Audit

CHAPTER I

INTRODUCTION

INTRODUCTION

The most general definition of an audit is an evaluation of a person, organization,

system, process, project or product. Audits are performed to ascertain the validity and

reliability of information, and also provide an assessment of a system's internal

control. Auditing is therefore a part of some quality control. The goal is to minimize

any error, hence making information valid and reliable. Audits are mainly associated

with gaining information about financial systems and the financial records of a

company or a business. It is performed by competent, independent and objective

person or persons, known as auditors or accountants, who then issue a report on the

results of the audit. It simply provides assurance for third parties or external users that

such statements present 'fairly' a company's financial condition and results of

operations. This report deals with the audit report of kirloskar industries limited.

PROJECT TITLE

The title of the project is “A STUDY ON AUDIT REPORT OF KIRLOSKAR

INDUSTRIES LIMITED”. The study is made with special reference to Kirloskar

industries limited.

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LITERATURE REVIEW

1. Origin of term :

The term audit is derived from the Latin term “audire” mean to hear. In early days, an

auditor used to listing to the account read out by the accountant in order to check

them.

2. Ancient origin :

Auditing is as old as accounting. It was in use in all ancient countries such as

Mesopotamia, Egypt, Greece, Rome, U.K., and India. The Vedas,Ramayana,

Mahabharata contain references to accounting and auditing. Arthashasastra by

Kautilya gives detailed rules for accounting and auditing of public finances. The

Mauryas, the Guptas and the Mughals had developed and accounting and auditing

system to control state finances. Thus, basically, accounting and auditing had their

origin in the need for the government to control the income and expenditure of the

state and the army. The original object of auditing was to detect and prevent errors

and frauds.

3. Compulsory audits of companies:

With increasing number of companies, the companies’ acts in different countries

began providing for compulsory audit of accounts of companies. Thus U.K. audit of

accounts of limited companies became compulsory in 1900. In India, the companies

act, 1913 made audit of company accounts compulsory. With increase in size of

companies, the object of audit also shifted to ascertaining whether the accounts were

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“true and fair” rather than “true and correct”. Thus, the emphasis was not arithmetical

accuracy but on fair representation of financial affairs.

4. Development of accounting and auditing standard:

The international accounting standards committee and the accounting standards board

of institute of chartered accountant of India have developed standard accounting and

auditing practices to guide the accountants and auditor in their day-to-day work.

5. Computer technology:

The latest development in auditing pertains to the use of computers in accounting as

well as auditing.

Really, auditing has come a long way from “hearing” the accounts in the ancient day

to using computers to examine computerized accounts of today.

Definition of auditing:

Various persons such as the owners, shareholders, investors, creditors, lenders,

government etc. use the final account of business concern for different purposes. All

these users need to be sure that the final accounts prepared by the management are

reliable. An auditor is an independent expert who examines the accounts of a business

concern and reports whether the final accounts are reliable or not. Different

authorities have defined auditing as follows.

Mautz define the auditing as “auditing is concerned with the verification of

accounting data, with determining the accuracy and reliability of accounting

statement and reports”.

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International auditing guidelines defines the auditing as “auditing is an

independent examination of financial information of any entity with a view to

expressing an opinion thereon”.

Objective of the Study

To measure the overall performance of Audit Department in Kirloskar

industries limited.

To study the functions and roles of Audit Department in Kirloskar industries

limited.

Scope of the study:

The Audit report study will help to know the performance of Kirloskar industries

limited & it also help the management can emphasize on their weaker areas for

improvement.

Limitation:

The present study has got all the limitation of case study method.

PRESENTATION OF THE STUDY

The present study is arranged as follows:

Chapter 1: “Introduction” gives an introduction to the title and to the report.

Chapter 2: Deals with Company Profile.

Chapter 3: Deals with Audit Procedure & Practice.

Chapter 4: Deals with the Analysis of Financial Statement

Chapter 5: Finding, Suggestion & Conclusion.

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CHAPTER II

COMPANY PROFILE

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COMPANY PROFILE

Kirloskar Group

Type Private

Industry Conglomerate

Founded 1903

Headquarters Pune, Maharastra, India

Area served Worldwide

Key people Sanjay Kirloskar, (Chairman &MD)

Products Pumps, engines, compressors, chillers, valves, pig iron, construction

transmissions automobiles through a joint venture with Toyota

infrastructure, pumping projects, bridges & flyovers, submarine,

pipelines, construction

The Kirloskar group origins were small but significant. In the year 1903, Sri,

Laxmanrao Kashinath Kirloskar opened a bicycle shop in the state Karnataka in south

India. From this modest venture has grown the Kirloskar group of more than 15

manufacturing company with an annual turnover exceeding 116 millions pounds

string and engineering field in India. A Kirloskar product includes pumps, farm

machineries, machine tools, diesel engines, electrical machinery a wide variety

forgings electric switchgears and tractors. The vast Kirloskar group is the result of

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industrial Vision of Shri. L.K.Kirloskar, many overseas factories are Located in the

West Germany Philippines, Malaysia and Kenya.

THE FIRST KIRLOSKAR GROUP COMPANY:

Kirloskar Brothers Limited (KBL) - the first Kirloskar venture at

Kirloskarvadi was to become the base for all of the Kirloskar Group's

subsequent enterprises. It began as the only Indian company with its own

standard products - the fodder cutter and the iron plough, which competed

with the British products.

KBL also manufactured groundnut shellers, sugarcane crushers and pumps, which

were to usher in a new economic order in the Indian industry. To power these

machines, diesel engines, coal gas generators and electric motors were developed at

Kirloskarvadi.

