RAJKUMAR S. ADUKIA1 Overview of Companies (Auditor’s Report) Order 2003 Rajkumar S. Adukia 093230 61049 [email protected]

RAJKUMAR S. ADUKIA 1

Overview of Companies (Auditor’s Report) Order

2003

Rajkumar S. Adukia

093230 61049

[email protected]


Agenda

1. Background1. Background

2. Focus of CARO 2. Focus of CARO

3. CARO Paragraphs3. CARO Paragraphs

4. Applicable Acts, regulations 4. Applicable Acts, regulations

5. Issues in CARO 5. Issues in CARO

6. Audit under CARO6. Audit under CARO

7. Activities of ICAI7. Activities of ICAI


Spectrum of Audit & Assurance Services

• Distinctions between investigation, certificate,audit,review,due diligence,assurance,compilation,

• Players in Accounting & Auditing process - Management & Auditor

• Responsibility of management - to prepare true and fair financial statements

• Responsibility of Auditor -to express an opinion on financial statements

• Auditor is a watchdog & not a bloodhound


Auditing Process

• 1. Pre Commencement Work– (AAS 1,26)

• 2. Understanding the entity’s business– (AAS 6,20,21,22,23,24,29)

• 3. Audit Planning– (AAS 2,3,8,12,15,16,17)

• 4. Substantive & Analytical Procedures– (AAS 4,5,7,9,10,11,13,14,18,19,30,34)

• 5. Audit Report– (AAS 27,28)

• Audit & Assurance Standards are auditing acts


Sec 227 is Audit Code for Companies

• 227(1) Right of Auditors• 227(1A) Inquire in 6 matters 227(1A) (a) to (f)• 227(2) Report to the members about true and

fair view of Balance Sheet & Profit & Loss Account

• 227(3) 8 matters(a),(b),(bb),©,(d),(e),(f),(g)• 227(4) Reasons for the negative answers 227(2)

Clauses (i) & (ii)227(3) (a),(b),(bb),©,(d)

227(4A) Central Government general or special order

227(5) Deeming Provision


Few Provisions of Companies Act 1956

• Section 215 Authentication of Balance Sheet & Profit & Loss Account

• Section 228 Audit of Accounts of Branch office of companies

• Section 229 Signature of Audit Report• Section 233 Penalty for non compliance by

auditor of sections 227 & 229


Background of Section 227 (4A)

• section (1A) and sub-section(4A) in section 227 inserted by the Companies Amendment Act,1965 w.e.f 15-10-1965 on recommentdation of Daphtary-Sastri committee

• Reasons for Daphtary-Sastri committee recommendations– Loans and advances with little or no interest– False book entries – Manipulations in share prices

• Loss to investing public due to use of such dubious means

• Recommendation in 227(4A) is similar to recommendation in section 619(3) by CAG in case of government companies


History of 227(4A)

• No general or special order between 15-10-1965 to 1975• Between 1975 to 1987 MAOCARO 1975• Between 1988 to 30-6-2003 MAOCARO 1988• Between 1-7-2003 to till date CARO 2003• MAOCARO 1975

– Central Government issued the Manufacturing and Other Companies (Auditor’s report) order, 1975

– applied to all manufacturing, service, trading and finance companies. – Auditor to report on 22 items

• MAOCARO 1988

– Auditor to report on 27 items

• CARO 2003 issued originally on 12th Jedune 2003 & Amended on 25th November 2004

• paragraph 4 has 21 sub paragraphs and 37 questions


CARO 2003 is wider compared to MAOCARO 1988

• Issues in Corporate governance

• Streamlining of reporting,deleting Redundant Paragraphs

• Emphasis on Internal control,Internal Audit

• Reporting on fraud

• Widening the scope of reporting


Non Applicability of CARO,2003

• Banking company

• Insurance company

• Section 25 company

• Private company – paid up capital and reserves upto fifty lakh

rupees and

Loan outstanding from bank or FI upto 25 lakhs and

– Turnover upto 5 crores


Sub Paragraphs of Paragraph 4

• Auditor to respond to 21 items relating to– (i)Fixed Assets– (ii)Inventories– (iii)Terms, conditions of loans and advances(granted

& taken)– (iv)Adequacy of internal control system– (v)Particulars of contracts or arrangements referred in

section 301– (vi)Compliance of 58A,58AA– (vii)Internal Audit System in listed companies/certain

specified companies – (viii)Maintenance of Cost Records


Sub Paragraphs of Paragraph 4(Contd.)

