Seminar on Companies Act Northern India Regional Council of ICAI at Hotel Surya 23 rd April,2011

1. Seminar on Companies ActNorthern India Regional Council of ICAIat Hotel Surya23rd April,2011 Issues on the Companies (Auditor’s Report) Order, 2003 Presented by Sanjay Vasudeva, Partner S.C. Vasudeva & Co. Chartered Accountants

2. Applicability of the Order Companies Covered by the Order Issue No. 01 Is the Companies (Auditor’s Report) order, 2003 (hereinafter referred to as the “Order” or “CARO”) applicable to a Liaison Office of a foreign company? S.C. Vasudeva & Co.

3. Clause 4 (i) (a) Whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets. Issue No. 02 The Statement on the Order states that the records of the fixed assets can also be maintained electronically, What are the conditions under which records maintained in electronic form can be said to be proper records. S.C. Vasudeva & Co.

4. Clause 4 (i) (c): If a substantial part of fixed assets have been disposed off during the year, whether it has affected the going concern. Issue No. 03   What constitutes “substantial part” of fixed assets,? What is the auditor’s reporting responsibility under this clause. S.C. Vasudeva & Co.

5. Clause 4 (ii) (b): Are the procedures of physical verification of inventory followed by the management reasonable and adequate in relation to the size of the company and the nature of its business? If not, the inadequacies in such procedures should be reported. S.C. Vasudeva & Co.

6. Clause 4 (ii) (b) Contd. Issue No. 04 The above requires the auditor to report on the procedure of physical verification relating to inventories, what are the auditor’s responsibilities in this regard? S.C. Vasudeva & Co.

7. Clause 4 (ii) (b) (Contd.) Issue No. 05 For the purposes of reporting under this clause, can the statutory auditor rely on the report of the internal auditors. S.C. Vasudeva & Co.

8. Clause 4 (ii) (c) Whether the company is maintaining proper records of inventory and whether any material discrepancies were noticed on physical verification and if so, whether the same have been properly dealt with in the books of account. [Paragraph 4(ii) (c)] S.C. Vasudeva & Co.

9. Clause 4 (ii) (c) Issue No. 06 What would constitute proper records? What is the auditor’s reporting responsibility in respect of discrepancies noticed on physical verification. S.C. Vasudeva & Co.

10. Clause 4 (iii) (a) and (iii)(e) Has the company 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. If so, give the number of parties and amount involved in the transactions; S.C. Vasudeva & Co.

11. Clause 4 (iii) (a) & (iii)(e) Issue No. 07 Are the loans given or taken by the company in kind from/to the parties covered in the register maintained under section 301 of the Act covered by this clause? S.C. Vasudeva & Co.

12. Clause 4 (iii) (a) & (iii)(e) (Contd.) Issue No. 08 Is this clause applicable only to loans granted or taken during the year or to opening balances of such loans also (whether or not settled during the year)?What about loans squared off during the year? S.C. Vasudeva & Co.

13. Clause 4 (iii) (b) and (iii)(f) Whether the rate of interest and other terms and conditions of loans given/taken by the company, secured or unsecured, are prima facie prejudicial to the interest of the company; S.C. Vasudeva & Co.

14. Clause 4 (iii) (a) & (iii)(e) (Contd.) Issue No. 09 What is meant by the term “prejudicial” in these clauses? S.C. Vasudeva & Co.

15. Clause 4 (iii) (b) & (iii)(f) (Contd.) Issue No. 10 What are the reporting responsibilities of the auditor under these clauses where a company has taken an unsecured loan from another group company to finance its activities but there are no conditions specified for repayment of such loan and there is no loan agreement. S.C. Vasudeva & Co.

16. Clause 4 (iii) (d) If overdue amount is more than rupees one lakh, whether reasonable steps have been taken by the company for recovery of the principal and interest. S.C. Vasudeva & Co.

17. Clause 4 (iii) (d) Issue No. 11 What is meant by the term “reasonable steps”? Whether reasonable steps for recovering the amount necessarily mean initiating and/or taking up a legal recourse to recover the amount? S.C. Vasudeva & Co.

18. Clause 4 (iii) (c) & (iii)(g) Issue No.12 What are the reporting responsibilities of the auditor in case of loans repayable on demand granted or taken by the company in respect of which no demand has been made by/on the company? S.C. Vasudeva & Co.

19. Clause 4 (iv): Is there an adequate internal control procedure commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods. Whether there is a continuing failure to correct major weaknesses in internal control. S.C. Vasudeva & Co.