In a display of great versatility, KBL then shifted its focus to fluid handling and

control. As India's largest manufacturer of pumps and valves, and also the group's

flagship company, KBL lends its strength and expertise to every new venture of the

Kirloskar Group.

PLAYING A PART IN THE WAR:

The intensified boycott of the British goods and the approaching World War

threatened to stop imports of machine tools into India. The Kirloskar, with

characteristic foresight began making machine tools. This paradigm shift of sorts,

from farm implements to machine tools, created a new company - The Mysore

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Kirloskar Limited. This company, situated in Harihar, benefited greatly from the

patronage of yet another Raja - the Maharaja of Mysore. In the first month of

production, Mysore Kirloskar sold all of manufactured seven lathes.

The new generation -Innovation, creation, traditionz

From colonialism to independence:

An important change, for the country, and for one of its premier industrial houses, the

Kirloskar Group. The altered political climate of the 1940s heralded the end of the

princely patronage for enterprise. The policy shifts and changes in authority were the

order of the day. This marked a turning point for the group.

Shantanurao Kirloskar, the eldest son of the founder travelled to Pune to initiate a new

aspect of the group's activities - diesel engines. His experience of trying to secure the

land for his factory in Pune was quite different from his father's in Kirloskarvadi.

There was no benevolent ruler here to bestow acres gratis. Shantanurao had to face

the tangle of red tape and public resistance to acquisition of land for industrial

purposes.

Finally, after arguing that factories have a longer life than human beings Shantanurao

Kirloskar won a place for Kirloskar Oil Engines Ltd. (KOEL), twelve months after

signing an agreement of collaboration with Associated British Oil Engines Export

Ltd. of UK.

This collaboration, incidentally, was the first of its kind between an Indian and a

foreign company, and signified a bridging of the technological gap between east and

west.

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The KOEL factory was incorporated in 1946, and soon after that gave India her first

vertical high-speed engine. Brijlal Sarda, who reported its satisfactory running for

over 4 decades, bought this first engine!

TO ELECTRIC MOTORS & PNEUMATICS:

The making of the electrical motor. This was the second of Laxmanrao Kirloskar's

long cherished dreams, the first being the making of an engine. This task was brought

to completion by Ravi Kirloskar, his youngest son, in 1946. Way back then, the

authorities whom Ravi Kirloskar had approached for land were astonished by the

request for 25 acres. Today, Kirloskar Electric Company Limited (KECL) has four

plants occupying several times that acreage.

The setting up of KECL and other Kirloskar companies saw

a major role being played by Nanasaheb Gurjar, a lawyer

who made industry his sole area of operation. Though the

development of air compressors was an established activity

at Kirloskarvadi, a full-fledged plant to manufacture the

same was set up at Pune in 1958, under the eventual

management of Shreekant Kirloskar, Shantanurao's

youngest son. In collaboration with Broom and Wade of England, Kirloskar

Pneumatic Company Limited began the manufacture of air compressors and

pneumatic tools.

THE KIRLOSKAR GROUP OF COMPANIES:

1) Kirloskar Brothers Limited (KBL):

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KECL's logo in the 40's

It becomes the only India Company with its own standard products the folder cutter

and the iron plough, which competed with the British product. Established in year

1988 and incorporated in 1920 is the acknowledge. Leader in fluid handling and

largest manufacturing and exporter of pumps in India. It has acquired SPP, VK in Nov

2003 consisting at three plants in UK, USA and Africa manufacturing fire fighting

pumps, water and sewage pumps.

2) Kirloskar Oil Engines Ltd. (KOEL):

It is incorporated in 1946. It has six plants with 2828 employees, manufacturing

Diesel engines, Generating sets, Engine bearing and values.

3) Kirloskar Pneumatic Company Limited (KPCL):

It is incorporated in 1957, KPCL is India’s leading name in manufacturing of

reciprocating compressors, screw and centrifugal compressors, tractor gears,

gearboxes, refrigeration projects.

4) Kirloskar Ferrous Industries Limited (KFIL):

It was incorporated in the year 1992 with 2 plants manufacturing Grey iron casting

and Pig iron with 1259 employees.

5) Kirloskar Copeland Limited (KPC):

It established in 1966 and incorporated in 1993.

6) Kirloskar Ebara Pumps Limited (KEPL):

It was established on 13th Jan 1988 as a joint venture promoted by KBL and EC with a

mission to equipments like process pumps, steam engines, fans etc. Required for

critical application in Hydrocarbon Processing industries and for power projects.

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7) Kirloskar Chillers Pvt. Ltd.

It was incorporated in the year 1996. It has a single plant producing centrifugal

chillers, screw chillers, reciprocating chillers

8) Kirloskar Middle East F2E:

Established in 1997. Kirloskar group of companies has been exporting their products

to various in Middle East Africa and other markets in South East Asia for more than 3

decades. KMEF caters to its markets and customers through network of more than 50

outlets.

THE KIRLOSKAR GROUP OF COMPANIES

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Achievements

The groups two largest companies, Kirloskar Brothers Limited and Kirloskar Oil

Engines Limited, own many patents.

Kirloskar Brothers Ltd created the world’s largest irrigation project which was

commissioned in March 2007 The Sardar Sarovar Damproject for the Gujarat

Government. This was done for Sardar Sarovar Narmada Nigam, and on 14 March

2008 commissioned the world’s second largest water supply system with the world’s

highest head in Andhra Pradesh. Kirloskar Brothers is associated with India's nuclear

program and has made canned motor pumps for pumping heavy water which are

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deployed at Indian Nuclear Power Plants. Kirloskar Brothers Limited is also a

supplier of FM UL certified pumps along with its subsidiary SPP Pumps (UK). It was

the first Indian company to get FM certification for its valves. Kirloskar Brothers has

a presence is numerous countries including Egypt.