– (ix)Depositing undisputed statutory dues– PF,IEPF,IES,IT,Sales T,WT,Service

T,Customs,Excise,Cess & other statutory dues– (x) Sick Companies– (xi)Default in repayment of dues FI/Bank/Debenture

holders– (xii)Documents for loans and advances granted– (xiii)Compliance of Chit fund act

• Nidhi/Mutual benefit fund/societies

– (xiv)Dealing or trading in shares & securities– (xv) Guarantee for loans taken by others– (xvi)Application of Term Loan


Sub Paragraphs of Paragraph 4(Contd.)

– xvii) Application of term loan fund raised for short term basis

– xviii)Preferential Allotment to parties & companies covered by section 301

– xix)Securities & charge on debenture issues– xx)Disclosure on the end use of money raised

by the public issue– xxi)Reporting on fraud on or by the company

Noticed or reported


Paragraph 4(i)- Fixed Assets

• Questions– Proper records with particulars like quantity and location– Physical verification at reasonable intervals– Dealing with discrepancies. if any– Disposal of substantial portion of FA

• Documentation– Fixed Assets Register showing classification– Management representation on physical verification– Evidence of verification and differences – Shareholders resolution for disposal [section 293(1)(a)]

• References– Companies Act(section 293), AS 10, 24,and 26 and AAS

16


Paragraph 4(ii)- Inventory

• Questions– Physical verification at reasonable intervals– Verification procedure is adequate to company’s size

and nature of business– Proper records– Discrepancies noted are properly dealt with

• Documentation– Evidence of physical verification– List of location & inventory– Management representation regarding Verification

procedure

• References– AS 2, AAS 34


Paragraph 4(iii)- Loans

• Documentation– Details of loans taken from & given to persons

covered in register under section 301– Terms , conditions and rate of interest of above loans

prima facie prejudicial to the interest of company– Repayments regular– Management representation on reasonable steps

taken for recovery of amounts >1 lakh

• References– Companies Act(section 227,297,299,301)– Non-Banking Financial Companies Prudential Norms

(Reserve Bank) Directions, 1998 (Paragraph 6A)


Paragraph 4(iv)- internal control system

• Questions– Adequacy of internal control system commensurate with

company size and business for purchase of inventory and fixed assets and for sale of goods and services

– Continuing failure to correct major weaknesses

• Documentation– Internal control questionnaire, flowchart– Management representation on steps taken to correct

major weaknesses– Internal audit reports

• References– AAS 6


Paragraph 4(v)-Contracts

• Questions– Details of contracts/arrangements referred in section 301

entered in register – Transactions made at reasonable prices with regard to

prevailing market prices

• Documentation– List of companies, firms, parties covered u/s 301– Copy of Form 24AA– Details of statement of contracts u/s 301– Prevailing market prices of similar items– management representation on reasonableness of prices

• References– Companies Act(section 301), AS 18, AAS 23


Paragraph 4(vi)-Deposits

• Questions– Compliance with RBI directives , section 58A,58AA & other

relevant provisions of the Act– Details of nature of contraventions– Compliance with orders of CLB, NCLT, RBI or any Court

• Documentation– Return filed with ROC– Checklist for rules u/s 58A & 58AA– Copy of order of CLB, NCLT, RBI or any Court – Management representation for compliance with RBI

directives

• References– Companies Act(section 58A & 58AA)


Paragraph 4(vii)-Internal control system

• Questions– Existence of internal audit system commensurate with

size & nature of business for:• Listed companies or,• Companies with paid up capital and reserves >50 lakhs or,• Average annual turnover >5 crores for 3 consecutive years

• Documentation– Existence of internal audit department – Its organisational chart – Internal audit reports