20. Clause 4 (iv) (Contd.) Issue No. 13 How is the term “continuing failure” defined? Does it refer to weaknesses uncorrected for more than a year? Should weaknesses noted during the course of audit also be considered for reporting under this clause? S.C. Vasudeva & Co.

21. Clause 4 (v) (a): Whether particulars of contracts or arrangements referred to in section 301 of the Act have been entered in the register required to be maintained under the above section. Issue No. 17 What is the reporting responsibility of the auditor under this clause in case the company should have obtained the prior approval of the Central Government but has not so obtained? Whether a separate qualification is also required in the main auditor’s report? S.C. Vasudeva & Co.

22. Clause 4 (v) (b): Whether transactions made in pursuance of such contracts or arrangements have been made at prices which are reasonable having regard to the prevailing market prices at the relevant time. (This information is required only in case of transactions exceeding the value of five lakh rupees in respect of any party and in any one financial year). S.C. Vasudeva & Co.

23. Clause 4 (v) (b) Issue No. 14 What procedure should the auditor adopt to determine the reasonableness of prices of the transactions with the parties required to be entered in the register under section 301 of the Act, particularly in cases transactions entered into with sole suppliers? S.C. Vasudeva & Co.

24. Clause 4 (vii): In the case of listed companies and/or other companies having a paid-up capital and reserves exceeding Rs. 50 lakh as at the commencement of the financial year concerned, or having an average annual turnover exceeding Rs. 5 crore for a period of three consecutive financial years immediately preceding the financial year concerned, whether the company has an internal audit system commensurate with its size and nature of its business. S.C. Vasudeva & Co.

25. Clause 4 (vii) (Contd.) Issue No. 15 Elaborate on the issue “whether the company has an internal audit system commensurate with its size and nature of its business?” S.C. Vasudeva & Co.

26. Clause 4 (ix): Is the company regular in depositing undisputed statutory dues including provident fund, investor education and protection fund, employees’ state insurance, income-tax, sales-tax, wealth tax, service tax, custom duty, excise duty, cess and any other statutory dues with the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they became payable, shall be indicated by the auditor. S.C. Vasudeva & Co.

27. Clause 4 (ix) (Contd.) Issue No. 16 How is the term “statutory dues” defined? S.C. Vasudeva & Co.

28. Clause 4 (ix) (Contd.) Issue No. 17 Does non-payment of advance income tax constitute default in payment of statutory dues reportable under this clause? Issue No. 18 What are the reporting responsibilities of the auditor in case of the cess payable by a company under section 441A of the Act? S.C. Vasudeva & Co.

29. Clause 4 (ix) (Contd.) Issue No. 19 What are the auditor’s reporting responsibilities under this clause in case the company has not provided for the statutory dues payable, for example, whether TDS not deducted and not recognised in the books of account can be treated by the auditor as being payable and accordingly reported under this clause? S.C. Vasudeva & Co.

30. Clause 4 (ix) (Contd.) Issue No. 20 Does “regular” mean within due date? If a company is making payments of TDS, PF etc., but with a delay of one or two days, can the company be said to be regular in depositing statutory dues? S.C. Vasudeva & Co.

31. Clause 4 (ix) (b): In case dues of Income-tax/sales-tax//wealth-tax/service-tax/custom duty/excise duty/cess have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending may please be mentioned. S.C. Vasudeva & Co.

32. Clause 4 (ix) (b) (Contd.) Issue No. 21 How is the term “disputed dues” defined ? Issue No. 22 What are the reporting responsibilities of the auditor under this clause in a situation where the amount under dispute is pending for an appeal having been filed after the time-limit for filing the appeal having lapsed? S.C. Vasudeva & Co.

33. Clause 4 (ix) (b) (Contd.) Issue No. 23 Should the amounts which have been disputed at a forum, but which have already been provided for in the books, be reported under this clause ? S.C. Vasudeva & Co.

34. Clause 4 (x): whether in case of a company which has been registered for a period not less than five years, its accumulated losses at the end of the financial year are not less than fifty per cent of its net worth and whether it has incurred cash losses in such financial year and in the immediately preceding financial year. S.C. Vasudeva & Co.

35. Clause 4 (x) (Contd.) Issue No. 24 Whether for the purpose of reporting under this clause, the “net loss” and the “net worth” as reported in financial statements should be taken or whether the same requires any adjustment S.C. Vasudeva & Co.

36. Clause 4 (x) (Contd.) Issue No. 25 What are the reporting responsibilities of the auditor under this clause in case the company does not have cash losses in both the years (that is, the current financial year and in the immediately preceding financial year) but only in one of these years? Should the auditor report separately for both the years or should his opinion state that the company has not incurred cash losses in the two consecutive years? S.C. Vasudeva & Co.

