payable to the Auditor,(b) Expenses if any, incurred by the Auditor in connection with the audit and any facility extended to the Auditor.

.

4. However, Remuneration does not include amount paid for any other service rendered by the Auditor at the request of the Company.

1.5 Audit of Branches [Sec.143(8), Rules]

1. Qualifications: The following persons are eligible for appointment as Branch Auditors –In case of Local Branches In case of Foreign Branches

(a) The Company’s Auditor appointed u/s 139, or(b) A person qualified for appointment as an

Auditor u/s 139.

(a) The Company’s Auditor appointed u/s 139, or(b) An Accountant or other person duly qualified to act as an

Auditor in accordance with the laws of that foreign 2. Audit Report of Branch:

(a) The Branch Auditor shall prepare a Report on the accounts of the Branch Office examined by him.(b) The Branch Auditor shall submit his report to the Company’s Auditor, who shall deal with it in the

manner required to finalise his Audit Report.

3. Duties and Powers of Company and Branch Auditor: The duties and powers of the Company’s Auditor with reference to the audit of the Branch, and the Branch Auditor, if any, shall be as contained in Sec.143(1) to 143(4).

4. Frauds at Branch: Sec.143(12) along with Rules, relating to reporting of fraud by the Company Auditor, shall also extend to Branch Auditor, to the extent it relates to the concerned Branch.

2. Appointment

2.1 Appointment of First Auditors [Sec.139(6), 139 (7)]

Provision Sec.139(7)

Sec.139(6)

Type of Company covered

1. Government Companies, or2. Any other Company owned or controlled,

directly or indirectly, by –(a) By the Central Government, or(b) By any State Government or Governments, or(c) Partly by the Central Government and

partly by one of more State

Any other Company

Appointment of First Auditor

• Appointment by: C&AG of India.• Time Limit: Within 60 days from the

date of registration of the Company.

• Appointment by: Board of Directors.• Time Limit: Within 30 days from the

date of registration of the Company.In case of failure of above

The Board of Directors shall appoint the FirstAuditor, within the next 30 days.

See next point below.

In case ofBOD failure

• BOD shall inform the Members of its failure.• Members shall appoint the Auditor,

within 60 days, in an EGM.

• BOD shall inform the Members of its failure.• Members shall appoint the Auditor, within

Tenure First Auditor shall hold office till the conclusion of theFirst

First Auditor shall hold office till the conclusion of the First AGM.Overriding

ofThe above provisions override Sec.139(1) & 139(5).

The above provisions override Sec.139(1).

2.2 Appointment of Auditors of Govt Companies [Sec.139(5)]

Point Description

Type ofCompanies

1. Government Companies, or2. Any other Company owned or controlled, directly or

indirectly, by – (a) By the Central Government, or(b) By any State Government or Governments, or(c) Partly by the Central Government and partly by one of more State Governments.

.

Point Description

Appointment of Auditors

1. Appointee: Auditor duly qualified to be appointed as Auditor under the Act.2. Appointment by: Comptroller and Auditor General (C&AG) of India.3. Time Limit: Within 180 days from the commencement of the financial year.4. Tenure: To hold office till the conclusion of the AGM.

2.3 Appointment of Auditors at AGM [Sec.139(1)]

Point Description

Appointment at AGM

Every Company shall appoint an Individual or a Firm as Auditor of the Company, at its 1st AGM.Note:• Appointment includes re–appointment.• Firm includes a Limited Liability Partnership (LLP) incorporated under the LLP Act, 2008.

Tenure1. Auditor shall hold the office from the conclusion of 1st AGM to till the conclusion of its

6th AGM and thereafter till the conclusion of every 6th AGM.2. For the above purpose, the Meeting wherein such appointment has been made will be

counted as the first Meeting.

Ratification at every AGM

1. The Company shall place the matter relating to appointment of Auditors, for ratification by Members, at every AGM, by way of passing an Ordinary Resolution.

2. If the appointment is not ratified by the Members of the Company at the AGM, the Board of Directors shall appoint another Individual / Firm as the Auditor(s), after following the procedure laid down in this behalf under the Act.

Duties ofCompany

3. The Company should obtain the written consent of the Auditor, and the prescribed Certificate

from the Auditor, before appointing the Auditor. [Note: See next point for Certificate.]

4. The Company should inform the Auditor about his appointment and file a notice with the Registrar, within 15 days of the Meeting in which Auditor was appointed, in Form ADT–1.

Contents of Certificate by Auditor

1. The Auditor (Individual / Firm), is eligible for appointment, and is not disqualified for appointment under the Companies Act, the Chartered Accountants Act, 1949 and its related Rules or Regulations,

2. The proposed appointment is as per the term provided under the Act,3. The proposed appointment is within the limits laid down by or under the authority of the Act,4. The list of proceedings against the Auditor or Audit Firm or any Partner of the Audit Firm Effect of no

appointment at AGM

If at any AGM, the Auditor is not appointed or re–appointed, the Existing Auditor shall continue to be theAuditor of the Company. [Sec.139(10)]

2.4 Manner & Procedure for Selection & Appointment of Auditors [S.139(1) & Rules]

Situation “A” Where Audit Committee is required to be constituted u/s 177(i.e. for Listed Companies and other prescribed class(es) of Companies)

Initial Selection of Auditors by Committee

The Audit Committee shall recommend to the BOD, the name of an Individual / Firm as Auditor, after considering the following –1. Qualifications and Experience of the Individual / Firm.2. Whether such Qualifications and Experience are commensurate with the size and

requirements of the Company.3. Order or Pending Proceedings against the Individual / Firm relating to professional

matter of conduct, before the ICAI or Competent Authority or Court.4. Any other information which the Committee has called for from the Proposed Auditor.

.

Situation “A” Where Audit Committee is required to be constituted u/s 177(i.e. for Listed Companies and other prescribed class(es) of Companies)

If Audit Committee and BOD agree

If the BOD agrees with the recommendation of Audit Committee, the BOD shall –1. further recommend the appointment to the Members,2. place the matter for consideration by Members in the AGM.

If Audit Committee and BOD disagree

1. If the BOD disagrees with Audit Committee’s recommendation, it should refer back to the Audit

Committee for its reconsideration, citing the reasons for its disagreement.2. If the Audit Committee does not reconsider its recommendation, after taking the

reasons given by the BOD, then, the BOD shall –(a) record the reasons for its disagreement with the Committee.(b) send its own recommendation for consideration of the Members in the AGM.Note: If a Company is required to constitute Audit Committee u/s 177, all appointments, including the

filling of a casual vacancy of an Auditor should be made after considering that Committee’s recommendations. [Sec.139(11)]

Situation “B”: When there is no requirement as to Audit CommitteeThe Board of Directors (BOD) shall recommend to the Members in the AGM, the name of an Individual / Firm as Auditor, after considering the factors mentioned in the Table above in Situation A.

2.5 Casual Vacancy [Sec.139(8)]

Type ofCompany

For Companies whose accounts are subject to audit by an Auditor appointed by the C&AG

For all other Companies

Filling of Casual Vacanc

• C&AG shall fill the Casual Vacancy, within 30 days.• If C&AG does not fill the vacancy within 30 days, the BOD

shall fill the vacancy, within next 30 days.

• Board of Directors shall fill the casual vacancy, within 30 days.

See Notes below.Tenure • Till the conclusion of the next AGM. [as per

Sec.139(5)]• Till the conclusion of the next AGM.

[Sec.139(8)]Note:• If vacancy is caused by resignation, the appointment should also be approved by the Company at a

General Meeting convened within 3 months of BOD recommendation.• For Companies in which an Audit Committee u/s 177 is required, the recommendations of that

Committee shall also be considered for Casual Vacancy.

2.6 Re–appointment of Retiring Auditor [Sec.139(9)]Subject to Sec.139(1), the Retiring Auditor may be re–appointed at an AGM, if –1. If the Retiring Auditor is not disqualified for re–appointment,2. If the Retiring Auditor has not given the Company a notice in writing of his unwillingness to be re–appointed,3. If a Special Resolution has not been passed at that AGM, appointing another Auditor instead of the

Retiring Auditor or providing expressly that the Retiring Auditor shall not be re–appointed.

2.7 Rotation of Auditors [Sec.139(2), (3), (4), Rules]

Rotation Principles Applicable to

1. Listed Companies2. All Unlisted Public Companies having Paid Up Share Capital of ` 10 Crores or more,3. All Private Limited Companies having Paid Up Share Capital of ` 20 Crores or more,4. All Companies having Paid Up Share Capital below the above specified limits, but having Public

Borrowings from Financial Institutions, Banks or Public Deposits of ` 50 Crores or more.Note: Excluded Companies – (a) One Person Company, and (b) Small

.

Maximum Tenure of

The above Companies shall not appoint / re–appoint –1. An Individual as Auditor, for more than 1 term of 5 consecutive years, and2. An Audit Firm as Auditor, for more than 2 terms of 5 consecutive years.

Auditors Ineligible for appointment – Different Scenarios

1. Cooling Off Period: Any Individual or Audit Firm shall not be eligible for re–appointment as

Auditor in the same Company, for 5 years from the completion of their audit term.

2. Common Partners: Any Audit Firm having common partner(s) on the date of appointment, in the retiring Audit Firm whose tenure has expired immediately preceding the financial year, shall not be appointed as Auditor, for a period of 5 years.

3. Old Certifying Partner in New Firm: If a Partner, who is in charge of an Audit Firm and also certifies the Financial Statements of the Company, retires from the said Firm and joins another Firm of Chartered Accountants, then such Other Firm is also ineligible to be appointed for a period of 5 years.

4. Same Network Firms: The Incoming Auditor or Audit Firm is not eligible to be appointed, if it is associated with the Outgoing Auditor or Audit Firm under the same network of Audit Firms. [Note: “Same Network” includes the Firms functioning, hitherto or in future, under the same brand name, trade name or

3 Year Time Period for Complianc

Every Existing Company which is required to comply with Sec.139(2), shall comply with the requirement,within 3 years from the date of commencement of this Act.

Additional Conditions [Sec.139(3)]

Subject to the provisions of the Act, the Members of a Company may resolve to provide that –1. In the Audit Firm appointed by it, the Auditing Partner and his Team shall be

rotated at such intervals, as may be resolved by the Members, or2. The Audit shall be conducted by more than one Auditor.

Other Points

1. When there is a Rotation of Auditors on expiry of 5–year term, the Audit Committee or BOD shall follow the Manner and Procedure for Selection and Appointment of Auditors, as specified u/s 139(1) and Rules above, e.g. consideration of qualifications, etc.

2. A break in the term for a continuous period of 5 years is considered as fulfilling the requirement of rotation.

3. Sec.139(2) shall not affect – (a) the right of the Company to remove an Auditor, or (b) the right of the Auditor to resign his office. Note: This means that the appointment for 5 year period is not irrevocable, and the Auditor may resign, or Company may remove

2.8 Illustration on Rotation of Auditors [Rules]

Illustration 1: Illustration explaining Rotation in case of Individual AuditorNumber of consecutive years for which an Individual Auditor has been functioning as Auditor in the same Company [in the first

AGM held after the commencement of provisions of Sec.139(2)]

Maximum number of consecutive years for which he may be appointed in the same Company (including

Transitional Period)

Aggregate period which the auditor would

complete in the same Company in view of

Column I and III II III5 years (or more than 5 years) 3

years8 years or more

4 years

3 years

7 years3

years3

years6

years2 years

3 years

5 years1

years4

years5

yearsNotes:1. Individual Auditor shall include other Individuals or Firms whose Name or Trademark or Brand is

used by such individuals, if any.

.

2. Consecutive years shall mean all the preceding financial years for which the Individual Auditor has been the Auditor, until there has been a break by five years or more.

Illustration 2: Illustration explaining rotation in case of Audit FirmNumber of consecutive years for which an audit Firm has been functioning as Auditor in the same Company [in the first AGM held after the commencement of provisions of

Sec.139(2)]

Maximum number of consecutive years for which the Firm may be appointed

in the same Company (including Transitional

Aggregate period which the Firm would

complete in the same Company in view of

Column I and III II III10 years (or more than 10 years) 3

years13 years or more

9 years

3 years

12 years8

years3

years11

years7 years

3 years

10 years6

years4

years10

years5 years

5 years

10 years4

years6

years10

years3 years

7 years

10 years2

years8

years10

years1 years

9 years

10 yearsNotes:

1. Audit Firm shall include other Firms whose Name or Trademark or Brand is used by the Firm or any of its Partners.2. Consecutive years shall mean all the preceding financial years for which the Firm has been the

Auditor until there has been a break by five years or more.