• References– AAS 7


Paragraph 4(viii)-Cost records

• Questions– Maintenance of cost records prescribed by

Central Government u/s 209 (1)(d)

• Documentation– List of records maintained u/s 209 (1)(d)

• Reference– Companies Act(section 209)


Paragraph 4(ix)-Statutory dues

• Questions• Regular payment of undisputed statutory dues including PF,

ESI,Income tax, Sales tax, service tax , custom duty, excise duty, cess or other statutory dues– Auditor to give details of Arrears of outstanding statutory dues for

more than 6 months– Details of disputed dues

• Documentation– List of statutory dues with details and evidence of payment – Management representation regarding completeness of

information – List of disputed dues– Schedule of contingent liability

• Reference – Companies Act(section 205C), Income tax (section 44AB)


Paragraph 4(x)-Sickness

• Questions– For a company registered for not < 5 years

• Accumulated losses not < 50% of net worth• Cash losses in current financial year and

preceding financial year

• Documentation– Statement of net worth and accumulated

losses, if any

• Reference– Companies Act[section 2(29A)]


Paragraph 4(xi)-Default in repayment

• Questions– Details of default, if any , in repayment of dues to financial

institutions, banks or debenture holders– Period and amount of default

• Documentation– Schedule showing loans taken with terms, conditions &

repayment schedule– Details of debentures with redemption date, payment date

etc– Loan agreement, debenture trust deeds

• Reference– Companies Act, 1956 (section 372A)& SEBI DIP

Guidelines, 2000(chapter X)


Paragraph 4(xii)-Loans on security

• QuestionsAdequacy of records & documents where loans &

advances granted on security of shares, debentures & other securities– Details of deficiencies , if any

• Documentation– List of loans & advances granted by pledge of security – List of records maintained by company– Statement of holding stating registration in company’s

name( D-mat shares & securities)

• Reference– Companies Act, 1956 (section 125, 372A and Schedule VI)


Paragraph 4(xiii) – Chit Fund/Nidhi/ Mutual benefit fund / societies

• QuestionsCompliance with provisions of any special statutes

applicable – Check

a)Net Owned Funds to Deposit Liability Ratio > 1:20 as on date of Balance Sheet

b)Compliance with prudential norms on income recognition and provisioning against Non Performing Assets

c)Existence of proper credit appraisal procedures

d) Repayment schedule of various loans granted by nidhi based on the borrowers capacity to repay


Paragraph 4(xiii) – Chit Fund/Nidhi/ Mutual benefit fund / societies

• Documentation– Management representation on applicability of

special statute– Procedure of company for credit appraisal,

credit needs, borrowers’ repayment capacity– Statement showing net owned funds vis a vis

liability ratio

• Reference– Companies Act (section 620A),Chit Fund

Act ,1982


Paragraph 4(xiv) – Companies Dealing in shares etc.

• QuestionsMaintenance of proper records of transactions and

contracts and timely recording of entries by companies who deal or trade in shares, securities, debentures and other investments. – securities to be held in company’s own name subject to

exemption under Section 49 of the Companies Act

• Documentation– List of records maintained– Statement of holding stating registration in company’s

name( D-mat shares & securities)

• Reference– Companies Act (section 49),AS 13


Paragraph 4 (xv)- Guarantees

• QuestionsWhether the company has given guarantee for loans taken

by others from bank or financial institutions, the terms and conditions whereof are prejudicial to the interest of the company

• Documentation– List of guarantees provided with details of name,

amount ,period and purpose– Board resolution– Management representation stating reason for

guarantee

• Reference– Companies Act (section 372A)


Paragraph (xvi) – Application of Term Loans

• Questions

Whether term loan applied for purpose obtained

• Documentation– List of loans taken– Board resolution– Sanction letter to verify the purpose of loan

• Reference– The Companies Act [section 227(1A)]


Paragraph (xvii) – Short term Funds

• Questions

Verify whether the funds raised on short-term basis used for long term investment; – if yes, the nature and amount is to be

indicated

• Documentation– Prepare statement showing long term sources

of funds vis a vis long term application of funds


Paragraph (xviii) – Preferential Allotment

• QuestionsPreferential allotment of shares to parties and

companies covered in the Register maintained under section 301 of the Companies Act – Issue price of shares is prejudicial to the interest of the

company

• Documentation– List of companies, firms, parties covered u/s 301– Board resolution for preferential allotment – Valuation report

