Selected Major Special Considerations

Transcription

1 Companies (Auditor s Report) Order, 2003 Presented By CA. Abhay Vasant Arolkar 24 th March 2012, Saturday

2 Selected Major Special Considerations Schedule VI& Companies Act or Regulatory requirements CARO Section. 227(1A) Items of specific inquiry Loans & Advances Whether Secured, Terms & Conditions, not prejudicial Whether Transactions represented by book entries are not prejudicial IncaseofCompanyotherthaninvestmentorbankingCompany- Securities sold below the purchase price Whether Loans& Advances shown as deposits Whether personal expenses charged to revenue account Whether cash received in respect of allotment if not, whether position of balance sheet misleading

3 Schedule VI Major Disclosures Share Capital Secured & Unsecured Loans Managerial Remuneration Investments Contingent Liabilities Other disclosures

4 CARO Major Items Fixed Assets Maintenance of Record & Physical Verification Inventories Maintenance of Record & Physical Verification Details pertaining to parties registered u/s 301 Internal audit system Statutory Liabilities Guarantees for borrowings of others End use of Funds out of term loans/public issue Borrow short Invest Long Fraud noticed or reported

5 Applicability Applicability to every company including foreign company Non-applicability: a) Banking Company b) Insurance Company c) Section 25 Company d) Private Limited Company - with paid-up capital and reserves <= 50 lacs rupees and - loan outstanding <= 25 Lacs rupees from any bank or financial institution and - turnover <= five crore rupees at any point of time during the financial year

6 i. A Pvt. Ltd. a new company registered with a capital of Twenty Five Lakhs, and subsequently before the year end raised the capital to Rs. One crore, Is the Order applicable to it?

7 ii. B Pvt. Ltd. has a revaluation reserve of Rs. 10 Lakhs, capital reserve of Rs. 10 Lakhs, Free reserves of Rs. 10 Lakhs, Credit balance in profit and loss account of Rs. 10 Lakhs and paid up capital of Rs. 20 Lakhs. What should be included while arriving at the reserves for the purpose of the order?

8 iii. C Pvt. Ltd., has paid up capital of Rs. 5,00,000/-. During the year the company issued new equity shares of Rs. 15,00,000/- (Face premium of 200% of the face value. Is the Order applicable to it? Is the Order applicable to it, if, thereafter, the company issues Bonus shares to its existing 1 share for every two shares held from out of its Share Premium Account?

9 iv. D Pvt. Ltd. has a paid up share capital of Rs. 10,00,000/- against its authorized capital of Rs. 1,00,00,000/-. During the year the company received share application money amounting to Rs. 90,00,000/-. The Directors have not made the allotment till the end of the financial year. Is the Order applicable to it?

10 v. F Pvt. Ltd. has a loan of Rs. 17 Lakhs from a Bank at the beginning of the year & received Rs. 15 Lakhs during the year from a Financial Institution. Since its borrowings from each of the Bank & Financial Institution is not exceeding Rs. 25 Lakhs at the beginning of the year, is the Order applicable to it?

11 vi. G Pvt. Ltd has received Rs 50 Lakhs on account of sale of scrap. It wants to know whether, it should be considered while arriving at Turnover for the purpose of this clause?

12 vii. AB Co. Ltd. is a closely held company having a paid-up capital of Rs. 10,00,000/- and the Reserves and Surplus include General Reserve of Rs. 2,00, and Profit & Loss Account Credit Balance of Rs. 3,00,000. The company has not taken any loans or deposits from banks or financial institutions and the turnover of the company is Rs. 10,00,00,000/-. Is the Order applicable to it?

13 viii.ac Co. Ltd., has a paid up capital of Rs. 20 Lakhs and the accumulated debit balance in the Profit & Loss Account as on March was Rs. 15 Lakhs. However the company had a credit balance in its Revaluation Reserve of Rs. 40 Lakhs. Is the Order applicable to the company?