Kirloskar Brothers is also one of the first pump companies to have an all women

operated and managed manufacturing plant at Coimbatore. which is the second largest

metropolitan city of state Tamil Nadu in India. The company was one of the country's

top ten wealth creators in 2007.

Dynamic people of KIL

Mr. Atul C. Kirloskar (Chairman)

Mr. Sanjay C. Kirloskar

Mr. R. V. Gumaste (Managing Director)

BOARD OF DIRECTORS

Mr. Anil N. Alawani

Mr. Nihal G. Kulkarn

Ms. Gauri A. Kirloskar

Mr. Shrikrishna N. Inamdar

Mr. Anant R. Sathe

Mr. Vijay K. Bajhal

COMPANY SECRETARY

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Mrs. Ashwini V. Mali

AUDITORS

M/s G. D. Apte & Co., Chartered Accountants

BANKERS

State Bank of India

Bank of Maharashtra

Andhra Bank

UTI Bank Ltd

ICICI Bank Ltd

IDBI Bank Ltd

ING Vysya Bank Ltd

HDFC Bank Ltd

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CHAPTER III

AUDIT PROCEDURES AND PRACTICES

Audit procedures and practices

A company is said to be an artificial person created by law having a separate legal

entity distinct from its shareholders. It cannot be directly managed by its owners, i.e.,

shareholders, because they are very large in number having small holding and also

scattered over a wide area. As such, the management and control of the affairs of the

company is done by other persons generally known as directors. Hence, it becomes

essential for a company to appoint an independent and qualified person, i.e., an

auditor, to verily and certify the truth and fairness of the financial statements.

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BASIC PRINCIPLES OF AUDITING:

1) Integrity, objectivity and independence:

The auditor should be honest and sincere in his audit work. He must be fair and

objective. He should also be independent.

2) Confidentiality:

The auditor should keep the information obtained during audit, confidential. He

should not disclose such information to any third party. He should, keep his eyes and

ears open but his mouth shut.

3) Skill and competence:

The auditor should have adequate training, experience and competence in Auditing.

He should have a professional qualification (i.e. be a Chartered Accountant) and

practical experience. He should be aware of recent developments in the field of

auditing such as statement of ICAI, changes in company law, decisions of courts etc.

4) Working papers:

The auditor should maintain working papers of important matters to prove that audit

was conducted with due care according to the basic principles.

5) Planning:

The auditor should plan his audit work. He should prepare an audit programmed to

complete the audit efficiently and in time.

6) Audit evidence:

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The report of the auditor should be base on evidence obtained in the course of audit.

The evidence may be obtained through vouching of transactions, verification of assets

and liabilities, ratio analysis etc.

7) Evaluation of accounting system and internal control:

The auditor should ensure that the accounting system is adequate. He should see that

all the transaction have been properly recorded. He should study and evaluate the

internal controls.

8) Opinion and report:

The auditor should arrive at his opinion on the account based on the audit evidence

and submit his report. The opinion may be unqualified, qualified or adverse. The audit

reportshould clearly express his opinion. Law should require the content and form of

audit report

QUALIFICATIONS AND DISQUALIFICATIONS OF COMPANY

AUDITOR :

1. Auditor’s qualifications :

According to section-226 of Companies Act, person or firm having the following

qualification can be appointed as an auditor :

(1) Person who is the member of Institute of Chartered Accountant.

(2) Any firm whose all the partners are serving as chartered accountants in India.

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(3) A person holding a certificate under the restricted auditor’s certificate (part B.

state) rules, 1956 can be appointed as an auditor.

2. Disqualifications of an auditor :

According to section-226(3) of Companies Act, the following person cannot be

appointed as an auditor :

(1) Any registered institute. e.g. Company;

(2) Any salaried officer or employee of the company’

(3) Officer of the company, partner of an employee or any person who is serving

there;

(4) A person who is indebted to the company for an amount exceeding Rs.1,000 or

who has provided any security in connection with the indebtedness of any third

person (party) to the company for an amount exceeding Rs.1000 cannot be appointed

as an auditor.

(5) According to section-226(4) of Companies Act, if a person is disqualified with

relation to either a holding company or its sub - Sidiary Company, he shall be

disqualified for being an auditor of the first company.

If an auditor becomes the subject to any of the disqualification mentioned above, after

his appointment, he shall be deemed to have left his rank (position) as an

auditor.Besides provisions of Companies Act, auditor can be disqualified according to

the disqualifications shown in section-8 of Charter Accountants Act,1949.

GENERAL CONSIDERATION IN COMPANY AUDIT

1. True and fair view:

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True and fair view in auditing means that the financial statements are free from

material misstatements and faithfully represent the financial performance and position

of the entity - Although the expression of true and fair view is not strictly defined in

the accounting literature, we may derive the following general conclusions as to its

meaning: True suggests that the financial statements are factually correct and have

been prepared according to applicable reporting framework such as the IFRS and they

do not contain any material misstatements that may mislead the users. Misstatements

may result from material errors or omissions of transactions & balances in the

financial statements. Fair implies that the financial statements present the information

faithfully without any element of bias and they reflect the economic substance of

transactions rather than just their legal form. -Preparation of true and fair financial

statements has been expressly recognized as one of the responsibilities of the directors

of companies in the corporate law of several countries such as in the Companies Act

2006 in the UK. Auditors must therefore consider whether directors have fulfilled

their responsibility for the preparation of true and fair financial statements when

providing an audit opinion. Company law of certain jurisdictions require the auditors

to expressly state in their audit report whether in their opinion the financial statements

present a true and fair view of the financial performance and position of the entity.