• Reference– The Companies Act (section 301),SEBI DIP Guidelines,

2000


Paragraph (xix) – Security for Debentures

• Questions

Creation of security or charge for debentures issued

• Documentation– List of debentures issued– Board resolution for creation of charge or security – Verify creation of charge from ROC

documentation

• Reference– The Companies Act , SEBI Act, 1992


Paragraph (xx) – End Use of Money

• QuestionsDisclosure of end use of money raised by

public issues– Verification of same by auditor

• Documentation– Copy of prospectus

– Management representation on completeness of disclosure


Paragraph (xxi) - Fraud

• Questionswhether any fraud on or by the company has been

noticed or reported during the year,– if yes, the nature and amount involved is to be indicated

• Documentation– List of debentures issued

– Board resolution for creation of charge or security

– Verify creation of charge from ROC documentation

• Reference– AAS 4


Issues in CARO

• Terms not defined – Paid up share capital and reserves– turnover

• Time periods not provided for calculation of– paid-up capital and reserves – borrowings of a private limited company

• End use of funds– Difficult to track the end use of funds on one-to one basis– Meaning of long-term investment’ may vary on a case to

case basis, reporting of whether the short-term funds are used for long-term investment will be complicated

• Reporting on frauds– Construction is vague and auditor’s responsibilities not

clear


Contribution in Activities of ICAI

• Technical

- Background material – Articles in CA Journals – Representation matter– Leading a discussion in a study circle– Presentation in a seminar

• Leadership– Coordinating a programme– Convenors of study circle


Committees

1. Accounting Standards Board2. Audit Committee3. Auditing and Assurance Board4. Board of Studies5. Committee for members in the Industry6. Committee for review of Education and Training7. Committee on Commerce Education and career Counseling.8. Committee on Ethical Standards9. Committee on Financial Markets and Investor’s Protection10. Committee on Information Technology 11. Research Committee12. Committee on Corporate Governance


Committees (Contd)

13. Committee on Insurance14. Committee on Internal Audit15. Committee on Trade laws and WTO16. Continuing Professional Education Committee17. Corporate and Allied Laws Committee18. Editorial Board19. Expert Advisory Committee20. Financial Reporting Review Board21. Fiscal Laws Committee22. ICAI-ICWAI-ICSI Coordination Committee23. International Affairs Committee24. Peer review Board25. Public Relations Committee26. Professional Development Committee27. Committee on Accounting Standards for Local Bodies


Committee on Trade laws and WTO

Background Material on following subjects/seminars/monthly e-newsletters :-

• International Commercial Arbitration• Intellectual Property Rights• Anti Dumping,Safeguard measures• Trade in Tax Heaven Countries• Special Economic Zones(SEZ)• Import & Export Procedures(Foreign Trade Policy)• Trade in Free Trade Areas(FTA)• Competition/MRTP


Peer Review

• Audit Manual

• Company Audit Manual

• Tax Audit Manual

• Guidance Note on Peer Review

• Office Records and Procedures

• Reporting


Research Committee

1) Accounting and Auditing of Telecom industry 2) Accounting and Auditing of Media industry 3) Accounting and Auditing of Power industry4) Accounting and Auditing of Oil industry5) Accounting and Auditing of Pharma industry6) Accounting and Auditing of Automobile

industry7) Accounting and Auditing of Sugar industry8) Accounting and Auditing of Paper industry 9) Accounting and Auditing of NBFC


Research Committee

10) Accounting and Auditing of Cement industry11) Accounting and Auditing of BPO Industry12) Accounting and Auditing of Software Industry13) Accounting and Auditing of Hotel Industry14) Accounting and Auditing of Jewellery Industry15) Accounting and Auditing of Textile Industry16) Accounting and Auditing of BPO Industry17) Accounting and Auditing of Tea Industry18) Accounting and Auditing of Computer

Hardware Industry


Questions


THANK YOU