3. Removal, Rights, Misc, etc.

3.1 Removal of Auditors before expiry of term [Sec.140(1) and Rules]

Procedure for Removal before expiry of term 1. BOD should pass a Resolution for removal of Auditors.2. Application should be made to Central Government in Form ADT–2, within 30 days of BOD Resolution.3. Previous Approval of Central Government should be obtained, in response to Form ADT–2.4. A General Meeting should be held within 60 days of receipt of approval from Central Government.5. Special Resolution should be passed in the above General Meeting, for removal of Auditors.6. Before taking any action u/s 140(1), the Auditor shall be given a reasonable opportunity of being heard

Note: Contents of Form ADT–2 include the following –1. Grounds of seeking removal of Auditor,2. Details of Qualifications in Accounts in past 3 years,3. Details of Opportunity of being heard given to the Auditor,4. Details of Civil / Criminal Proceedings pending between Company / Concerned Officers,5. Special Notice received for Removal of Auditors, if any.6. Percentage of Capital held by Members who propose removal of Auditors,7. Whether all due Audit Fees has been paid to the concerned Auditors,8. Details of Other Services rendered by such Auditors to the Company,9. Number of years for which audit is pending,10. Stage of accounts for each financial year, e.g. yet to be approved by Board, or yet to be handed over to Auditors, etc.

.

11. Dispute with regard to Books of Accounts in the possession of Auditors but not delivered back to the Company,

3.2 Removal of Auditors at AGM [Sec.140(4) and Rules]

This is done by appointing an Auditor other than the Retiring Auditor with the following points –2. Special Notice: Special Notice is required for a resolution at an

AGM for – (a) appointing as Auditor, a person other than the Retiring Auditor, or

(b) providing expressly that the Retiring Auditor shall not be re–appointed.

Note: If the Retiring Auditor has completed a consecutive tenure of 5 years (for Individual) or 10 years (for Firm), suchSpecial Notice is not required.

3. Copy to Auditor: On receipt of above notice, the Company shall send forthwith a copy thereof to the Retiring Auditor.4. Rights of Retiring Auditor: The Retiring Auditor has the

following rights – (a) To make a representation of a reasonable length to the Company,(b) To request that such representation be circulated among the members,(c) To require that the representations be read out at the AGM, and he be heard orally at the AGM.

5. Company’s Duties: Where the Retiring Auditor makes a representation in writing to the Members of the Company, the

Company shall –(a) state the fact of representations being made, in any notice of the resolution given to Members of the Company, and(b) send a copy of representation to every Member of the Company to whom notice of meeting is sent,

whether before or after the receipt of representation by the Company.

Note: The Auditors’ Representations need not be circulated to Members by the Company, if – (a) The representations are received too late by the Company, or(b) The Tribunal is satisfied, on the application made by the Company or any other aggrieved

person, that the right of representation is being abused by the Auditor.If the representation is not sent to the Members, a copy thereof should be filed with the ROC.

3.3 Change of Auditors based on Tribunal’s Direction [Sec.140(5)]

SituationTribunal is satisfied that the Auditor of a Company has, directly or indirectly, –1. acted in a fraudulent manner, or2. abetted or colluded in any fraud by, or in relation to, the Company or its Directors or Officers.Basis for

Tribunal’s findings

1. suo–motu by Tribunal, or2. Application made to Tribunal by Central Government, or3. Application made to Tribunal by any person concerned.

Order ofTribunal

1. The Tribunal can order the Company to change its Auditors, on the abovecited grounds.2. In case of Application by Central Government, the Tribunal shall make an order within

15 days of receipt of application, that the person shall not function as an Auditor. The Central Government may appoint another Auditor in his place.

.

Effect of Tribunal’s Final Order

1. The Individual / Firm against whom a Final Order u/s 140 is passed by Tribunal, is not eligible to be appointed as Auditor of any Company for a period of 5 years from the date of the order.

2. If the order is against any Firm, the liability shall be of the Firm and of every Partner(s) who have acted in a fraudulent manner, or abetted or colluded in the fraud.

3. The erring Auditors are also liable for action u/s 447.4. In case of criminal liability of any Audit Firm, the liability other than fine shall

devolve only on the concerned Partner(s) who acted in a fraudulent manner, or abetted

3.4 Resignation of Auditors [Sec.140(2), (3) and Rules]

Procedure 1. An Auditor has the right to resign from the Company, before the expiry of his term.2. The Resigning Auditor should file Form ADT–3, within 30 days of date of resignation.

Form ADT–3Time Limit

Form ADT–3 shall be filed with –1. the Company,2. the ROC, and also3. the C&AG in case of Sec.139(5) Companies.

Form ADT–3Contents

Form ADT–3 requires details to be furnished in respect of – (a) reasons for resignation, and (b) any other facts as may be relevant with regard to the resignation.

Non– Compliance

If the Auditor fails to furnish Form ADT–3 as above, he is punishable with Fine of Minimum ` 50,000 toMaximum ` 5,00,000.

3.5 Rights of Auditors

1. Right of Access to Books and Vouchers [Sec.143(1)]:(a) The Company Auditor shall have a right of access at all times to the books of accounts and vouchers of the

Company, whether kept at the Registered Office of the Company or elsewhere.(b) The Auditor of a Holding Company shall also have the right of access to the records of all its

Subsidiaries in so far as it relates to the consolidation of its Financial Statements.

2. Right to obtain information and Explanations[Sec.143(1)]:The Company Auditor is entitled to require from the Officers of the Company, such information and explanations as theAuditor may think necessary for the performance of his duties.

3. Right to visit Branches, and access Branch Accounts [Sec.143(8)]: See Para 1.5

4. Right to Remuneration [Sec. 142]: See Para 1.4

5. Right to have Qualifications, etc. read out at General Meeting [Sec.145]: Qualifications, Observations or Comments on the Financial Transactions or matters, which have any adverse effect on the functioning of the Company mentioned in the Auditor’s Report, shall be –(a) read before the Company in its General Meeting.(b) open for inspection by any Member of the Company.

6. Right to receive Notices and to attend General Meetings [Sec.146](a) All Notices of and other communications relating to, any General Meeting of a Company should be forwarded to the

Auditors of a Company.(b) The Auditor shall be entitled to attend any General Meeting and to be heard at any General

Meeting, which concerns him as Auditor.(c) Unless otherwise exempted by the Company, the Auditor shall attend the General Meeting –

• either by himself, or

.

• through his Authorised Representative, who shall also be qualified to be an Auditor.Note: Thus, it is also the duty of the Auditor to attend the General Meeting.

3.6 Duties of Auditors1. Inquiry into specified areas [Sec.143(1)]: The Company Auditor shall inquire into the following aspects –

(a) Whether Loans and Advances made by the Company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the Company or its Members,

(b) Whether transactions of the Company, which are represented merely by Book Entries, are prejudicial to the interests of the Company,

(c) Where the Company is not an Investment Company or Banking Company, whether Assets of the Company consisting of Shares, Debentures, and other Securities have been sold at a price less than that at which they were purchased by the Company.

(d) Whether Loans and Advances made by the Company have been shown as Deposits, (e) Whether Personal Expenses have been charged to Revenue Account,(f) Where any Shares have been allotted for cash, whether cash has actually been received, and if

no cash has been received, whether the position as stated in the account books and the Balance Sheet is correct, regular and not misleading.

2. Reporting as to True and Fair [Sec.143(2)]:

Items reported on The Auditor shall make a Report to the Members of the Company –(a) on the accounts examined by him, and(b) on every Financial Statements which are required by or under this Act to be laid before the Company in General Meeting.

ReportingConsiderations

The Report shall be made after taking into account, the following – (a) the provisions of the Act,(b) the accounting and auditing Standards,(c) matters which are required to be included in the Audit Report under the

provisions of the Act / Rules / Order u/s 143(11)(d) best of his information and knowledge.

Essence ofReport

In addition to other reporting matters, the Audit Report shall state whether the said Accounts, Financial Statements, give a true and fair view of –(a) the state of the Company’s affairs as at the end of the financial year, (b) Profit or Loss,

(c) Cash Flow for the year.

.

3. Reporting Requirements [Sec.143(3)]: The Auditor’s Report shall also state –(a) Whether he has sought and obtained all information and explanations to the best of his

knowledge and belief that are necessary for the purpose of his audit. If the required information is not obtained, details and effect in Financial Statements should be mentioned.

(b) Whether, in his opinion, proper books of account as required by law have been kept by the Company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from Branches not visited by him,

(c) Whether the report on the accounts of any Branch Office audited by a person other than the Company Auditor has been forwarded to him and how he has dealt with the same in preparing the Auditor’s Report,

(d) Whether the Company’s Balance Sheet and Profit and Loss account dealt with in the report are in agreement with the books of account and returns,

(e) Whether, in his opinion, the Financial Statements comply with the Accounting Standards, the observations or comments of the Auditors on financial transactions or matters which have any adverse effect on the functioning of the company,

(f) Whether any Director is disqualified from being appointed as a Director u/s 164(2),(g) any Qualification, Reservation or Adverse Remark relating to the maintenance of accounts and

other matters connected therewith,(h) Whether the Company has adequate Internal Financial Controls system in place and the operating

effectiveness of such controls,(i) Other matters as may be prescribed –

(i) whether the Company has disclosed the impact, if any, of pending litigations on its financial position in its

Financial Statement,(ii) whether the Company has made provision, as required under any law or Accounting Standards,

for material foreseeable losses, if any, on long–term contracts including Derivative Contracts,(iii) whether there has been any delay in transferring amounts, required to be transferred, to the Investor

Education and Protection Fund by the Company.

4. Reasons for Negative / Qualification [Sec.143(4)]:(a) In case of Negative Remark or Qualification in any of the reporting matters u/s 143, the Audit Report shall state the

reasons therefor.(b) Qualifications, Observations or Comments on the Financial Transactions or matters, which have any

adverse effect on the functioning of the Company mentioned in the Auditor’s Report, shall be –• read before the Company in its General Meeting.• open for inspection by any Member of the Company. [Sec.145]

5. Duties w.r.t. audit of Government Companies [Sec.143(5), (6), (7)]:Directions by C&AG

The C & AG of India can issue directions to the Statutory Auditors on the manner in which the accounts are required to be audited, in case of Auditors appointed by C&AG u/s 139(5) or 139(7).

SituationIf the Company Auditor, in the course of performance of his duties, has reason to believe that an offence involving fraud is being or has been committed against the Company, by Officers or Employees of the Company.

Auditors’ Duties – to report to Central Govt within 60 days

(a) Immediate Report to BOD / Audit Committee: Immediately after he comes to knowledge of the fraud, the Auditor shall forward his Report to the Board or the Audit Committee seeking their reply or observations within 45 days.

(b) Report to Central Government: Within 15 days of receipt of reply / observations as above, the Auditor shall forward to the Central Government –• his Report (on Fraud),• Reply or Observations of BOD / Audit Committee thereon, and• his Comments on above reply or observations.

Note: If no reply is received from BOD / Audit Committee in 45 days, the Auditor shall forward his report only to the Central Government, mentioning the fact of non–receipt of reply/observations.

ReportRequirements

(a) Sent to: The Secretary, Ministry of Corporate Affairs, in a sealed cover.(b) Mode: Registered Post with Acknowledgement Due, or by Speed post, followed

by an e–mail in confirmation thereof.(c) Stationery: Report shall be in Auditors’ Letterhead, containing his

Membership Number, Postal Address, Email Address and Contact Number. It shall be signed and sealed by Auditor.

(d) Format: Report shall be in Form ADT–4.

ADT–4Contents

(a) Full details of suspected offence involving fraud (with documents in support),(b) Particulars of Officers / Employees who are suspected to be involved in the offence, (c) Basis on which fraud is suspected,(d) Period during which the suspected fraud has occurred,

.

Audit Report

The Auditor shall submit a copy of the Audit Report to C&AG. In addition to the matters u/s 143, the report shall include the following additional points –(a) Directions issued by C&AG, (b) Actions taken thereon, and(c) Its impact on the Accounts and Financial Statement of the Company.

Supple– mentary Audit

Within 60 days from the receipt of above Audit Report, the C&AG have right to –(a) Conduct a Supplementary Audit of the accounts with the help of authorized

persons. C&AG shall also direct persons to provide additional information and other details for conducting supplementary audit.

(b) Comment upon or supplement the Audit Report.

Comments of C&AG

(a) The comments or supplement given by C&AG on the Audit Report shall be sent to the Company. (b) The Company shall forward the same to every person entitled to copies of Financial Statements

u/s 136(1).(c) The comments / supplement shall also be placed in the AGM similar to that of the

Test Audit(a) The C&AG, if it deems fit, may order for conduct of Test Audit in case of a Company covered u/s

139(5) or 139(7).(b) The provisions of Sec.19A of the Comptroller and Auditor–General’s (Duties, Powers and

6. Compliance with Auditing Standards [Sec.143(9), (10)]:(a) Every Auditor shall comply with the Auditing Standards.(b) The Central Government may prescribe the Standards of Auditing, as recommended by the ICAI,

in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.