2. Accounting Policies:

The specific policies and procedures used by a company to prepare its financial

statements. These include any methods, measurement systems and procedures for

presenting disclosures. Accounting policies differ from accounting principles in that

the principles are the rules and the policies are a company's way of adhering to the

rules. 

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Accounting principles are lenient at times, so the policies of a company can be very

important. Looking into a specific company's accounting policies can signal whether

management is conservative or aggressive when reporting earnings. This should be

taken into account by investors when reviewing earnings reports. Also, outside

accountants that are hired to review a company's financial statements should check the

company's policies to ensure they conform to accounting principles.

3. Internal control:

Internal control is under the Board of Director's responsibility. Internal control's

function is, for example, to ensure the efficiency and profitability of operations, the

reliability of  information, and adhering to rules and regulations. Internal control is a

part of day-to-day management and company administration.

An essential part of internal control is the Internal Audit, which operates as a separate

unit under the CEO and reports its observations to the Board of Directors. The

Internal Audit supports the Group's management in directing operations by inspecting

and evaluating the efficiency of business operations, risk management and internal

control, and by producing information and recommendations to enhance efficiency.

Internal Audit also inspects the processes of business operations and financial

reporting. Internal Audit's directive has been approved by Stockmann's Board of

Directors. The operations of the Internal Audit are guided by being risk-focused and

emphasising the development of business operations.

4. Audit Approach:

The Audit Approach is a risk analysis methodology that focuses on the combined

impact of the environment in which a client operates, the client's management

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information and financial results, and the effectiveness of the client's internal controls.

It is based on a thorough, up-to-date understanding of the client's business and

industry, which is obtained through a comprehensive analysis of the external and

internal operating environments. It enables us to design an audit programme that

includes the most effective and efficient combination of test responsive to a client's

unique circumstances. In addition, it provides a uniform method for developing and

documenting the basis for the audit programme. 

The Audit Approach enables us to plan our effort to be proportionate to the risk of

material error in specific accounts and transactions. This provides the basis for

planning the minimum effort necessary to limit audit risk in each area to a low level.

As a result, every audit procedure has a specific purpose that is related to the

company's particular situation – nothing is "routine" and hence potentially

unnecessary. By following this approach we can avoid over auditing and under

auditing, and we can distribute our audit work more evenly throughout the year. 

MATERIALITY AND AUDIT RISK 

Professional standards require us to consider materiality and audit risk when planning

the nature, timing and extent of our audit procedures, and when evaluating the results

of those procedures. Materiality is determined at two levels during the initial planning

stage : 

1. An overall level as relates to the accounts taken as a whole – planning materiality;

and

2. An individual balance or class of transactions level – tolerable error.

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Audit risk is defined as the risk that an auditor may unknowingly fail to modify his or

her opinion on accounts that are materially misstated. We address materiality and

audit risk at an overall level to help us develop an audit strategy that will provide

sufficient evidence to enable us to evaluate whether the accounts are materially

misstated. 

At the account balance or class of transactions level, audit risk is the product of the

risks that : 

1. Factors in a company's internal or external operating environment, before

considering the functioning of internal controls, will lead to a material error – inherent

risk;

2. A material error will not prevented or detected on a timely basis by the system of

internal control – control risk; and

3. The auditor's procedures will fail to detect a material error not detected by the

system of internal control – detection risk.

The Audit Approach provides a methodology for relating these risk concepts to

materiality and correlating them to the nature, timing, and extent of our audit

procedures. This is accomplished through the Specific Risk Analysis and the

Preliminary Audit Approach. 

OBJECTIVES AND STANDARDS

A company’s internal accountants are primarily responsible for preparing financial

statements. In contrast, the purpose of the auditor is to express an opinion on the

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assertions of management found in financial statements. The auditor arrives at an

objective opinion by systematically obtaining and evaluating evidence in conformity

with professional auditing standards. Audits increase the reliability of financial

information and consequently improve the efficiency of capital markets. Auditing

standards require that all audits be conducted by persons having adequate technical

training. This includes formal education, field experience, and continuing professional

training.

SPECIFIC PROVISIONS AS REGARDS ACCOUNTS IN THE COMPANIES

ACT, 1956

The provisions in the matter of books of account which a company is required to

maintain are contained in section 209 of the Companies Act, 1956. They are briefly

summarised below:

(1) Every company shall maintain at its registered office proper books of account with

regard to:

(a)All sums of money received and expended by the company and the matters in

respect of which the receipts and expenditure take place;

(b) All sales and purchases of goods by the company;

(c) The assets and liabilities of the company; and

(d) In case, it is a company engaged in production, processing, manufacturing or

mining activities, particulars relating to utilisation of material or labour or other items

of cost, provided there is such a requirement by the Central Government in respect of

the class of companies to which it belongs.

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N.B. - It is permissible, however, for all or any of the books of account may be kept at

such place in India as the Board of directors may decide but, when a decision in this

regard is taken, the company shall file with the Registrar of Companies a notice

giving full address of the other place.

(2) When a company has a branch office, whether in or outside India, to comply with

the aforementioned provisions, the company must maintain proper books of account

relating to transactions effected at the branch office, also arrange to obtain from the

branch proper summarised returns, at intervals of not more than three months, for

being kept at the registered office or the other place.

(3) For the purposes of sub-sections (1) and (2), proper books of account shall not be

deemed to be kept with respect to the matters specified therein :

(a) if there are not kept such books as are necessary to give a true and fair view of the

state of affairs of the company or branch office, as the case may be, and to explain

its transactions; and

(b) if such books are not kept on accrual basis and according to the double entry

system of accounting.

(4) The books of account and other books and papers shall be open to inspection by

any director during business hours.

4A) The books of account together with vouchers relevant to any entry made therein

for a period of not less than eight years immediately preceding the current year shall

be preserved by the company in goodorder.

