Transcript
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RAJKUMAR S. ADUKIA 1
Overview of Companies
(Auditors Report) Order2003
Rajkumar S. Adukia
093230 61049
researchadukia@gmail.com
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Agenda
1. Background
2. Focus of CARO
3. CAROParagraphs
4. Applicable Acts, regulations
5. Issues in CARO
6. Audit under CARO
7. Activities of ICAI
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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
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Auditing Process
1. Pre Commencement Work (AAS 1,26)
2. Understanding the entitys 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
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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 andfair 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 specialorder
227(5) Deeming Provision
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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
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Background of Section 227
(4A)
section (1A) and sub-section(4A) in section 227inserted by the Companies Amendment Act,1965 w.e.f15-10-1965 on recommentdation of Daphtary-Sastricommittee
Reasons for Daphtary-Sastri committeerecommendations
Loans and advances with little or no interest
False book entries
Manipulations in share prices
Loss to investing public due to use of such dubiousmeans
Recommendation in 227(4A) is similar torecommendation in section 619(3) by CAG in case of
government companies
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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
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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
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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/Debentureholders
(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
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Sub Paragraphs of
Paragraph 4(Contd.)
xvii) Application of term loan fund raised forshort 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
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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 AAS16
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Paragraph 4(ii)- Inventory
Questions Physical verification at reasonable intervals
Verification procedure is adequate to companys sizeand 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
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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 stepstaken 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)
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Paragraph 4(iv)- internal control
system
Questions Adequacy of internal control system commensurate with
company size and business for purchase of inventory andfixed 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 correctmajor weaknesses
Internal audit reports
References AAS 6
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Paragraph 4(v)-Contracts
Questions Details of contracts/arrangements referred in section 301
entered in register
Transactions made at reasonable prices with regard toprevailing 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
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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)
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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
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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)
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Paragraph 4(ix)-Statutory
dues
Questions Regular payment of undisputed statutory dues including PF,
ESI,Income tax, Sales tax, service tax , custom duty, exciseduty, 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 ofinformation
List of disputed dues
Schedule of contingent liability
Reference Companies Act(section 205C), Income tax (section 44AB)
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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 andpreceding financial year
Documentation
Statement of net worth and accumulated
losses, if any
Reference Companies Act[section 2(29A)]
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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 dateetc
Loan agreement, debenture trust deeds
Reference Companies Act, 1956 (section 372A)& SEBI DIP
Guidelines, 2000(chapter X)
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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 companysname( D-mat shares & securities)
Reference Companies Act, 1956 (section 125, 372A and Schedule
VI)
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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
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Paragraph 4 (xv)- Guarantees
QuestionsWhether the company has given guarantee for loans taken
by others from bank or financial institutions, the termsand conditions whereof are prejudicial to the interest ofthe company
Documentation List of guarantees provided with details of name,
amount ,period and purpose
Board resolution
Management representation stating reason forguarantee
Reference Companies Act (section 372A)
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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)]
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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 beindicated
Documentation
Prepare statement showing long term sourcesof funds vis a vis long term application of
funds
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Paragraph (xviii)Preferential
Allotment
QuestionsPreferential allotment of shares to parties and
companies covered in the Register maintainedunder section 301 of the Companies Act
Issue price of shares is prejudicial to the interest of thecompany
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
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Paragraph (xix)Security for
Debentures
QuestionsCreation 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
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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 ofdisclosure
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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
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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 tocase basis, reporting of whether the short-term funds areused for long-term investment will be complicated
Reporting on frauds
Construction is vague and auditors responsibilities not
clear
C t ib ti i A ti iti f
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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
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Committees
1. Accounting Standards Board2. Audit Committee
3. Auditing and Assurance Board
4. Board of Studies
5. Committee for members in the Industry
6. Committee for review of Education and Training
7. Committee on Commerce Education and career Counseling.
8. Committee on Ethical Standards
9. Committee on Financial Markets and Investors Protection
10. Committee on Information Technology
11. Research Committee
12. Committee on Corporate Governance
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Committees (Contd)
13. Committee on Insurance14. Committee on Internal Audit
15. Committee on Trade laws and WTO
16. Continuing Professional Education Committee
17. Corporate and Allied Laws Committee
18. Editorial Board
19. Expert Advisory Committee20. Financial Reporting Review Board
21. Fiscal Laws Committee
22. ICAI-ICWAI-ICSI Coordination Committee
23. International Affairs Committee
24. Peer review Board
25. Public Relations Committee26. Professional Development Committee
27. Committee on Accounting Standards for Local Bodies
C itt T d l
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Committee on Trade laws
and WTO
Background Material on followingsubjects/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
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Peer Review
Audit Manual
Company Audit Manual
Tax Audit Manual
Guidance Note on Peer Review
Office Records and Procedures
Reporting
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Research Committee
1) Accounting and Auditing of Telecom industry2) Accounting and Auditing of Media industry
3) Accounting and Auditing of Power industry
4) Accounting and Auditing of Oil industry
5) Accounting and Auditing of Pharma industry6) Accounting and Auditing of Automobile
industry
7) Accounting and Auditing of Sugar industry
8) Accounting and Auditing of Paper industry
9) Accounting and Auditing of NBFC
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Research Committee
10) Accounting and Auditing of Cement industry11) Accounting and Auditing of BPO Industry
12) Accounting and Auditing of Software Industry
13) Accounting and Auditing of Hotel Industry
14) Accounting and Auditing of Jewellery Industry
15) Accounting and Auditing of Textile Industry
16) Accounting and Auditing of BPO Industry
17) Accounting and Auditing of Tea Industry18) Accounting and Auditing of Computer
Hardware Industry
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Questions
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