(c) Till such Auditing Standards are notified, Standards of Auditing specified by the ICAI shall be deemed to be the

Auditing Standards.

7. Additional Matters reporting per NAFRA [Sec.143(11)]: In consultation with the National Financial Reporting Authority (NAFRA), the Central Government may order for the inclusion of a Statement on specified matters in the Auditor’s Report for specified class or description of Companies.

8. Reporting of Frauds [Sec.143(12), (13), (15)]:

.

(e) Date of sending report to BOD / Audit Committee, and Date of reply, if any, received,(f) Whether Auditor is satisfied with the reply / observations of BOD / Audit Committee, (g) Estimated amount involved in the suspected fraud,(h) Steps taken by the Company, if any, in this regard, with full details of references.Good faith

[Sec.143(13)]No duty to which the Company Auditor may be subject to shall be regarded as having been contravened by reason of his reporting the matter referred u/s 143(12), if it is done in good faith.

Contravention

(a) Persons: Auditor / Cost Accountant / Company Secretary, who do not comply with S.143(12) (b) Punishment: Fine of Minimum ` 1,00,000 Maximum ` 25,00,000.

Note: Cost Audit / Secretarial Audit [Sec.143(14)]: Sec.143 (in entirety) shall be applicable for – (a) A Cost Accountant in Practice, conducting Cost Audit u/s 148, and(b) A Company Secretary in Practice, conducting Secretarial Audit u/s 204.

9. Signing Audit Report [Sec.145]:(a) The person appointed as Auditor of the Company shall – (i) sign the Auditor’s Report, and (ii) sign

or certify any other document of the Company as per Sec.141(2).(b) If a Firm is appointed as Auditor of the Company, signing or certification shall be done only by the Chartered

Accountants who are Partners and are authorised to act and sign on behalf of the Firm.

3.7 Punishment for Contravention [Sec.147]

Sec. Nature of Act / Omission Person punishable Punishmen

t

147 (1)

Contravention of Sec.139 to

Sec.146

(a) Company Fine of Minimum ` 25,000 Maximum ` 5,00,000.

(b) Every Officer in Default

• Imprisonment of Maximum 1 Year, or• Fine of Minimum ` 10,000 Maximum ` 1,00,000, or• Both of the above.

147 (2)

Contravention of

Sec.139, 143,144, 145

Auditor

(a) Normal: Fine of Minimum ` 25,000 Maximum ` 5,00,000.(b) If done knowingly or wilfully, with intention

to deceive the Company or its Shareholders or Creditors or Tax Authorities:• Imprisonment of Maximum 1 Year, or• Fine of Minimum ` 1,00,000 Maximum ` 25,00,000, or

Notes: Additional Liability of Auditor [Sec.147(3), (4)]1. If the Auditor is convicted u/s 147(2), he shall be liable to –

(a) refund the remuneration received by him to the Company, and(b) pay for damages to the Company, Statutory Bodies or Authorities or to any other persons for loss

arising out of incorrect or misleading statements made in his Audit Report.

2. The Central Government can notify any Statutory Body / Authority / Officer, to ensure prompt payment of damages to the Company or other entitled parties, and to file a report for compliance.

Joint and Several Liability in case of Audit by Firm [Sec.147(5)]

SituationWhere it is proved that the Partner or Partners of the Audit Firm has or have – (a) acted in a fraudulent manner, or(b) abetted or colluded in any fraud by, or in relation to or by, the Company or its Directors or Officers

.

Liability The civil or criminal liability, as provided in this Act or in any other law, for such act shall be of the Partner orPartners concerned of the Audit Firm and of the Firm jointly and severally.

.

3.8 Cost Audit [Sec.148]1. Maintenance of Cost Accounts / Records [Sec.148(1)]:

(a) The Central Government can order for maintenance of Cost Accounts / Records.(b) Cost Accounts / Records shall comprise particulars relating to – (i) utilisation of material or

labour, or (ii) other items of cost as may be prescribed.(c) Such order may be for specified class of Companies, engaged in – (i) production of

specified goods, or (ii) providing prescribed services.(d) For such Companies, the books of account shall include these Cost Accounts / Records.(e) In case of Companies regulated under a Special Act, the Central Government shall

consult that Regulatory Body established under that Act, before ordering maintenance of Cost Records.

2. Cost Audit [Sec.148(2)]:(a) The Central Government may, if it feels necessary, direct by an order that an audit of the Cost Records kept by a

Company shall be conducted in the prescribed manner.(b) Such order relating to Cost Audit shall be given in case of Companies –

• which are covered u/s 148(1), i.e. maintenance of Cost Records / Accounts, and,• which have a Net Worth or Turnover of prescribed amounts.

3. Cost Auditor [Sec.148(3)]:(a) Cost Audit shall be conducted by a Cost Accountant in practice (either Individual or Firm) (b) A Statutory Auditor of the Company u/s 139 cannot be a Cost Auditor of the Company.(c) Cost Auditor shall comply with the Cost Auditing Standards issued by the Institute of Cost

and Works Accountants of India, with the approval of the Central Government.(d) The appointment and remuneration of Cost Accountant is as under –

Situation If Audit Committee is required u/s 177

No Requirement as to Audit Committee

Appointment By Board, on the recommendations of the Audit

CommitteBy Board, on its own.

Remuneration

• Recommended by Audit Committee,• Approved by Board of Directors, and• Ratified by Shareholders.

• Fixed by Board of Directors, and• Ratified by Shareholders.

(e) Cost Audit shall be in addition to the audit conducted u/s 143.

4. Rights, etc. of Cost Auditor [Sec.148(5)]:(a) The Qualifications, Disqualifications, Rights, Duties and Obligations applicable to

Auditors under Chapter X, are applicable to Cost Auditor also.(b) The Company is duty bound to give all assistance and facilities to the Cost Auditor for auditing the Cost Records.

5. Cost Audit Report [Sec.148(5), (6), (7)]:(a) The Cost Auditor shall submit his report to the Board of Directors of the Company.(b) Within 30 days from the receipt of Cost Audit Report, the Company shall furnish full

information and explanation on every reservation or qualification contained in the Cost Audit Report, to the Central Government.

(c) If Central Government calls for further information and explanations, the Company should furnish the same within the timeframe specified by Central Government.

6. Non Compliance [Sec.148(8)]:(a) The Company / Officer in Default is punishable in the manner provided in Sec.147(1). (b) The Cost Auditor is punishable in the manner provided in Sec.147(2) to (4).

.

RTP Questions

Q. As an auditor, how would you deal with the following situations:

(a) M/s XYZ & Co., auditors of Goodwill Education Foundation, a recognised nonprofit

organisation feels that the standards on auditing need not to be applied as Goodwill

Education Foundation is a non-profit making concern.

As per sub section 9 of section 143 of the Companies Act, 2013, every auditor shall comply with the auditing standards. Further as per sub section 10 of section 143 of the Act, the Central Government may prescribe the standards of auditing or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949, in consultation with and after examination of the

recommendations made by the National Financial Reporting Authority.In the given case, even though the client is a non-profit oriented entity the SAs shallapply and the auditor shall be guilty of professional misconduct for failing todischarge his duty in case of non-compliance with SAs.(b) Rama Pvt. Ltd. is a private company having paid up share capital of rupees twenty five

crore but having public borrowing from nationalized banks and financial institutions of rupees forty crore. The company appointed CA Raman as an auditor in its AGM dated 29th September, 2014. You are required to state the following provisions as the section 139 of the

Companies Act, 2013 in case of an individual auditor or an audit firm, both-

(i) Rotation of auditor;

(ii) Cooling off period;

(iii) Common partner(s) to the other audit firm whose tenure has expired;

(iv) Transitional period for the adoption of new Companies Act;

(v) Right of the company to remove an auditor;

(vi) Rotation between partners of audit firm;

(c) MSY & Co. is an Audit Firm having partners CA Mukti, CA Shakti and CA Yukti. CA

Mukti, CA Shakti and CA Yukti are holding appointment as an Auditor in 4, 6 and 10

Companies respectively.

(i) Provide the maximum number of Audits remaining in the name of MSY & Co.

(ii) Provide the maximum number of Audits remaining in the name of individual

partner i.e. CA Mukti, CA Shakti, CA Yukti.

ANS-Ceiling Number of Audit: As per section 141(3)(g) of the Companies Act, 2013, a

person shall not be eligible for appointment as an auditor if he is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such person or

.

partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies; As per section 141 (3)(g), this limit of 20 company audits is per person. In the case of an audit firm having 3 partners, the overall ceiling will be 3 × 20 = 60 company audits. Sometimes, a chartered accountant is a partner in a number of auditing

firms. In such a case, all the firms in which he is partner or proprietor will be together entitled to 20 company audits on his account. In the given case, CA Mukti is holding appointment in 4 companies, whereas CA Shakti is having appointment in 6 Companies and CA Yukti is having appointment in 10 Companies. In aggregate all three partners are having 20 audits.

(i) Therefore, MSY & Co. can hold appointment as an auditor of 40 more

companies:

Total Number of Audits available to the Firm = 20*3 = 60

Number of Audits already taken by all the partners

In their individual capacity = 4+6+10 = 20

Remaining number of Audits available to the Firm = 40

(ii) With reference to above provisions an auditor can hold more appointment as

auditor = ceiling limit as per section 141(3)(g)- already holding appointments

as an auditor.

Hence (1) CA Mukti can hold: 20 - 4 = 16 more audits. (2) CA Shakti can hold 20-6 = 14 more audits and (3) CA Yukti can hold 20-10 = 10 more audits.

(d) State the provisions relating to filling of casual vacancies as per section 139 (8) of

the Companies Act, 2013 and casual vacancy due to resignation.As per Section 139(8), any casual vacancy in the office of an auditor shall-(i) In the case of a company other than a company whose accounts aresubject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Board of Directors within thirty days. If such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting;(ii) In the case of a company whose accounts are subject to audit by anauditor appointed by the Comptroller and Auditor-General of India, befilled by the Comptroller and Auditor-General of India within thirty days: It may be noted that in case the Comptroller and Auditor-General of India does not fill the vacancy within the said period the Board of Directors shall fill the vacancy within next thirty days.

Q-Mr. A", a practicing Chartered Accountant, is holding securities of "XYZ Ltd." having face value of Rs.900/-. Whether Mr. A is qualified for appointment as an Auditor of "XYZ Ltd."?

• Ans-In the present case, Mr. A. is holding security of Rs 900 in the XYZ Ltd, therefore he is not eligible for appointment as an Auditor of "XYZ Ltd".

.

Q-Ram and Hanuman Associates, Chartered Accountants in practice have been appointed as Statutory Auditor of Krishna Ltd. for the accounting year 2013-2014.Mr. Hanuman, a partner of the Ram and Hanuman Associates, holds 100 equity shares of Shiva Ltd., a subsidiary company of Krishna Ltd.• Ans-In the present case, Mr. Hanuman, Chartered Accountant, a partner of M/s Ram and

Hanuman Associates, holds 100 equity shares of Shiva Ltd. which is a subsidiary of Krishna Ltd. Therefore, the firm, M/s Ram and Hanuman Associates would be disqualified to be appointed as statutory auditor of Krishna Ltd. as per section 141 (3)(d)(i), which is the holding company of Shiva Ltd., because Mr. Hanuman one of the partner is holding equity shares of its subsidiary. Q"Mr. P" is a practicing Chartered Accountant and "Mr. Q", the relative of "Mr. P" is holding securities of "ABC Ltd." having face value of Rs 90,000/-. Whether "Mr. P" is Qualified from being appointed as an Auditor of "ABC Ltd."?

• Ans-In the present case, Mr. Q. (relative of Mr. P, an auditor), is having securities of f 90,000 face Value in the ABC Pvt. Ltd., which is as per requirement of proviso to section 141 (3)(d)(i), Therefore, Mr. P will not be disqualified to be appointed as an auditor of ABC Ltd.Q: "BC & Co." is an Audit Firm having partners "Mr. B" and "Mr. C", and "Mr. A" the relative of "Mr. C", is holding securities of "MWF Ltd." having face value of Rs 1,01,000/-. Whether "BC & Co." is qualified from being appointed as an Auditor of "MWF Ltd."?

• ANS-In the instant case BC & Co, will be disqualified for appointment as an auditor of MWF Ltd as the relative of Mr. C i.e. partner of BC & Co., is holding the securities in MWF Ltd which is exceeding the limit mentioned in proviso to section 141(3)(d)(i).

Q- Mr. Amar, a Chartered Accountant, bought a car financed at ` 7,00,000 by Chaudhary Finance Ltd., which is a holding company of Charan Ltd. and Das Ltd. He has been the statutory auditor of Das Ltd. and continues to be even after taking the loan.

• ANS-According to section 141 (3)(d) (ii) of the Companies Act, 2013, a person is not eligible for appointment as auditor of any company, If he is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of rupees five lakh.