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(5) If any of the persons referred to in sub-section (6), fails to take reasonable steps to

secure compliance with the requirements of law aforementioned or by a wilful act

causes any default by the company, he shall be punishable for each offence with

imprisonment for a term which may extend to six months or a fine which may extend

to ` 10000 or with both. But he may be relieved from such a liability if he can show

that he has reasonable ground to believe that a competent and responsible person was

charged with the duty of seeing that these requirements were complied with and he

was in a position to discharge that duty.

(6) Where the company has a managing director or manager, such managing director

or manager and all officers and other employees of the company; and where the

company has neither a managing director nor manager, every director of the company.

(7) If a person, not being a person referred to in the foregoing paragraph, who has

been charged with the duty of seeing that requirements of law in regard to the books

of account is complied with, makes a default in doing so, he shall, in respect of each

offence, be punishable with a fine which may extend to ` 10,000.

AUDIT OF PAYMENT

Managerial Remuneration 

The term remuneration covers the following types of expenditure incurred by the

company for its Director or his family –

Rent free accommodation;

Any benefit or amenity in respect of accommodation free of charge;

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Any other benefit or amenity free of charge at a concessional rate;

Any personal obligation; and

Insurance on the life of, or to provide any pension, annuity or gratuity for, any of

the director or his /her spouse or child.But the definition is inclusive one. It covers

every amount that the company pays or spends for or for the benefit of a Director,

in whatever form and by whatever name.

Applicability:

Section 198 and 309 deals with the provisions relating to managerial remuneration. 

The term managerial remuneration mentioned in section 198 and 309 covers the

remuneration of all Directors and also its manager. It is applicable to all public

companies and private company which is a subsidiary of public company.  Provisions

of the above mentioned section are not applicable on government companies (within

the meaning of section 619 of the Act).

Ceiling on Managerial Remuneration:

Section 198(1) lays down 11% of net profits of the company computed in the manner

as laid down in section 349 and 350 as the overall ceiling on the total remuneration of

the company.  While computing the net profits the remuneration of the Directors shall

not be deducted from the gross profits. The above mentioned limit shall be exclusive

of sitting fees payable to the directors in terms of section 309 (2).

Purchase of Goods: Cash purchases should be verified by reference to cash memos

or receipted invoices by suppliers. Payments made against credit purchases should be

vouched with the receipts issued by the suppliers and the credit to their accounts on

the basis of invoices entered in the Purchases Day book. There must be also evidence

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of the goods having been received through an entry in the Goods Inward Books or

stock ledger. It is necessary, however, to make a distinction between a payment for

goods and an advance against supplies to be made in future; the latter should be

classified as advance recoverable in cash or in kind or for value to be received. Since

the amount shown as an advance paid against goods may be only a camouflage for

assistance to a party, it is necessary for the auditor to confirm that the advance was

paid pursuant to a normal trade practice and supplies were, subsequently, received

with a reasonable period of the advance.

Remuneration paid to Directors:

The following points must be considered while vouching the directors’ remuneration

in case of a public company and private company which is a subsidiary of a public

company-

(i) Examine the Entitlement: The directors are not automatically entitled to

remuneration. It is paid either according to the term of articles of association or in

accordance with a resolution of the general meeting.

(ii) Examine Adherence to Legal Provisions: The auditor should examine adherence

torelevant sections of the Act such as -

Section 309(3) and (4) which deals with manner of payment of managerial

remuneration.

Section 309(2) which deals with payment of listing fees.

Section 198 which has prescribed the overall limit to managerial remuneration.

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Schedule XIII to the Act that has laid down conditions for payment of remuneration

for companies having profits those having no profits or inadequate profits and

companies having negative effective capital.

Section 310 which provides for increase in remuneration.

PERSONAL EXPENSES MEET BY DIRECTOR

1) AUTORIZATION: check article of association, service contract ,minutes of

general meeting to check authorization of such payment

2) S.227(1A): ensure and enquire that personal expenses are not camouflaged in any

other item as contemplated under section 227(1a)

3) Supporting documents: check the documents to examine the payment

reimbursement

4) CARO 2003: chek the compliance with requirements of CARO 2033

DIRECTOR COMMISION

1)A/A: see the article of association of company and note the rules regarding the

payment of commission

2) Agreement : examine the terms and condition of the agreement to find out the rate

of commission payable

3) Compliance: check section 198 and 309 also see calculation as per section 349,350

and 351 of the act

4) Calculation :vouch calculation of commission paid and verify with receipt

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DIVIDENDS:-

The return on investment in share is called dividend. It is the part of the profit earned

by the company. Dividend rate approved in the general meeting by the shareholders.

DUTIES OF AUDITOR RELATING TO DIVIDENDS:-

Following are the important duties of the auditor:

1. Rules Of Company:-

The auditor should check the rules of a company. He should examine that articles of

association and companies ordinance allow the management to propose dividends out

of revenue profits.

2. Rate Of Dividend :-

The auditor should check that rate of dividend must not be above the rate of profit. It

should also not exceed the market rate.

3. Reasonable Profit :-

The auditor should check that amount of revenue profits is reasonable. If it is not

reasonable then dividend should not be paid.

4. Account :-

Dividend amount is payable with in the days. The auditor should check that dividend

account is opened in the bank or not. The amount equal to dividend must be

deposited.

5. Tax :-

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It is also the duty of the auditor that he should check the tax payable or dividend is

paid to the Govt. or not ? The payment of tax is a legal formality.

6. Not Collected :-

Sometimes shareholders fail to collect the amount from the banks. The auditor should

check such amount because it is stated in the balance sheet as liability.

7. Profit & Loss Account :-

The profit and loss appropriation account must be checked by the auditor. He should

note the amount of dividend recorded in it.