37. Clause 4 (xi): Whether the company has defaulted in repayment of dues to a financial institution or bank or debenture holders? If yes, the period and amount of default to be reported. Issue No. 26 What would constitute “ default” ? . Whether auditor has to report on defaults which took place in the current year only or those which occurred in the earlier years and continuing in the current years also. S.C. Vasudeva & Co.

38. Clause 4 (xv): Whether the company has given any guarantee for loans taken by others from bank or financial institution, the terms and conditions whereof are prejudicial to the interest of the company. Issue No. 27 How should the auditor determine whether the guarantee is “prejudicial” to the interest of the company? S.C. Vasudeva & Co.

39. Clause 4 (xvi): Whether the term loans were applied for the purpose for which the loans were obtained. Issue No. 28 Whether reporting under this clause also covers term loans obtained from entities/persons other than banks/financial institutions? Further, whether reporting is to be made on the term loans obtained during the year or outstanding as at the end of the year irrespective of the year in which they are obtained? S.C. Vasudeva & Co.

40. Clause 4 (xvi) (Contd.) Issue No. 29 What procedures should be adopted by the auditor in case of term loans from banks, raised against title deeds, long term FDRs, NSCs etc., where the bank is not concerned with the purpose for which it is being obtained? What would be the manner of reporting under this clause in such cases ? S.C. Vasudeva & Co.

41. Clause 4 (xvii): Whether the funds raised on short-term basis have been used for long term investment. If yes, the nature and amount is to be indicated. Issue No. 30 Should, for the purposes of reporting under this clause, the auditor restrict to the data given in the financial statements of the company or should he go beyond that? S.C. Vasudeva & Co.

42. Clause 4 (xvii) (Contd.) Issue No. 31 Should the amounts, given as deposits (rent and other security deposits) for long term e.g. for a period of three to seven years, but being cancellable, be considered as long term investment? S.C. Vasudeva & Co.

43. Clause 4 (xviii): Whether the company has made any preferential allotment of shares to parties and companies covered in the Register maintained under Section 301 of the Act, and if so whether the price at which shares have been issued is prejudicial to the interest of the company. Issue No. 32 Whether a situation, where a limited company has already issued shares at a premium to outsiders and later on issued shares (at par or book value) to parties listed under section 301 of the Act, the latter issue of shares would be treated as being prejudicial to the interests of the Company? S.C. Vasudeva & Co.

44. Clause 4 (xviii) (Contd.) Issue No. 33 Will issue of ESOPs by private companies be considered as preferential allotment? S.C. Vasudeva & Co.

45. Clause 4 (xix): Whether security or charge has been created in respect of debentures issued? Issue No. 34 If the debentures have been issued towards the end of the year and the charge is created subsequently, what are the reporting responsibilities of the auditor under this clause? Further, whether reporting is required to be done in respect of debentures issued during the year or outstanding as on the year end irrespective of the year in which they were issued? S.C. Vasudeva & Co.

46. Clause 4 (xx): Whether the management has disclosed the end use of money raised by public issues and the same has been verified. Issue No. 35 Should the amount required to disclosed under this clause be the amount utilised during the year or the cumulative amount utilised? S.C. Vasudeva & Co.

47. Clause 4 (xxi); Whether any fraud on or by the company has been noticed or reported during the year. If yes, the nature and the amount involved is to be indicated. S.C. Vasudeva & Co.

48. Clause 4 (xxi) (Contd.) Issue No. 36 Whether a transaction where the company gets a fake purchases bill from the supplier and a letter of credit is issued against such purchases, and the latter gets the LC discounted and gives the money back to the company, would need to be reportedunder this clause? Should the auditor consider materiality of the amount involved for reporting under this clause? S.C. Vasudeva & Co., C.A.'s

49. Clause 4 (xxi) (Contd.) Issue No. 37 What are the reporting responsibilities of the auditor under this clause where frauds have been committed by the directors of the company but are not reported by the company and come to the knowledge of the auditor from private sources? S.C. Vasudeva & Co.

50. Clause 4 (xxi) (Contd.) Issue No. 38 Whether, for the purposes of reporting under this clause, a total amount of all the frauds noticed on reported to be disclosed, explaining the nature of the fraud committed? Whether the total amount of frauds and the each major can be clubbed and disclosed? Whether individual amount involved in each fraud is to be separately listed out with the corresponding nature of fraud? S.C. Vasudeva & Co.