• Hence audit work performed by Mr. Amar as an auditor is invalid, he should vacate his office immediately and Das Ltd should appoint another auditor for the company.

• Q Contravene Ltd. appointed CA Innocent as an auditor for the company for the current financial year. Further the company offered him the services of actuarial, investment advisory and investment banking which was also approved by the Board of Directors.

• ANS-Services not to be Rendered by the Auditor: Section 144 of the Companies Act, 2013 prescribes certain services not to be rendered by the auditor.

• An auditor appointed under this Act shall provide to the company only such other services as are approved by the Board of Directors or the audit committee, as the case may be, but which shall not include any of the following services (whether such services are rendered directly or indirectly to the company or its holding company or subsidiary company),

• In the given case, CA Innocent was appointed as an auditor of Contravene Ltd. He was offered additional services of actuarial, investment advisory and investment banking which was also approved by the Board of Directors. The auditor is advised not to accept the services as these services are specifically notified in the services not to be rendered by him as an auditor as per section 144 of the Act. Q- Nick Ltd. is a subsidiary of Ajanta Ltd., whose 20% shares have been held by Central

.

Government, 25% by Uttar Pradesh Government and 10% by Madhya Pradesh Government. Nick Ltd. appointed Mr. Prem as statutory auditor for the year.

• ANS-In the given case Ajanta Ltd is a government company as its 20% shares have been held by Central Government, 25% by U.P. State Government and 10% by M.P. State Government. Total 55% shares have been held by Central and Stategovernments. Therefore, it is a Government company.

• Nick Ltd. is a subsidiary company of Ajanta Ltd. Hence Nick Ltd. is covered in the definition of a government company. Therefore, the Auditor of Nick Ltd. can be appointed only by C & AG.

• Consequently, appointment of Mr. Prem is invalid and he should not give acceptance to the Directors of Nick Ltd.

Professional Ethics

No ChangesNote-The chartered accountant Act,1949 has not been amended to incorporate the provision of the companies Act,2013.corresponding sections of the companies act,2013 given above.

Dividend

Dividends And Interim Dividends (Section 123 of company act 2013)(205 0f cos. Act,1956)

A company desirous of declaring dividend on its shares will have to observe the following issues.

I. Dividend can be declared or paid by a company for any financial year only out of:

a. Its profit for that year, arrived at after providing for depreciation; orb. Its profits for any previous financial year or years, after providing for

depreciation as aforementioned and remaining undistributed; orc. Out of balances of profits mentioned in (a) and (b) above; ord. Out of moneys provided by the Central or State Government for payment

of dividend pursuant to the guarantee given by the government.

Dividend out of current year

.

Transfer to Reserves-the company shall transfer to its reserve, the prescribed percentage of its current profits(not exceeding 10%).such transfer shall be made in accordance with the provisions of companies(Transfer of profits to reserves)rule,1975.

Before declaration of dividend, profits shall be compulsorily transferred to reserves at the following rates:

Rate of proposed dividend of paid up capital Minimum percentage of current year’s profits to be transferred to reserve

Up to 10% Nil

Exceeds 10% but up to 12.5% 2.5% of current year’s profits

Exceeds 12.5% but up to 15% 5% of current year’s profits

Exceeds 15% but up to 20% 7% of current year’s profits

Exceeds 20% 10% of current year’s profits

It is evident that no transfer to reserves is required if the rate of proposed dividend is 10% or less.

Rate of proposed dividend mentioned above refers to- (a) Equity dividend and

(b) Part of dividend which participating preference shareholder are entitled to,after receiving their fixed percentage of dividend.

The requirement of transfer to reserves equally applies to deceleration of interim dividend.

A company cans voluntary transfer a higher percentage of its profit to the reserves in accordance with the rules made by the central government.

The term ‘current year profit’ means profit for the current year after providing for depreciation.

The term ‘reserves’ does not include capital reserve or any reserve or any reserve created by revaluation of assets.

Transfer of high percentages to Reserves

As per Companies (Transfer of Profits to Reserve) Rules, 1975, a company may voluntary transfer a percentages higher than 10% of its profits to its reserves for any financial year provided the following conditions are satisfied:

Case-1: Where a dividend declared

.

1. A minimum distribution sufficient for the maintenance of dividends to shareholder at a rate equal to the average of the rates at which dividends declared by it over the 3 years immediately preceding the financial year or:

2. In a case where bonus shares have been issued in the financial year in which the dividend is declared or in the 3 years immediately preceding the financial year , a minimum distribution sufficient for the maintenance of dividends to shareholders at an amount equal to the three years immediately preceding the financial year, is ensured.

3. Provided that in case where the net profits after tax are lower by 20 per cent, or more than the average net profit after tax of the two financial years immediately preceding, it shall not be necessary to ensure such minimum distribution.

Case II: Where no dividend is declared The amount proposed to be transferred to its reserves from the current profits shall be lower than the average amount of the dividend to the shareholders declared by it over the three years immediately preceding the financial year.

Dividend out of the Profits Transferred to Reserves:

Condition: dividend can be declared out of profits transferred to the reserve only if-

1. Previous approval of CG is obtained; or

2. such payment is made in accordance with such rule as may be prescribed by the Central Government in this behalf i.e. , The companies ( Declaration of Dividend out of Reserves) Rules 1975, which are detailed hereunder:

In the event of inadequacy or absence of profits in any year, a company may declare dividend out of the accumulated profits earned by it in previous year and transferred by it to the reserves, subject to the following conditions:

Rate of dividend. The rate of dividend must not exceed lower of –

1. average 6f the rates 6f dividend declared by the company in immediately preceding 5 Financial year, or

2. 10% Amount withdrawn from reserves.

.

Amount withdrawn from reserves amount to be withdrawn from reserves must not exceed 1/10th of aggregate of paid capital and reserves. Further, the amount so withdrawn shall be first utilized to set off the losses incurred in the financial year, and the balance amount can only be utilized for the declaration of dividend.

Balance of reserve . The balance of reserves, after such withdrawal, shall not fall below 15% of paid up share capital.

NOTE : Payment of Dividend by utilizing credit balance of profit and loss account

Carried forward profits which have not transferred to the reserves (i.e. credit balance in the profits and loss account) can be utilized for the payment of dividend without any restriction. Such utilization would not amount to withdrawn of profits from reserves.

Payment of dividend in proportion to amount paid up (section 51 of 2013 Act)

Generally, the dividend is paid on the nominal value of share. However, a company may pay dividend in proportion to the amount paid-up

on each share,if authorized by its articles.

Power to close register of members or debenture holders or other security holders [Section91 of 2013 Act]

1. Closure of register of members means that the company can lawfully refuse to register transfer of shares for such period during which the register of members has been closed. Generally, the company closes its register of members before the annual general meeting. This is done so that the dividend, bonus issue or right issue is given to the person who is the member as on the date of closure of register of members.

2. The period of closure of register of members shall not exceed—

(a) 45 days in a year;(b) 30 days at any one time.

3. The company shall give previous notice of at least 7 days or such lesser period as may be specified by Securities and Exchange Board for listed companies or the companies which intend to get their securities listed, in such manner as may be prescribed.

.

4. In case of any of the following default, the company and every officer of the company who is in default shall be liable to a penalty of Rs. 5,000 for every day subject to a maximum of Rs. 1,00,000 during which the register is kept closed—

(a) register of members is closed without giving the notice; or(b) register of members is closed after giving shorter notice; or(c) register of members is closed for a continuous period in excess of the limits specified above;

or(d) register of members is closed for an aggregate period in excess of the limits specified above.

5. The provisions of this section shall equally apply to register of debentureholders or any othersecurity holders.

The new Act of 2013 introduces the closure of the Registers of other security holders in the provision.Listed companies or the companies which intend to get their securities listed( i.e., the unlisted

companies) close the register of members/ debentureholders I other security holders by giving a previous notice of at least 7 days/ such lesser period as may be specified by Securities and Exchange

Board. This law pertaining to listed companies is lacking in the 1956 Act.

In case of default with respect to the closure of register of member I debenture-holders I other security holders, there the company and every officer of the company who is in default shall be liable to a

penalty ofRs. 5,000for every day during which register is closed but not exceeding Rs. 1,00,000. This limit of penalty is lacking in 1956 Act.

Punishment for failure to distribute dividends Section 127 of company act 2013]

1. As per section 2(35), "dividend" includes any interim dividend. No change in the definition.

2 .Where a dividend has been declared by a company but has not been paid within 30 days from the date of declaration to any shareholder entitled to the payment of the dividend, every defaulting director of the company and the company shall be punishable under this section.

3 Every director who is knowingly a party to the default shall be punishable with imprisonment which may extend to 2 years and with fine which shall not be less than Rs. 1,000 for every day during such default continues.

4. The company shall be liable to pay simple interest at the rate of 18% per annum during the period for which such default continues.

5, Dividend may also be paid by way of issuing warrants to the shareholder.

6. However, no offence under this section shall be deemed to have been committed in the (blowing cases, even if the dividend is not paid within 30 days:—

.

(a) where the dividend could not be paid by reason of the operation of any law; ib) where a

shareholder has given directions to the company regarding the payment of the dividend and

those directions cannot be complied with and the same has been communicated to him;(c) where there is a dispute regarding the right to receive the dividend;( d ) where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or{ e ) where, for any other reason, the failure to pay the dividend or to post the warrant within the period under this section was not due to any default on the part of the company.

Under the Companies Act, 1956, the director of the company, if he is knowingly a party to the default, shall be liable for the imprisonment which may extend to three years in case of failure to pay dividend within 30 days. The imprisonment for the default has now been reduced to two wears under the Companies Act, 2013.Earlier under the Companies Act, 1956, if a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with, then no offence shall be deemed to be committed. But under the Companies Act, 2013, it shall be deemed to be an offence. However, if the same (i.e. directions cannot be complied with) has teen communicated to the shareholder, then no offence shall be deemed to be committed.

Audit of Public Sector Undertaking

Performance Audit

It is an adjective and systematic examination for independent assessment of the performance of a government organization program or activity so as to improve public accountability.

It includes economy and efficiency and program auditsEconomy & efficiency audit

1. It includes determining as to whether:(a) entity is acquiring & using all its resources in economic & efficient

manner.(b) entity is complying with laws and regulations(c) causes of uneconomical & inefficiencies are identified.

2. For example it considers whether the entity is Avoiding overstaffing Having sound procurement practices

.

Using appropriate and efficient operating procedures.Program Audits

1. Program audits include determining the followinga. Effectiveness of programs activities or functions.b. Compliance with laws & regulations applicable to the program.

2. For example performance audit may consider the following: Assessing the suitability of objectives of a new or ongoing program. Deterring the effectiveness of a program. Identifying ways of making

Planning for Performance Audit

Work is to be adequately planned

Auditor should define the audits objectives and the scope and methodology to achieve those objectives

Planning should continue throughout the audit.

Significance and user needs

a. The significance of a matter is its relative importance to the audit objectives and potential users of the audit report,

b. group of users of the auditors' report are; government officials the auditee, the media, interest groups, and individual citizens.

c. Thus, an awareness of these potential users' interests and influence can help auditors understand why the program operates the way it does.Understanding the Program

Auditors should obtain an understanding of the program to be audited The auditors' understanding may come from knowledge they already

have about the program and knowledge they gain from inquiries and observations they make in planning the audit.

Any type of performance audit could encompass program operations if auditors are looking for reasons why the program was successful or not.Criteria

Criteria are the standards used to determine whether a program meets or exceeds^ expectations.

Criteria provide a context for understanding the results of the audit Auditors have a responsibility to use criteria that are reasonable, attainable, and relevant to the matters being audited.

Audit Follow-Up

.

Auditors should follow up on significant findings and recommendations from previous audits

Auditee management is responsible for resolving audit findings and recommendations,

Continued attention to significant findings and recommendations can help auditors

Considering Others' Work

Auditors should determine if"other auditors have previously done audits of the program or the entity that operates it.

If auditors intend to rely on the work of other auditors, they should perform procedures that provide a sufficient basis for that reliance.

Bank Audit

Appointment of Auditor:

Type of Bank How Auditor is appointed How Remuneration to be fixed

State Bank of India To be appointed by Comptroller and Auditor General of India in consultation with the CG

To be fixed by RBI of India in consultation with the CG

Assess the Risk of Fraud including Money Laundering

As per SA 240 (Revised), “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”, the auditor’s objective are to identify and assess the risks of material misstatement in the financial statements due to fraud, to obtain sufficient appropriate audit evidence on those identified misstatements and to respond appropriately. The attitude of professional skepticism should be maintained by the auditor so as to recognise the possibility of misstatements due to fraud.

Deposit Taking Dealing Lending

Management and employee frauds

Camouflage of depositors by hiding their identity in connection with funds transfer or money laundering.