8. Account Statement :-

The auditor examines that amount of dividend paid and due prepares reconciliation

statement of dividend account. He should make detailed checking in case of

discrepancy. The errors can be detected.

9. Warrant :-

To register the shareholder management issues dividend warrants. Such amount can

be claimed by the shareholders from the bank. The auditor should check these

warrants has been issued or not?

CONSIDERATIONS IN INITIAL AUDITS

The auditor should undertake the following activities before starting an initial audit:

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Perform procedures regarding the acceptance of the client relationship and the

specific audit engagement; and

Communicate with the predecessor auditor in situations in which there has been a

change of auditors in accordance with AU sec. 315, Communications Between

Predecessor and Successor Auditors.

The purpose and objective of planning the audit are the same for an initial audit or a

recurring audit engagement. However, for an initial audit, the auditor should

determine the additional planning activities necessary to establish an appropriate audit

strategy and audit plan, including determining the audit procedures necessary to

obtain sufficient appropriate audit evidence regarding the opening balances.

SPECIAL REQUIREMENTS OF COMPANY AUDIT

(i) Verification of the constitution and powers - A company can function within the

limits prescribed by the documents on the basis of which it has been registered. It

raises its capital from the public on certain conditions, specified in the Prospectus.

Before commencing business, to purchase a property or to have subscription to its

capital underwritten on this account, it is essential that the auditor, prior to starting the

audit of a company, shall examine:

(a) The Memorandum of Association.

(b) The Articles of Association.

(c) Contracts entered into with vendors and other persons relating to purchase of

property, payment of commission, etc.

A company cannot enter into a contract before it has been registered. What is more, a

public company cannot commence business until the certificate of commencement of

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business has been granted to it by the Registrar of Companies. It is, therefore, the duty

of the auditor to take into account, while examining the transaction entered into by the

company, the dates when these were entered into for confirming the validity.

With a view to carrying out the audit effectively, it is necessary that the auditor should

know the authority structure of the company. Under Section 291 of the Act, the Board

of Directors of a company are entitled to exercise all such powers, and to do all such

acts and things, as the company is authorised to do. However, the Board shall not

exercise any power or do any act or thing which is directed or required by any

legislation (including the Companies Act) or by the memorandum or articles of the

company, to be exercised or done by the company, in general meeting.

Section 292 specifies six types of decisions that can be taken by the Board of

Directors only in Board’s meetings. These relate to :

(i) making calls on partly paid shares.

(ii) issue of debentures,

(iii) borrowing monies otherwise than on debentures,

(iv) investing the funds of the company, and

(v) making loans.

The transaction barring the first three can be delegated to any of the following:

(a) a committee of directors,

(b) managing director,

(c) manager,

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(d) any other principal officer of the company, or

(e) principal officer of the branch office, in relation to the branch.

Apart from the above, a number of other functions are also carried out by the Board.

A few of such functions are stated herein by way of examples :

(a) Adopting of accounts before the same submitted to the auditor for their report-

Section 215.

(b) Appointment of the first auditors and filling of casual vacancy - Section 224.

(c) Investment in shares of companies within the limits specified in Section 372A.

(d) Entering into contracts with persons who are directors of the company or related to

or associated with the directors as are specified in Section 297 of the Act.

Some of the matters which only the shareholders can sanction at a general meeting :

(a) Appointment and fixation of remuneration of auditors in the annual general

meeting -Section 224.

(b) Declaration of dividends - Regulation 85, Table A.

(c) Appointment of relatives of directors etc. to an office or place of profit in the

company under Section 314 of the Act.

(d) Sale, lease or a disposal of the whole of the company’s undertaking or a

substantial part of it and donations above a certain limits [Section 293(1)].

(ii) Matters which require sanction of the Central Government:

Loans to directors by a company other than a banking or a finance company (Section

295).

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For verifying the foregoing transactions and others authorized by the directors or

shareholders, the auditor should refer to the minutes of the meeting at which these

have been considered. Further, for judging the validity or otherwise of section

accorded, the relevant provision of law must be referred to. A few such instances are

given below:

(a) Appointment of Directors (Section 256).

(b) Disqualifications of Directors (Section 274).

(c) Conduct of Board Meeting (Sections 285-290).

(d) General powers of Board (Section 291).

(e) Powers which the Board must exercise only at a meeting (Section 292).

(f) Restriction on powers of the Board regarding disposal of the undertaking or part

of it etc. (Section 293).

(g) Prohibitions and restrictions regarding political contributions (Section 293A).

(h) Power of Board and other persons to make contributions to the National Defence

Fund, etc. (Section 293B).

(i) Restriction on advancing loans to Directors, etc. (Section 295).

(j) Restriction on a Director or his relative, a firm in which a director or relative is a

partner; or any other partner of the firm or a private company of which such a director

is a member or director to enter into a contract of sale or purchase of goods except

with the sanction of the Board of Directors (Section 297).

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(k) Restriction on an interested director in participating in or voting at Board’s

proceedings (Section 300).

(l) Disclosure of interest by directors (Section 299).

(m) Register of contracts, Companies or firms in which directors are inspected

(Section 301)

(n) Remuneration of directors (Section 309).

(o) Restraint on a director’s holding offices or places of profit (Section 314).

(p) Restraint on payment of compensation for loss of office to a director (Sections

318 to 321).

(q) Restriction on loans, etc., to companies under the same management (Section

370).

(r) Regulation of inter-corporate loans and investments (Section 372A).

AUDIT OF LIABILITIES

Liabilities reorganization is the concession items made by a creditor in accordance

with the agreement made with a debtor in financial difficulty or rules of the court.

