1 Overview of Companies (Auditor’s Report) Order 2003.

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Overview of Companies (Auditor’s Report) Order

2003

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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 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

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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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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

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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, SA501

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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 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)

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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 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

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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 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, SA540

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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– SA 600

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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, 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)

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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 and

preceding 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 date

etc– 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 company’s

name( 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

• 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

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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(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

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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 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)

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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 be

indicated

• Documentation– Prepare statement showing long term sources

of 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 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

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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

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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 of disclosure

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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• Representation by management regarding

the fraud risk factors their assessment and course of actions

• Reference– SA240

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Questions

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