Unrecorded deposits.

Theft of customer deposits

Off market / related party deals whereby no checks are carried out on the prices at which deals are transacted or there are unusual activity levels with certain counterparties.

Loans to fictitious borrowers.

Transactions with connected companies.

Kick backs and inducements.

Selling recovered collateral at below market prices.

Bribes to obtain release of security or

.

particularly, from dormant accounts.

High level of business with particular brokers, including payment of abnormal commission.

False deals represented by unusual number of cancelled deals or unusually high number of unsettled transactions.

Delayed deal allocations

represented by no time stamping of deals or alterations or overwriting on deals sheets.

Exploiting weaknesses in matching procedures due to absence of proper guidelines.

to reduce the amount claimed.

Theft or misuse of collateral held as security.

External Frauds Money

Laundering. Fraudulent

instructions. Counterfeit

currency.

Fraudulent custodial sales.

False information or documents regarding counterparties

Impersonation and false information on loan applications.

Fraudulent valuations.

Misappropriation of loan funds by agents /customers

Due to the nature of their business, banks are ready for targeting those who are engaged in the money laundering activities by which the proceeds of illegal acts are converted into proceeds from the legal acts. The RBI has framed specific guidelines that deal with prevention of money laundering and “Know Your Customer (KYC)” norms. The RBI has from time to time issued guidelines (“Know Your Customer Guidelines – Anti Money Laundering Standards”), requiring

.

banks to establish policies, procedures and controls to deter and to recognise and report money laundering activities.

Insurance

Trade credit insurance It means insurance of suppliers against the risk of non-payment of goods or services by their

buyers who may be situated in the same country as the supplier (domestic risk) or a buyer situated in another country (export risk) against non-payment as a result of insolvency

of the buyer or non-payment after an agreed number of months after duedate (protracted default) or non-payment following an event outside the control of the buyer or the seller (political risk cover).

Political risk cover is available only in case of buyers outside India and in countries agreed upon at the proposal stage.

An insurer shall offer trade credit insurance product only if all requirements mentioned below are met:

1) Policyholder's loss is non-receipt of trade receivable arising out of a trade of goods or services. 2) Policyholder is a supplier of goods or services in consideration for a fair market value. 3) Policyholder's trade receivable does not arise out of factoring or reverse factoring arrangement or any other similar arrangement. 4) Policyholder has a customer (i.e. Buyer) who is liable to pay a trade receivable to the policyholder in return for the goods and services received by him from the policyholder, in accordance with a policy document filed with the insurer. 5) Policyholder undertakes to pay premium for the entire Policy Period. 6) Any other requirement that may be specified by the Authority from time to time.

.

For May 2014 Exam

Non-Banking Financial Company

Definition of NBFC

Section 45 I(f) of Reserve Bank of India (Amendment) Act, 1997 defines a non-banking financial company as:(i) A financial institution which is a company;(ii) A non banking institution which is a company with principal business of receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;(iii) Such other non-banking institution or class of such institutions, as the Reserve Bank with the previous approval of the Central Government may specify by notification in the Official Gazette.

Type of NBFCsCurrently, NBFCs registered with RBI are being classified as:

Asset Finance Company (AFC)

The main activity of an AFC is financing of physical assets supporting productive / economic activity.

These may be in the areas such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments and general purpose industrial machines.

Investment Company (IC)

Which mainly deal in acquisition of shares and securities of other companies.

A core investment company would be a company which acquires shares and securities of Group companies

Loan Company (LC):

Loan companies primarily provide finance (whether by making loans or advances or otherwise for any activity), other than its own activity.

Infrastructure Finance Companies:

This category of NBFCs deploys a minimum of three-fourths of their total assets in infrastructure loans.

The net owned funds of this category of NBFCs are more than ` 300 crores and they should have a minimum credit rating of ‘A’ or equivalent and the Capital to Risk-Weighted Assets Ratio (CRAR) is 15%

.

(with a minimum Tier I Capital of 10%).Core Investment Company (CIC):

These are NBFCs which carry on the business of acquisition of shares and securities in group companies and

Satisfies four conditions stated in the regulatory framework for Core Investment Companies issued by RBI.

Infrastructure Debt Fund- Non- Banking Financial Company (IDF-NBFC) -

Infrastructure Debt Funds (IDFs) are funds set up to facilitate the flow of long-term debt into infrastructure projects.

The IDF will be set up either as a trust or as a company.

A trust based IDF would normally be a Mutual Fund (MF) while a company based IDF would normally be a NBFC.

Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI)

Non-deposit taking NBFC(other than a company licensedunder Section 25 of the Indian Companies Act, 1956) that fulfils certain conditions

Audit Procedure i) General Procedure

1. Ascertaining the business of the Company.2. Evaluation of I.C. System.3. Registration with RBI which is compulsory for companies having net owned funds of Rs.2 Crores.Also ascertain whether it has submitted quarterly return with RBI about liquid Assets within 15 days in specified form. Moreover, it must transfer at least 20% of its net profit to reserve fund before any dividend is declared.

ii) NBFC Public Deposit Directions

(i) Public deposit in accordance with the credit rating assigned to it.(ii) Interest calculations should be proper(iii) NBFC accepted public deposit or renewed it only after written application received by the depositor in a specified form.(iv) Public deposits should be accepted only after advertisement or statement in lieu of advertisement has been filed with RBI.(v) Check deposit register (payment on due date).(vi) Investment in approved liquid assets and it should be kept in safe custody.(vii) Audited statement submitted within 15 days of Holding AGM to RBI.

.

(viii) Annual Return within 6 months from close of year submitted to RBI.(ix) If not accepting deposits, see Board resolution in this behalf.(x) For Group holding Investment Company, see board resolution to identify the group.(viii) Annual Return within 6 months from close of year submitted to RBI.(ix) If not accepting deposits, see Board resolution in this behalf.(x) For Group holding Investment Company, see board resolution to identify the group.

iii) NBFC Prudential norms Directions

1) Check compliance with prudential norms encompassing, income recognition, income from investment, AS, asset classification, capital adequacy norms, prohibition on granting of norms against own shares, prohibition on loans and investment, for failure to repay public deposits etc

2) An auditor should ensure that the Board of Directors of every NBFC granting/intending to grant demand/call loans shall frame a policy for the company and shall implement too.

3) He should verify that advances and other credit facilities have been properly classified as standard/sub standard/doubtful/loss and that proper provision has been made.

4) Income from NPAs should be accounted for on realization basis only.

5) He should check whether Previous year’s NPA account has been continue or not.

Audit Check List i) Equipment Leasing Finance Company

1) Ascertain whether proposals for Leasing are accepted only after adequate appraisal.

2) The auditor should verify whether there is an adequate system in place for ensuring installation of assets and their periodical physical verification.

3) The system for ensuring that the asset is adequately insured and properly maintained should be in place.

4) The auditor should ensure that leasing transactions are classified and accounted as per AS- 19 “Leases”.

5) Ensure that the provisions relating to asset classification, provisioning and income

.

recognition laid down for lease financing by NBFCs are observed.

ii) Hire Purchase Finance Company

1) The auditor should verify whether there is a proper system in place for adequate appraisal of proposals.

2) The auditor should verify that payments for assets are made directly to the vendor and the assets are in the name of the company.

3) The auditor should verify whether an adequate system is in place to ensure installation of the asset and their periodic physical verification.

4) If the hire purchase agreement is against vehicles, the registration certificate should contain an endorsement in favour of the financing company.

5) The auditor should verify whether there is adequate system to ensure that no charges are created on the assets by the borrower with proper approval of the financing company.

6) The auditor should check whether interest income is properly recognized.

7) The auditor should verify that hire purchase assets are adequately insured.

8) The auditor should examine the valuation of goods sold on hire purchase and goods repossessed.

9) The auditor should ensure that provisions relating to asset classification, income recognition and provisioning laid down for hire purchase financing by NBFCs have been observed.

iii) Investment Company

1) The investment certificates should be physically verified. In case they are lodged with another person; certificate to that effect should be obtained from such institution.

2) Verify whether investments made by the NBFC are within limits laid down under the NBFC prudential norms.

3) Check that no loans have been advanced on the security of its own share.

4) Verify that income in the form of interest, dividend and capital gains is properly recognized.

.

5) Test Check the contract notes received from brokers with the prices in the stock market on the respective dates.

6) Ensure that there is a proper system of authorization for purchase and sale of investments.

7) Check whether investments have been valued as per NBFC Prudential Norms and AS 13 “Accounting for Investments”.

8) Check the investments made in subsidiary / group companies for basis for price paid, quantum of investment made etc.

9) Check whether investments in unquoted debentures and bonds have not been classified as investments but as term loans for the purpose of asset classification, provisioning and income recognition.

10) In case of securities lent / borrowed under securities lending scheme of SEBI, verify the terms and conditions of the agreement.

11) In respect of shares/securities held through a depository, obtain a confirmation from the depository regarding the shares/securities held by it on behalf of the NBFC.

12) Verify charges received or paid in respect of securities, lend/borrowed;

iv) Loan Company

1) The auditor should verify whether there is system in place for proper appraisal, and sanction of loans.

2) The auditor should verify the terms of sanction and security obtained.

3) Verify that adequate records are maintained as regards the bill discounting facilities.

4) Check that the loans are within the limits specified for single and group borrowers.

5) No loans should be given on the security of NBFCs own shares.

6) Check whether norms for asset classification, provisioning and income recognition as specified for credit facilities have been adhered to.

7) The auditor may also obtain balance

.

confirmation from the borrowers.8) In case of companies which are engaged in

the business of providing short term funds in the ICDs market, the auditor should ascertain whether the NBFC has a regular system for ascertaining the credit worthiness of the clients prior to placed by the company are being rolled over and whether there is any risk of non-recovery.

9) An auditor should also verify whether provision for bad and doubtful debts has been disclosed separately in the B/S and the same have not been netted off against the income or against the value of assets as required by the NBFC Prudential Norms Directions.

NBFC Audit Report Directions,2008(as notified by RBI)Auditor to submit additional report to BODs

In addition to report made U/s 227 of companies act 1956 on the accounts of NBFC for every FY,

The auditor make separate report to BOD of company on the matters specified below:

A. In case of all non-banking financial companies

(i) Whether the company is engaged in the business of non-banking financial institution and whether it has obtained a certificate of Registration(COR) from the bank.

(ii) In the case of a company holding CoR issued by the Bank, whether that company is entitled to continue to hold such CoR in terms of its asset/income pattern as on March 31 of the applicable year.

B. In the case of a non- banking financial company accepting/holding public deposits

(i) Whether the public deposits accepted by the

company together with other borrowings are within the limits

admissible to the company as per the provisions of the Non-

Banking Financial Companies Acceptance of Public Deposits

(Reserve Bank) Directions, 1998;(ii) Whether the public deposits held by the company in excess of the quantum of such deposits permissible to it under the provisions of Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 are regularised in the manner provided.(iii) Whether an Asset Finance Company having Capital to Risk Assets Ratio (CRAR) less than 15% or an Investment Company or a Loan company is accepting "public deposit" without minimum investment grade credit rating from an

.

approved credit rating agency;(iv) whether the credit rating(for each of the fixed deposit Scheme):

is in force; and whether the aggregate amount of deposits outstanding

as at any point during the year has exceeded the limit specified by the such Credit Rating Agency;

(v) In case of NBFCs having Net Owned Funds of Rs. 25 lakh and above but less than Rs 200 lakhs, whether such company has frozen its level of deposits as on the date of that Notification;

(vi) Whether the company has defaulted in paying to

its depositors the interest and /or principal amount;(vii) Whether the company has complied with the prudential norms on income recognition, accounting standards, asset classification, provisioning for bad and doubtful debts, and concentration of credit/investments;

(viii) Whether the capital adequacy ratio has been correctly determined;(ix) Whether the company has complied with the liquid assets requirement;

(x) Whether the company has furnished to the Bank within the stipulated period the return on deposits;

(xi) Whether the company has furnished to the Bank

within the stipulated period the half yearly return on

prudential norms;

(xii) Whether, in the case of opening of new branches or

offices to collect deposits or in the case of closure of

existing branches/offices or in the case of appointment

of agent, the company has complied with the

requirements.C. In the case of

a non-banking financial company not accepting public deposits

(i) Whether the Board of Directors has passed a resolution for non- acceptance of any public deposits

(ii) Whether the company has accepted any public deposits during the relevant period/year;

(iii) Whether the company has complied with the prudential norms

whether the capital adequacy ratio as disclosed in the return submitted to the Bank has been correctly arrived at

.

and. Whether the company has furnished to the Bank the

annual statement of capital funds, risk assets/exposures and risk asset ratio within the stipulated period.