There are four major forms of liabilities reorganization:

To confirm whether the date of liabilities reorganization is accurately defined. The

fair market price of assets varies from date to date, the amount of liabilities payable

with interest also varies from each other. Consequently, the profits and losses of

liabilities reorganization and the relevant records of assets and liabilities recognized in

different dates vary from each other. In addition, the date of liabilities reorganization

is also the basis for defining the accounting period. No matter when the assets

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transactions were conducted, the reorganization date should be the accounting cut-off

date. Auditors, in carrying out auditing, shall obtain the asset reorganization

agreement files in the first place to identify the date of reorganization. They should

then review the accounting information to check whether the valuation of the assets

and liabilities are based on the reorganization date and the accounting information

prepared are within the corresponding accounting period.

To check whether the accounting of the liabilities reorganization is proper. Major tool

of such auditing is to examine on a sample basis the accounting vouchers of liabilities

reorganization. These vouchers are verified against relevant agreement to make sure

(1) relevant assets, liabilities and capital items are consistent with the agreement,- (2)

proper accounting items have been applied and (3) accurate amounts have been

recorded. Special attention shall be paid to see if the capital received and the capital

reserve have been classified accurately, if the bad debt provision of the creditor has

been written off and if contingent expenditures have been given due consideration?

To check whether the calculation and recognition of the profits and losses of liabilities

reorganization has been conducted in accordance with relevant requirements. Review

of the calculation of the profits and losses of liabilities reorganization is done through

consulting and examining such information as the reorganization agreement,

information provided by intermediary institutions and market information, the book

value of debtor's liabilities, book value of assets, fair value of assets, fair value of

shareholder's equity, future payables, the creditor's net credit value, future receivables.

The calculation of the profits and losses of the enterprise is then reviewed to make

sure data has been applied correctly and correct calculation has been conducted.

Special attention shall be paid to see if the fair market value of assets, shareholder's

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equity and the amount of contingent liabilities have been accurately defined on proper

basis and, whether the accounting period of the profits and losses is appropriate.

To audit whether the disclosure of reorganization is sufficient. Accounting standards

require that liabilities reorganization be disclosed in the footnotes of the financial

statements at the end of an accounting period, explaining the contents and impact of

the reorganization. Such disclosure aims to make the user of financial statements

better informed of the financial condition of the enterprise. The user of the financial

statements will not be able to understand the full impact of the reorganization on the

assets and liabilities, profits and losses of the enterprise, nor can they study the value

for money of the enterprise correctly if the disclosure is not properly made. It is

therefore necessary to observe carefully if complete disclosure has been made by the

enterprise through examining the disclosure of the process of liabilities

reorganization.

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CHAPTER IV

AUDIT REPORT & FINANCIAL ANALYSIS

Auditors report & Financial Analysis of Kirloskar Industries

Report on the Financial Statements

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We have audited the accompanying Financial Statements of Kirloskar Industries

Limited (the Company), which comprise the Balance Sheet as at 31st March 2013, the

Statement of Profit & Loss and Cash Flow Statement for the year then ended and a

summary of significant accounting policies and other explanatory information.

Management's responsibility for the Financial Statements

Management is responsible for the preparation of these Financial Statements that give

a true and fair view of the financial position, financial performance and cash flows of

the Company in accordance with the accounting standards referred to in Sub-Section

(3C) of Section 211 of the Companies Act, 1956, (the Act). This responsibility

includes the design, implementation and maintenance of internal control relevant to

the preparation and presentation of the Financial Statements that give a true and fair

view and are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these Financial Statements based on our

audit. We conducted our audit in accordance with the Standards on Auditing issued by

the Institute of Chartered Accountants of India. Those standards require that we

comply with ethical requirements and plan and perform the audit to obtain reasonable

assurance about whether the Financial Statements are free from material

misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts

and disclosures in the Financial Statements. The procedures selected depend on the

auditor's judgement, including the assessment of the risks of material misstatement of

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the Financial Statements, whether due to fraud or error. In making those risk

assessments, the auditor considers internal control relevant to the company's

preparation and fair presentation of the Financial Statements in order to design audit

procedures that are appropriate in the circumstances. An audit also includes

evaluating the appropriateness of accounting policies used and the reasonableness of

the accounting estimates made by the management as well as evaluating the overall

presentation of the Financial Statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to

provide a basis for our audit opinion.

Opinion

In our opinion and to the best of our information and according to the explanations

given to us, the Financial Statements give the information required by the Act in the

manner so required and give a true and fair view in conformity with the accounting

principles generally accepted in India:

a. In the case of the Balance Sheet, of the state of affairs of the Company as at 31st

March 2013;

b. In the case of the Statement of Profit and Loss, of the profit for the year ended on

that date; and

c. In the case of the Cash Flow Statement, of the cash flows for the year ended on

that date.

Report on other legal and regulatory requirements

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1. As required by the Companies (Auditor's Report) Order, 2003 (the Order) issued

by the Central Government of India in terms of sub-section (4A) of Section 227 of

the Act, we give in the Annexure a statement on the matters specified in

paragraphs 4 and 5 of the Order.

2. As required by Section 227 (3) of the Act, we report that:

a. We have obtained all the information and explanations which to the best of our

knowledge and belief were necessary for the purpose of our audit.

b. In our opinion, proper books of account as required by law have been kept by the

Company so far as appears from our examination of those books.

c. The Balance Sheet, Statement of Profit and Loss and Cash Flow Statement dealt

with by this report are in agreement with the books of account.

d. In our opinion, the Balance Sheet, Statement of Profit and Loss and Cash Flow

Statement comply with the accounting standards referred to in Sub-Section (3C)

of Section 211 of the Companies Act, 1956.

e. On the basis of written representations received from the directors as on 31st

March 2013 and taken on record by the Board of Directors, none of the directors

is disqualified as on 31st March 2013, from being appointed as a Director in terms

of clause (g) of Sub-Section (1) of Section 274 of the Companies Act, 1956.

CERTIFICATE BY THE AUDITORS ON CORPORATE GOVERNANCE

TO THE MEMBERS OF KIRLOSKAR INDUSTRIES LIMITED

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We have examined the compliance of conditions of Corporate Governance by

Kirloskar Industries Limited ('the Company'), for the year ended 31 March 2013, as

stipulated in Clause 49 of the Listing Agreement of the Company with Stock

Exchange(s) in India.

The compliance of conditions of Corporate Governance is the responsibility of the

Company's management. Our examination was limited to procedures and

implementation thereof, adopted by the Company for ensuring the compliance of the

conditions of Corporate Governance. It is neither an audit nor an expression of

opinion on the Financial Statements of the Company.

In our opinion and to the best of our information and in accordance with the

explanations given to us, we certify that the Company has complied with the

conditions of Corporate Governance as stipulated in the above mentioned Listing

Agreement.

We further state that such compliance is neither an assurance as to the future viability

of the Company nor the efficiency or effectiveness with which the management has

conducted the affairs of the Company.

ANALYSIS OF ACCOUNTS AND AUDIT OF KIRLOSKAR INDUSTRIES

LIMITED

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1. The Company has maintained proper records showing full particulars including

quantitative details and situation of fixed assets.

2. All fixed assets have not been physically verified by the Management during the

year but as explained to us, there is a phased programme of verification of fixed

assets over a period of three years, which in our opinion, is reasonable having

regard to the size of the Company and the nature of its assets. No material

discrepancies were noticed on such verification during the year.

3. There was no disposal of substantial part of fixed assets during the year.

4. Considering the nature of the inventories [Renewable Energy Certificates (RECs)

and Voluntary Carbon Units (VCUs)] of the Company, the provisions of clause

4(ii) of the Order are not applicable to the Company.

5. According to the information and explanations given to us, the Company has not

granted/ taken any loans secured or unsecured to/ from companies, firms or other

parties covered in the register maintained under Section 301 of the Act.

6. According to the information and explanations provided by the Management, we

are of the opinion that the particulars of contracts or arrangements referred to in

Section 301 of the Act that need to be entered into the register maintained under

Section 301 have been so entered.

7. In our opinion and according to the information and explanations given to us, the

transactions made in pursuance of such contracts or arrangements exceeding value

of Rupees five lacs in respect of any party during the year have been made at

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prices which are reasonable having regard to the prevailing market prices at the

relevant time.

8. The Company has not accepted deposits from the public within the meaning of

Sections 58A and 58AA of the Act.

9. In our opinion, the Company has an internal audit system commensurate with the

size and nature of its business.

10. We have broadly reviewed the books of account maintained by the Company

pursuant to the Rules made by the Central Government for the maintenance of the

cost records under Section 209 (1)(d) of the Act and are of the opinion that prima

facie, the prescribed accounts and records have been made and maintained. We

have not, however, made a detailed examination of the records with a view to

determine whether they are accurate or complete.

11. The Company is generally regular in depositing with appropriate authorities

undisputed statutory dues including provident fund, investor education and

protection fund, income-tax, sales-tax, wealth-tax, cess and other material

statutory dues applicable to it. According to the information and explanations

given to us and from the records of the Company, there were no undisputed

statutory dues as at the last day of the Financial Year which were outstanding for a

period of more than six months from the date they became payable. We have been

explained that no dues in respect of Employees State Insurance, Custom Duty,

Excise duty or cess arose during the year.

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12. According to the information and explanations given to us and records of the

Company, there are no dues in respect of income tax, sales tax, wealth tax, service

tax, custom duty, excise duty and cess which have not been deposited on account

of any dispute.

13. According to explanations given to us, the Company has not given any guarantee

for loans taken by others from bank or financial institutions during the year.

14. The Company has not taken any term loans during the year.

15. On the basis of an overall examination of the balance sheet of the Company, in

our opinion and according to the information and explanations given to us, there

are no funds raised on a short- term basis which have been used for long-term

investment.

16. The Company has not made any allotment of shares during the year.

17. The Company has not issued any debentures during the year.

18. The Company has not raised money by public issues during the year.

19. Based upon the audit procedures performed for the purpose of reporting the true

and fair view of the Financial Statements and as per the information and

explanations given by the management, we report that no fraud on or by the

Company has been noticed or reported during the course of our audit.

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CHAPTER V

CONCLUSION

Conclusion

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Every Company registered under Companies Act 1956, need to do its audit every

year, which is known as statutory audit..During the company audit, the auditor

discusses his observations with those charged with governance, such as the audit

committee of the company, before finalising the report. The auditor should be firm in

his opinion, and exercise his independence at this level. This part of the audit is

critical, and calls for resilience on the part of the auditor. An audit report, being a

public document, should be drafted skilfully. The code of conduct prohibits an auditor

from divulging any information received by him in the course of his professional

assignment, unless legally required so to do. Therefore, the auditor shouldn't hesitate

to take the help of a legal expert on whether to include certain comments in his report.

And atlast he submit the reports with adverse , modified or with qualified opnion.

This study has given a information of how really a big organization works by facing

so many hurdles. As it is a pig iron plant it totally covered by the risks & company is

successfully overcoming the problems.

The culture in KIL is very cordial and the atmosphere of the workforce is also very

good which contributed to the study a lot.

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BIBLIOGRAPHY

Websites:

1. http://www.kirloskar.com/

2. http://www.kfil.com/

3. www.icai.com

4. http://www.icai.org/

5. www.google.co.in

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