D. In the case of a company engaged in the business of non-banking financial institution not required to hold CoR subject to certain conditions

Where a Company has obtained a specific advice from the Bank that it is not required to hold CoR from the Bank whether the company is complying with the conditions stipulated as advised by the Bank

Classification of Frauds by NBFC (RBI Circular March, 2008) (a)Misappropriation and criminal breach of trust. (b)Fraudulent encashment through forged instruments,

manipulation of books of account or through fictitious accounts and conversion of property.

(c) Unauthorised credit facilities.(d) Negligence and cash shortages.(e) Cheating and forgery.(f) Irregularities in foreign exchange transactions.(g) Any other type of fraud not coming under the specific heads

as above.Obligation of auditor to submit an exception report to the BankWhere, in the case of a non-banking financial company, in the

opinion of the auditor the company has not complied with:(a) the provisions of Chapter III B of Reserve Bank of India Act,

1934; or(b) the Non-Banking Financial Companies Acceptance of Public

Deposits (Reserve Bank) Directions, 1998; or(c)Non –Banking financial (deposit accepting or holding)

companies prudential norms(RBI)direction 2007(D) Non banking Financial (Non-deposit accepting or holding)

companies prudential norms(RBI)direction 2007It shall be the obligation of the auditor to make a report

containing the details of such unfavorable or qualified statements and/or about the non-compliance as the case be, in respect of the company to the department of non-banking supervision of bank.

CASE STUDIES

Q1. Explain the classification of NBFCs. What are the special points in the audit of a Non-

Banking Equipment Leasing Finance Company?

.

Hint Ans: Refer To Point No Classification

QUESTIONS

Q1. You are the auditor of IJK Ltd., a NBFC registered with RBI. How would you proceed to

ensure the compliance of Prudential Norms directions by it? (4 Marks) (Nov 2008)

Q2. Enumerate the verification procedures in relation to audit of a Hire-Purchase Finance

Company. (8 Marks) (June 2009)

Q3. Write short notes on the special points that may be covered in the audit of equipment

leasing finance company. (4 Marks) (May 2010)

BANK AUDIT

Prudential norms for classification, valuation and operation of investment portfolio by banks issued on July 1, 2011.

Investment policy: Banks are required to frame their investments policy and obtain the Board's approval. Such policies should be implemented to ensure that the operations in securities are conducted in accordance with sound and acceptable business practices. Investments in Shares/debenture: Banks opting to invest in shares/debentures to observe the following guidelines:(i) Build up adequate expertise in equity research and establish equity research facility.(ii) Formulate transparent policy and procedure for investment in shares as

approved by its board.(iii) Investment committee is to be set up by the bank's board for direct

investments and such committee should be held accountable for the investments made by the bank.

Ready Forward (buy back) Deals: No bank shall undertake inter-bank ready forward transactions other than in treasury bills (of all maturities) and dated securities of the Government of India and State Governments. Transactions through SGL: All transactions in government securities for which SGL facility is available are to be put through SGL accounts only.Use of Bank Receipts:

(i) Banks should not issue BRs under any circumstance in respect of transactions in government securities for which SGL facility is available.

(ii) No BR should be issued covering transactions relating to PMS client or other constituents' accounts including brokers.

.

(iii)No BR should be issued on the basis of a BR of another bank held by the bank, and no transaction should be made on the basis of a mere exchange of BRs held by the bank.

(iv) All BRs should be in a standards formats, and serially numbered.(v) Separate registers for BRs issued and BRs received should maintained.(vi) There should a proper system for custody of unused BRs and their

Utilisation.(vii) The central auditors should review the existence and operations of the

control over unused BRs.

Dealings through Brokers: Banks should follow the guidelines prescribed in the above-mentioned Master Circular:

(i) Transactions between banks should not be put through the broker's account.(ii) The brokerage on the deal payable to brokers should be clearly indicated

on thenotes/memorandum put up to the top management.

(iii) A separate account of brokerage paid, broker-wise, should be maintained. Further, arecord of broker-wise details deals should also be maintained.

(iv) The role of the broker should be restricted to that of bringing the two parties to the deal together.

(v)It should also be ensured by the bank that the broker note contains the exact time of the deal.

(vi) Panel of brokers as approved by top management to be constituted and should bereviewed annually based on criteria laid down by the Board for their empanelmentincluding creditworthiness, market reputation, etc., of the brokers.

(viii) Inter bank securities transactions should not be entered through a broker unless such transactions are undertaken on NSE, BSE or OTCEI.

(ix) Concurrent auditors who audit the treasury operations should scrutinise the business done through brokers and report to the appropriate authority in accordance with the Master Circular.

Audit, Review and Reporting: ♦ Banks should undertake half-yearly reviews (as of 30th September and

31st March) of their investment portfolio. ♦ These half yearly reviews should not only cover the operational

aspects of the investment portfolio but also clearly indicate amendments made to the investment policy and certify the adherence to laid down internal investment policy and procedures and RBI guidelines.

.

♦ The copy of the review reports should be put up to banks' boards within a month, and should be forwarded to RBI by 15 November and 15 May respectively.

Classification of Investments

Banks are required to classify their entire investments portfolio into three categories: (i) Held-to-maturity (HTM): This category would comprise securities acquired by the bank with the intention to hold them up to maturity.(ii) Held-for-trading (HFT):This category would comprise securities acquired by the bank with the intention of trading, i.e., to benefit from short-term price/interest rate movements.(iii) Available-for-sale (AFS):This category will comprise securities, which do not qualify for being categorised in either of the above categories, i.e., those that are acquired neither for trading purpose nor for being held till maturity.Banks should decide the category of the investment at the time of acquisition and the decision should be recorded on the investment proposal/deal slip.(i) HTM Category-Broad Guidelines: The RBI has prescribed the following guidelines with regard to HTM category:(1) Investments under this category should not normally exceed 25 per cent

of the totalinvestments of the bank, however, this limit can be exceeded, provided-(a) the excess comprises only SLR securities, and(b) the total SLR securities held in the HTM category is not more than 25

per cent of their DTL as on the last Friday of the second preceding fortnight.

(2) the following securities are to be classified under HTM but are not to be reckoned while applying the ceiling of 25 per cent:♦ Re-capitalisation bonds received from the Government of India

towards their recapitalisation requirement and held in their investment portfolio.

♦ Investment in subsidiaries and joint ventures (A Joint Venture would be one in which the bank, along with its subsidiaries, holds more than 25 percent of the equity).

♦ The investments in debentures/bonds, which are deemed to be in the nature of advance

(3) Profit on sale of HTM category investments should first be credited to Profit & Loss account and thereafter appropriated to 'Capital Reserve Account' and loss is to be charged to Profit & Loss Account.

(ii) Held for Trading: The broad RBI guidelines are as follows:(1) These securities are to be sold within 90 days.

.

(2) Profit/loss is recognised in the Profit & Loss Account.(iii) Available for Sale: Profit/loss on sale of investments under this category is recognized in the Profit & Loss Account.

Shifting Among Categories:

To / from HTM Approval of BOD. Shifting can take place once a year at beginning of year.

From AFS to HFT with approval of BOD / ALCO/ Investment Committee. From HFT to AFS Generally not allowed only in exceptional situation with

permission of BOD /ACCO / I Committee.Shifting of investments from one category to another should, under all circumstances, be done at the lowest of-(i) acquisition cost;(ii) book value; and(iii) market value on the date of transfer.Valuation

(i) Held-to-Maturity Securities: Investments classified under held-to-maturity category need not be marked to market. They should be carried at acquisition cost unless it is more than the face value, in which case the premium should be amortised over the period remaining to maturity.(ii) Available-for-Sale Securities: The individual scrips in the Available for Sale category will be marked to market at quarterly or at more frequent intervals. Further, the investment in a particular classification, both in domestic and foreign securities, may be aggregated for the purpose of arriving at net depreciation/appreciation of investments under that category.Net depreciation, if any, shall be provided for. Net appreciation, if any, should be ignored. Net depreciation required to be provided for in any one classification should not be reduced on account of net appreciation in any other classification. (iii) Held-for-Trading Securities: The individual scrips in the held-for-trading categoryshould be marked to market at monthly or at more frequent intervals and provided for as in the case of those in the available-for-sale category.

Non-Performing Investments:

A non performing investment (NPI), similar to a non-performing advance (NPA), is one where(i) Interest/ instalment (including maturity proceeds) is due and remains

unpaid for more than 90 days.(ii) The above would apply mutatis-mutandis to preference shares where the

fixed dividend is not paid.

.

(iii) If any credit facility availed by the issuer is NPA in the books of the bank, investment in any of the securities, including preference shares issued by the same issuer would also be treated as NPI and vice versa. However, if only the preference shares are classified as NPI, the investment in any of the other performing securities issued by the same issuer may not be classified as NPI and any performing credit facilities granted to that borrower need not be treated as NPA.

(iv) The investments in debentures/bonds, which are deemed to be in the nature of advance would also be subjected to NPI norms as applicable to investments.(v) In case of conversion of non-performing loans into equity, debentures,

bonds, etc., such instruments should be treated as NPI ab-initio in the same asset classification in which the relevant non-performing loans were

classified and provision should be made as per the norms.The guidelines specified above for identification of NPI will apply to state government guaranteed securities also.Bank should make appropriate provisions for such NPIs by way of depreciation in the value of the investment. The banks should not set-off the depreciation requirement in respect of these non-performing securities against the appreciation in respect of other performing securities.

Investment Fluctuation Reserve (IFR), Market Risk & Investment Reserve Account (IRA)

The Master Circular specifies the following guidelines with respect to IFR and IRA:(i) Banks have been advised to build reserves towards investment

fluctuation, of a minimum 5% of the investment portfolio within 5 years period.

(ii) Banks are allowed to consider balance in excess of 5% held in IFR as Tier I capitalsubject to the conditions.

(iii) Banks are allowed to consider balance held in IFR as Tier I capital subject to theconditions.

(iv) Provisions created for depreciation on investments in the AFS and HFT categories iffound excessive should be credited to the Profit & Loss Account and equivalent amount should be appropriated to an Investment Reserve Account

(v) The Investment Reserve Account can be utilised in the manner prescribed (vi) The withdrawal from the Investment Reserve Account cannot be used for

dividend declaration. Income Recognition:

.

The banks may book income in the following manner:(i) Banks may book income on accrual basis on securities of corporate

bodies/ public sector undertakings in respect of which the payment of interest and repayment of principal have been guaranteed by the Central Government or a State Government, provided interest is serviced regularly and as such is not in arrears.

(ii) Banks may book interest income from all other performing investments on accrual basis provided interest rates on these instruments are pre-determined.

(iii) Discount earned on discounted instruments like commercial papers, zero coupon bonds should be booked on accrual basis. The discount may either be accrued equally over the remaining period to maturity or by following the constant yield method.

(iv) Interest income from non-performing investments should be booked on realisation.(v) Dividend on shares may be booked on accrual basis provided it is

approved by thecorporate body in its Annual General Meeting and the owner's right to receive dividend is established.

(vi) Income from units of mutual funds should be booked on cash basis.(vii) Discount on interest bearing government securities classified under

HTM should berecognised on redemption of the investments and should not be amortised over theremaining period to maturity.

(viii) Profit and loss on sale of investments should be shown under Profit/Loss on sale of investments

Broken-period Interest:

Banks should not capitalise the Broken Period Interest paid to seller as part of cost, but treat it as an item of expenditure under Profit and Loss Account

Non-Performing Assets:

An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank.

A non performing asset (NPA) is a loan or an advance where;

(i) The installment of principal or interest thereon remains overdue for two crop seasons for short duration crops,

(ii) The installment of principal or interest thereon remains overdue for one crop season for long duration crops,

(iii)The account remains “out of order “ in respect of

.

an overdraft/Cash credit(OD/CC),(iv) The bill remains overdue for a period of

more than 90 days in the case of bills purchased and discounted,

(v) Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,

(vi) The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitization transaction undertaken in terms of guidelines on securitisation dated February 1, 2006.

(vii) In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.

On Leased Assets The finance charge component of finance income [as defined in 'AS 19 -Leases] on the leased asset which has accrued and was credited to income account before the asset became non-performing, and remaining unrealised, should be

reversed or provided for in the current accounting period.

Sale/ Purchase of NPAs: In case of a sale/ purchase of NPAs by the bank, the auditor should examine the policy laid down by the Board of Directors in this regard relating to procedures, valuation and delegation of powers.

The auditor should also examine that:(i) Only such NPA has been sold which has remained

NPA in the books of the bank for atleast 2 years.

(ii) The assets have been sold/ purchased "without recourse only.

(iii)Subsequent to the sale of the NPA, the bank does not assume any legal, operational orany other type of risk relating to the sold NPAs.

(iv) The NPA has been sold at cash basis only.(v) The bank has not purchased an it NPA which

had originally sold.

The auditor should also ensure that:(i) On the sale of the NPA, the same has been removed from the books of the account.(ii) The short fall in the net book value has been charged to the profit and loss account.

In case of sale of an NPA

.

(iii) where the sale is for a value higher than the NBV, no profit is recognised and the excessprovision has not been reversed but retained to meet the shortfall/ loss on account ofsale of other non-performing financial assets.

The auditor should verify that:

(i) The NPA purchased has been subjected to the provisioning requirements appropriate tothe classification status in the books of the purchasing bank.

(ii) Any recovery in respect of an NPA purchased from other banks is first adjusted againstits acquisition cost and only the recovered amount in excess of the acquisition cost hasbeen recognised as profit.

(iii) For the purpose of capital adequacy, banks has assigned 100% risk weights to the NPAspurchased from other banks.

Agricultural Debt Waiver and Debt Relief Scheme,

20081. While the entire 'eligible amount shall be waived

in the case of a small or marginal farmer, in the case of 'other farmers', there will be a one time settlement scheme (OTS) under which the farmer will be given a rebate of 25 per cent of the 'eligible amount subject to the condition that the farmer repays the balance of 75 per cent of the 'eligible amount.

2. The amount eligible for waiver, pending receipt from the Government of India, may be transferred by the banks to a separate account named "Amount receivable from Government of India under Agricultural Debt Waiver Scheme 2008".

3. The balance in this account may be treated by the banks as a "performing" asset, provided adequate provision is made for the loss in Present Value (PV) terms, computed under the assumption that such payments would be received from Government of India in the installments.

4. However, the provision required under the current norms for standard assets, need not be provided for in respect of the balance in this account.

5. The accounts subject to Debt Relief Scheme would be classified as standard / performing assets only if the farmers pay their share of the settlement within one month of the pre-specified due dates.

6. In case, however, the payments are delayed by the farmers beyond one month of the respective

In case of purchase of NPAs

.

due dates, the outstanding amount in the relevant accounts of such farmers shall be treated as NPA. The asset classification of such accounts shall be determined with reference to the original date of NPA,

Restructuring/ Reschedulement of Loans {Including Under Corporate Debt Structuring (CDR) Scheme}:

Eligibility criteria for restructuring of

advances

1. Banks may restructure the accounts classified under 'standard', 'sub-standard' and 'doubtful' categories.

2. Banks can not reschedule / restructure / renegotiate borrowal accounts with retrospective effect.

3. While a restructuring proposal is under consideration, the usual asset classification norms would continue to apply.

4. The asset classification status as on the date of approval of the restructured package by the competent authority would be relevant to decide the asset classification status of the account after restructuring / rescheduling / renegotiation.

5. No account can be taken up for restructuring by the banks unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring package.

6. BIFR cases are not eligible for restructuring without the express approval of the BIFR

Asset Classification Norms: The stages at which the restructuring/rescheduling/ renegotiation of the terms of loan | agreement could take place are as under:

(a) before commencement of commercial production/operation;

(b) after commencement of commercial production/operation but before the asset has been classified as sub standard; and

(c) after commencement of commercial production/operation and after the asset has been classified as sub standard or doubtful.

The accounts classified as 'standard assets' should be immediately re-classified as 'substandard assets' upon restructuring except for in certain cases.

Any additional finance may be treated as 'standard asset', up to a period of one year after the first interest/principal payment, whichever is earlier, falls due under the approved restructuring package. However, in case of accounts where the pre-restructuring facility was classified as "sub-standard" and "doubtful", interest income on the additional finance should be recognized on cash basis only. If the restructured asset does not qualify for

.

upgradation at the end of the above specified one year period, the additional finance shall be placed in the same asset classification category as the restructured debt

Upgradation of Accounts:

All restructured accounts would be eligible for up-gradation to the 'standard' category after observation of 'satisfactory performance* during the 'specified period'. Specified Period means a period of one year from the date when the first payment of interest or installment of principal fails due under the terms of restructuring package.

Subsequent Restructuring:

In case a restructured asset, which is a standard asset on restructuring, is subjected to restructuring on a subsequent occasion, it should be classified as sub-standard. If the I restructured asset is a sub-standard or a doubtful asset and is subjected to restructuring, on a subsequent occasion, its asset classification will be reckoned from the date when it became NPA on the first occasion.

Income Recognition Norms: Interest income in respect of restructured accounts

classified as 'standard assets' is to be recognised on accrual basis and that in respect of the accounts classified as 'non-performing assets' is to be recognised on cash basis. However, in the case of accounts where the pre-restructuring facilities were classified as 'sub-standard' and 'doubtful', interest income on the additional finance classified as Standard Asset should be recognised only on cash basis.

Provisioning Norms Banks are required to hold provision against the restructured advances as per the existing provisioning norms.

Provision for diminution in the fair value of restructured

advances:

Reduction in the rate of interest and /or reschedulement of the repayment of principal amount, as part of the restructuring, will result in diminution in the fair value of the advance. Such diminution in value is an economic loss for the bank and will have impact on the bank's market value of equity. It is, therefore, necessary for banks to measure such diminution in the fair value of the advance and make provisions for it by debit to Profit & Loss Account .

The erosion in the fair value of the advance should be computed as the difference between the "the present value of future cashflows (principal and interest) reckoned based on the current BPLR as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring", and 'the present value of future cashflows'

.

(principal and interest) based on rate charged as per the restructuring package

Prudential Norms for Conversion of Principal into Debt/Equity

Asset Classification Norms: A part of the outstanding principal amount can be converted into debt or equity instruments as part of restructuring. The debt/equity instruments so created will be classified in the same asset classification category in which the restructured advance has been classified.Income Recognition Norms

Standard Accounts: In the case of restructured accounts classified as 'standard', the income, if any, generated by these instruments may be recognised on accrual basis.

Non- Performing Accounts: In the case of restructured accounts classified as non-performing assets, the income, if any, generated by these instruments may be recognised only on cash basis.

Corporate Debt Restructuring (CDR)

Mechanism1. A Corporate Debt Restructuring system has been

evolved for restructuring of the corporate debts of viable entities facing problems, which are outside the purview of BIFR, DRT and other legal proceedings.

2. All the banks have been advised by RBI to follow the Corporate Debt Restructuring mechanism , which would be a non-statutory voluntary system.

3. The RBI has issued separate guidelines in respect of debt restructuring for small and medium enterprises (SMEs).

4. Corporate Debt Restructuring (CDR) would generally affect the operations both at Branch level as well as the Head office level, although, in most of the cases the effects of provisioning due to sacrifice in the interest would be made at the Head Office level.

5. Accounts, which are classified as 'standard' and 'substandard' in the books of the Creditors , will be restructured under the first category (Category 1). Accounts which are classified as 'doubtful' in the books of the creditors would be restructured under the second category (Category 2).

6. Category 1 CDR system: It is applicable only to accounts classified as 'standard' and 'substandard'. There may be a situation where a small portion of debt by a bank might be classified as doubtful. In that situation, if the account has been classified as 'standard'/ 'substandard' in the books of at least 90% of creditors (by value), the same would be treated as standard / substandard, only for the purpose of judging the account as eligible for CDR, in the books of the remaining 10% of creditors. There is no requirement of the account / company

.

being sick, NPA or being in default for a specified period before reference to the CDR system. However, potentially viable cases of NPAs will get priority.

7. Category 2 CDR System: Second category of CDR applies to such cases where the accounts have been classified as 'doubtful' in the books of creditors, and if a minimum of 75% (by value) and 60% (by number) of the lenders satisfy themselves of the viability of the account and consent for such restructuring. It will not be binding on the creditors to take up additional financing worked out under the debt restructuring package and the decision to lend or not to lend will depend on each creditor bank/FI separately.

Eligibility criteria(i) The CDR mechanism covers only multiple banking

accounts/ syndication/consortium accounts of corporate borrowers with outstanding exposure of 10 crore and above by banks and institutions.

(ii) Corporates indulging in frauds even in a single bank are ineligible for restructuring under CDR mechanism. The Core Group may ensure that cases involving frauds or diversion of funds with malafide intent are not covered.

Reference to Corporate Debt Restructuring SystemReference to Corporate Debt Restructuring System could be triggered by

(i) any or more of the creditor who have minimum 20% share in either working capital or term finance, or

(ii) by the concerned corporate, if supported by a bank or financial institution having stake as in (i) above.

Stand-Still Clause One of the most important elements of Debtor-

Creditor Agreement is the 'stand still' agreement binding for 90 days, or 180 days by both sides. Under this clause, both the debtor and creditors should agree to a legally binding 'stand-still' whereby both the parties commit themselves not to take recourse to any other legal action during the 'stand-still' period.

During pendency of the case with the CDR system, the usual asset classification norms would continue to apply.

Additional finance:Additional finance, if any, is to be provided by all creditors of a 'standard' or 'substandard account' irrespective of

.

whether they are working capital or term creditors, on a pro-rata basis. In case for any internal reason, any creditor (outside the minimum 75 per cent and 60 per cent) does not wish to commit additional financing, that creditor will have an exist option. Exit option: A creditor (outside the minimum 75 per cent and 60 per cent) who for any internal reason does not wish to commit additional finance have an exit option. At the same time, in order to avoid the "free rider" problem, it is necessary to provide some disincentive to the creditor who wishes to exercise this option.Conversion Option The CDR Empowered Group, while deciding the restructuring option package, should decide on the issue regarding convertibility (into equity) option as a part of restructuring exercise, whereby, the banks/financial institutions shall have the right to convert a portion of the restructured amount into equity.

DebtRestructuring Mechanism for

Small and Medium

Enterprises (SMEs)

Unlike in the case of CDR Mechanism, the operational rules of the mechanism have been left to be formulated by the banks concerned. This mechanism will be applicable to all the borrowers which have outstanding up to 10 crore under multiple/consortium banking arrangement Major elements of this arrangements are as under:

(i) Under this mechanism, banks may formulate, with the approval of their Board of Directors, a debt restructuring scheme for SMEs within the prudential norms laid down by RBI.

(ii) While framing the scheme, banks may ensure that the scheme is simple to comprehend and will, at the minimum, include parameters indicated in these guidelines.

(iii) Banks should work out the restructuring package and implement the same within a maximum period of 90 days from date of receipt of requests.

(iv) The SME Debt Restructuring Mechanism will be available to all borrowers engaged in any type of activity.

(v) Banks may review the progress in rehabilitation and restructuring of SMEs accounts on a quarterly basis and keep the Board informed

PEER REVIEW

.

1. Meaningi. The term “Peer” means a person of similar standing.ii. The term “Review” means retrospective evaluation of the subject

matter.iii. “Peer Review” means an examination and review of the systems and

procedures to ensure whether they have been put in place by the practice unit for ensuring the quality of attestation services.

iv. The review is carried out by a “Reviewer”, i.e., a member, selected from a panel of reviewers maintained by the Board.

v. The term “practice unit” means members in practice, whether practicing individually or as a firm of Chartered Accountants.

2. Objectivei. To ensure that members while performing attestation services comply

with technical standards laid down by the Institute;ii. To ensure that such a member has in place proper system for

maintaining the quality of attestation services performed by him;iii. To ensure compliance with statutory and other regulatory

requirements; andiv. To enhance the reliance placed by the users of FS.

The key objective of peer review exercise is to identify weaknesses that are pervasive and chronic in nature.

3. Scope of Peer Review

The Peer Review process shall apply to all the assurance services provided by aPractice Unit.

1. Once a Practice Unit is selected for Review, its assurance engagement records pertaining to the Peer Review Period shall be subjected to Review.

2. The Review shall cover: Compliance with Technical, Professional and Ethical Standards: Quality of reporting. Systems and procedures for carrying out assurance services. Training programmes for staff (including articled and audit assistants) concerned with assurance functions, including availability of

appropriate infrastructure. Compliance with directions and / or guidelines issued by the Council to

the Members, including Fees to be charged, Number of audits undertaken, register for Assurance Engagements conducted during the year and such other related records.

.

Compliance with directions and / or guidelines issued by the Council in relating to article assistants and / or audit assistants, including attendance register, work diaries, stipend payments, and such other related records.

4. Applicability

Every Practice Unit, based on their category as determined below will be subject to Peer Review in accordance with this statement.

1. Level I :

A Practice Unit which has undertaken any of the under-mentioned assurance Services in the period under review:(i) Central Statutory Audit of Public Sector Banks, Private Sector Banks, Foreign Banks, Cooperative Banks and Public Financial Institutions;(ii) Central Statutory Audit of Central or State Public Sector Undertakings and Central Cooperative Societies based on criteria such as turnover or paid up-capital etc. as may be decided by the Board;(iii) Central Statutory Audit of Insurance Companies;(iv)Statutory Audit of asset management companies or mutual funds;(v) Statutory Audit of enterprises whose equity or debt securities are listed in India or abroad;(vi)Statutory Audit of Entities which have raised funds from public or banks or financial institutions of over Rupees Fifty Crore during the period under review.(vii)Statutory Audit of Entities which have raised donations and / or contributions above Rupees Fifty Crore during the period under Review;(viii) Statutory Audit of entities having Net Worth of more than Rupees Five Hundred Crores at any time during the period under Review;(ix) Statutory Audit of entities which have been funded by Central and / or State Government(s) schemes of over Rupees Fifty Cores during the period under Review.

1. Level II A Practice Unit which has undertaken any of the under-mentioned assurance services in the period under review:(i) Statutory / Internal / / Concurrent / Systems / Tax audit and / or Departmental Review of Branches / Offices of(a). Public Sector or Private Sector and / or Foreign Banks;(b). Insurance Companies;(c). Co-operative Banks

.

(d). Statutory Audit of Regional Rural Banks,(e). Statutory Audit of Non – Banking Financial Companies (NBFCs)(ii) Statutory Audit of entities having Net Worth of over Rs. Five Crores or an annual turnover of more than Rs. Fifty Crores during the period under Review.

Level III Any other Practice Unit providing assurance services not covered in Level I and Level II hereinabove.

Suo-Moto Any Practice Unit not selected for Peer Review, may suo-moto apply to the Board For the conduct of its Peer Review. The Board shall act upon the same within 30 days from the date of receipt of such request

Auditee (Client) Request

An Auditee (Client) may request the Board for the conduct of Peer Review of its auditor (Practice Unit). The Board shall act upon the same within 30 days from the date of receipt of such request.

Periodicity The Periodicity of Peer Review will be(a) Level - I Practice Units – Once in 3 years.(b) Level - II Practice Units – Once in 4 years(c) Level - III Practice Units – Once in 5 YearsHowever, if the Board so decides or otherwise at the request of the Practice Unit, the Peer Review for a Practice Unit can be conducted at shorter interval

5. Peer Review Board1. The Board shall consist of maximum of 12 members to be appointed

by the Council, of whom at least 6 shall be from amongst the Members of the Council.

2. The balance members of the Board shall he drawn from amongst prominent individuals of high integrity and reputation, such as former public officials, regulatory authorities, bankers, senior professional chartered accountants, security industry executives, educators, economists and business executives.

3. The Chairman and Vice-Chairman is appointed by Council from amongst the members of the Council.

4. Casual vacancies on the Board shall be filled in by the council5. The term of a member shall be for one year or such period as may be

prescribed by the Council

6. Eligibility to be a Reviewer

1. A Peer Reviewer shall: -

.

(a) Be a member with at least 10 years of experience in practice;(b) Is in Practice as per the Chartered Accountants Act, 1949.(c) Should have undergone the requisite training as prescribed by the Board.(d) Should furnish a declaration as prescribed by the Board, at the time of acceptance of Peer Review appointment.(e) Should have signed the Declaration of Confidentiality as prescribed by theBoard.(f) Should have conducted audit of Level I Entities for at least 7 years to be eligible for conducting Peer Review of Level I Entities as referred to in Para II of this Statement.

2. For being a Reviewer a member should not have: -(i) Disciplinary action / proceedings pending against him(ii) Been found guilty by the Council or the Disciplinary Board or Committee at any time.(iii) Been convicted by a Competent Court whether within or outside India, of an offence involving moral turpitude and punishable with transportation or imprisonment. (iv)Any Obligation or conflict of interest in the Practice Unit or its Partners /Personnel.

3. A Reviewer shall not accept any professional assignment from the Practice Unit for a period two years from the date of appointment.

7. Peer Review Process –

Selection of Practice Unit and appointment of Reviewer, Planning Execution and Reporting

Selection of Practice Unit and appointment of Reviewer :

(a)A Practice Unit which has been selected for a Peer Review shall be notified by the Board.

(b)Name of three Reviewers shall be recommended by the Board to the Practice Unit so selected.

(c) The Practice Unit shall select one out of the three Reviewers & intimate to the Board within seven days of receipt of the names.

(d)The Board shall intimate the Reviewer so selected and seek his consent within seven days.

.

Planning : i) Information to be furnished by Practice Unit On intimation by the Board of the Reviewer's consent, the Practice Unit shall within 15 days furnish the followinginformation to the Reviewer:

(a)Duly filled-in Questionnaire sent by the Board.(b)Complete list of assurance service clients.(c) A note on the policies and procedures adopted

by the Practice Unit. (d)Details of any proceedings against the

Practice Unit or any of its partners or qualified assistants relating to investigation or allegation of deficiency in the conduct of Attest function by them during the period of three years preceding the period of Review or at any time thereafter i.e. till the date of submission of the duly filled-in

Questionnaire.(ii) Selection of Sample by the Reviewer:

(a) The Reviewer shall within 15 days of receiving the information from the Practice Unit select a sample of the assurance services and intimate the same to the Practice Unit.

(b) The Reviewer may also seek further additional clarification from the Practice Unit on the information furnished / not furnished.

(c) The Reviewer shall plan for an on-site Review visit or initial meeting in consultation with the Practice Unit. The Reviewer shall give the Practice Unit at least fifteen days time to keep ready the necessary records of the selected assurance services.

The Reviewer and Practice Unit shall mutually cooperate and ensure that the entire Review process is completed within 90 days from the date of notifying the Practice Unit about its selection for Review.

Execution (i) Peer Review visits will be conducted at the Practice Unit's head office or /and branch(es) or any other locations. This on-site Review should not extend beyond seven working days.(ii) Compliance Review-General Controls: The Reviewer is required to carry out a compliance Review of the following General Controls for evaluating the degree of reliance to be placed upon them for effective Review:

(a) Independence

.

(b) Maintenance of Professional Skills and Standards

(c) Outside Consultation(d) Staff recruitment. Supervision and

Development(e) Office Administration

(iii)Selection of Assurance Service Engagements for Review

(1)The number of assurance service engagements to be Reviewed shall depend upon:

(a) Standard of quality controls generally prevailing;

(b) The size and nature of assurance service engagements undertaken by the Practice Unit;

(c) The methodology generally adopted by the Practice Unit in providing assurance services;

(d) The number of partners / members involved in assurance service engagements in the Practice Unit;

(e) The number of locations / branch offices of the practice Unit;

(f) The Fees charged / received / service tax paid by the Practice unit.

(2) From the initial sample selected at the planning stage, the Reviewer, in consultation with the Practice Unit, may reduce or enlarge the initial samplesize of assurance service engagements for Review.

(iv)Review of Records The Reviewer is required to adopt a combination of compliance approach and substantive approach in the Review process.1. Compliance Approach - Assurance Service

Engagements. The compliance approach is to assess whether proper control procedures have been established / followed by the Practice Unit.

2. Substantive Approach - Assurance Service Engagements. This approach requires a Review of the assurance working papers in order to establish the extent of compliance, whether the assurance work has been carried out as per the Technical, Ethical, and Professional Standards

.

Reporting The Peer Review Report should state that the system of quality control of the Practice Unit has been designed that ensures compliance with Technical, Professional and Ethical standards. The Peer Review Report shall address his report of compliance or otherwise on the following areas of controls:(a) Independence(b) Maintenance of Professional skills and standards.(c) Outside Consultation(d) Staff recruitment, Supervision and Development.

(e) Office Administration.(1)Discussion/Communication of Findings(i) After completing the on-site Review, the

Reviewer, before making his Report to the Board, shall communicate his findings in the Preliminary Report to the Practice Unit if in his opinion, the systems and procedures are deficient or non-compliant with reference to any matter that has been noticed by him or if there are other matters where he wants to seek clarification.

(ii) The Practice Unit shall within 15 days after the date of receipt of the findings, make any submissions or representations, in writing to the Reviewer, (i.e Response to the Preliminary Report).

(2)Peer Review Report of Reviewer(a)At the end of an on-site Review if the Reviewer is

satisfied with the reply received from the Practice Unit, he shall submit a Peer Review Report to the Board along with his initial findings, response by the Practice Unit and the manner in which the responses have been dealt with. A copy of the report shall also be forwarded to the Practice Unit.

(b)In case the Reviewer is of the opinion that the response by the Practice Unit is not satisfactory, the Reviewer shall accordingly submit a modified Report to the Board incorporating his reasons for the same. The Reviewer shall also submit initial findings, response by the Practice Unit and the manner in which the responses have been dealt with. A copy of the report shall also be forwarded to the Practice Unit.

(c) In case of a modified report, The Board shall order for a "Follow On" Review after a period of one year from the date of issue of report. If the Board so decides, the period of one year may be reduced but shall not be less than six months.

.

8. Qualified Assistant:(1)The reviewer may take the help of a qualified assistant while carrying

out peer review. (2)A reviewer is permitted to take the assistance of only one assistant

who shall be a chartered accountant and a person who does not attract any of the dis-qualifications prescribed under Section 8 or Section 21 of the Chartered Accountants Act, 1949.

(3)The name of the qualified assistant which shall be identified and intimated to the Board as well as the practice unit before the commencement of the peer review.

(4)Such a qualified assistant shall also have to sign the declaration of confidentiality

(5)He shall have no direct interface either with the practice unit or the Board.

(6)the person chosen for assisting the reviewer shall be from the firm of the reviewer and should have been working with him for at least one year as a member in practice.

9. Confidentiality:(a)Strict confidentiality shall be maintained by all those involved(b)in the Peer Review process, namely, Reviewers, members of the Board,

any Qualified(c) Assistants or Practice Unit.(d)All persons governed by the secrecy provisions:

shall at all times preserve and aid in preserving secrecy with regard to any matter arising in the performance or in assisting in the performance of any function, directly or indirectly related to the process and conduct of Peer Reviews;

Reviewer shall not make use of or disclose the contents of Review report or any confidential information about the process of Review unless as required by the Board or the Council.

Non-compliance with the secrecy provisions in the above clause shall amount to professional misconduct

A Declaration of Confidentiality shall be signed by the persons who are responsible for the conduct of Peer Review i.e., Reviewers, and his Qualified Assistants and be filed with the Board. All members of the Board shall also sign a declaration of Confidentiality in a manner as may be prescribed by the Board.

10. Approach of the Reviewer:(a)The reviewer should gain an understanding of the engagement letter.

Engagement letter is an important document as it defines the nature and scope of the assurance engagement, practice unit's responsibilities with regard to the engagement. This understanding would help him in planning the review of documentation.

.

(b)The number of assurance engagements to be selected requires the exercise of judgment by the reviewer based on the evaluation of replies given in the questionnaire and the size of the practice unit.

(c) The practice unit may have policies and procedures for accepting a particular engagement. These policies and procedures may not exist in the form of records in each practice unit. In such a case the reviewer should consider enquiring from the concerned persons about such policies and procedures.

(d)The reviewer may follow a combination of compliance procedures and substantive procedures throughout the peer review process. The mix of compliance and substantive procedures depends upon the professional judgement of the reviewer. The reviewer may consider the following: In carrying out the compliance tests, the reviewer may evaluate

whether the policies and procedures of the practice unit are sufficient to ensure compliance of technical standards and whether these policies and procedures are adequately communicated to all staff.

In performing substantive tests, the reviewer should evaluate whether the practice unit's worki relating to the client adequately document the findings and conclusions and whether the practice unit is appropriate,

(e)Finally, the reviewer while evaluating records may consider the following: Determine that any significant issues, matters, problems that arose

during the course of the eit have been appropriately considered, resolved and documented;

Determine that adequate evidence in relation to the engagement is obtained to sr reasonableness of the conclusions drawn; and

determine that significant decisions relating to the engagement, use of professional j resolution of significant matters have been properly documented.

Technical, Professional and Ethical Standards(i) Accounting Standards issued by ICAI and /or prescribed and notified by the CentralGovernment of India;(ii) Standards issued by the Institute of Chartered Accountants of India including(a) Engagement standards(b) Statements(c) Guidance notes(d) Standards on Internal Audit(e) Statements on Quality Control(f) Notifications / Directions / Announcements / Guidelines / Pronouncements /Professional standards issued from time to time by the Council or any of itscommittees.(iii) Framework for the Preparation and presentation of financial statements, framework ofstatements and Standard on Auditing. (iv) Provisions of the various relevant statutes and / or regulations which are applicable in the context of the specific engagements being Reviewed including

.

instructions, guidelines,notifications, directions issued by regulatory bodies as covered in the scope ofassurance engagements;

CASE STUDYQ1. Develop an illustrative check list of audit programme of a reviewee for the guidance of the reviewer under the Peer Review Process?

QUESTIONSQ1. Explain the objectives of Peer Review. (4 Marks) (Nov 2008)Q2. Write short note on “Reporting" stage in Peer Review. (4 Marks) (June 2009)Q3. Briefly explain the Collection of evidences by Peer reviewer. (4 Marks) (Nov 2009)Q4. Write short note on the “Focus of a Peer review”. (3 Marks) (May 2010)

.