14 ix. H company, limited by shares and guarantee, having licence u/s 25 of the Companies Act, 1956 is having paid up capital of Rs. 30 Lakhs and the balance in the Income & Expenditure Account exceeds Rs. 25 Lakhs during the year. Is the Order applicable to it?

15 x. I Bank Ltd., a public company registered under the Companies Act, 1956, is a Scheduled Bank. Is the Order applicable to it? xi. J Insurance India Ltd., a public company registered under the Companies Act, 1956, has tied up with a leading international insurance major. It is registered with the IRDA and commences business in India. Is the Order applicable to it?

16 xii. K Pvt. Ltd., has a turnover of sales of Rs. 4 crores. Besides the company has Other Income as follows: a) Profit on sale of Fixed Assets (Sale Value Rs. 1 crore) Rs. 20 Lakhs b) Interest on Deposits with Banks Rs. 10 Lakhs c) Dividend from its subsidiary company (private company) Rs. 80 Lakhs d) Is the Order applicable to it?

17 xiii. M Pvt. Ltd., has accepted deposits from its shareholders, directors and relatives amounting to Rs. 50 Lakhs. However the limits as to the paid up capital and reserves as also the turnover of the company has not crossed Rs. 50 Lakhs and Rs. 5 crores respectively. The company has taken an overdraft limit from its bankers of Rs. 10 Lakhs, which is unutilised.

18 xiv. AD Pvt. Ltd., enjoys sanctioned cash credit facility of Rs. 30 Lakhs from its bank. The credit balance as per the books of account of the company as on March 31, 2008 was Rs Lakhs. The company had issued a cheque as advance to a supplier of capital equipment, which was presented to the bank only on April 1, Thus the debit balance in the said account in the books of the bank was Rs Lakhs. The company claims that as the balance as per the bank statement has never exceeded the limit prescribed, the Order is not applicable. Advise.

19 xv. N Pvt. Ltd., has disclosed its sales in accordance with the requirement of Schedule VI and the applicable accounting standards as follows: Sales (excl. of VAT) Less Excise Duty Net Sales Rs. 510 Lakhs Rs. 86 Lakhs Rs. 424 Lakhs Besides the company has paid Maharashtra VAT of Rs. 64 Lakhs in respect of the said sales. The sales is accounted in the books at net of taxes. Is the Order applicable to it?

20 Clause (i) Fixed Assets: a) whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets; b) whether these fixed assets have been physically verified by the management at reasonable intervals; whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the books of account;

21 Clause (i) - Fixed Assets (contd.): c) if a substantial part of fixed assets have been disposed of during the year, whether it has affected the going concern;

22 xvi.o Pvt. Ltd., has not maintained any statutory registers including the Fixed Assets Register as required by the Companies Act, On the directors request, the auditors had not qualified their report, and instead had stated in their report that the fixed asset registers are under preparation. In the subsequent year, the directors have once again requested that auditors state that the fixed assets are under preparation. What should the auditor do? Will he be liable in any manner.

23 xvii.p Ltd., has genuinely made efforts to maintain the Fixed Assets Register as required by the Companies Act, However due to the complexity of the number of assets, their costs of acquisition/improvement, locations etc., the fixed asset registers could not be ready in full. The directors have stated that the fixed assets are under preparation and provided the status of the work. What should the auditor do? Will he be liable in any manner.

24 xviii.the Directors of Q Pvt. Ltd., claim that they have physically verified the fixed assets during the year and have issued a management certificate to the effect. No evidence was provided in that regard. On subtle enquiry the auditor has found that there was no such stock taking carried out by the management. Should the auditor qualify? If not, what are the implications?

25 xix.the management of R Ltd., has physically verified the fixed assets during the year and minor discrepancies were found. These discrepancies have not been given any effect in the accounts. Should the auditor report?

26 xx.s Ltd., is in the business of manufacturing and trading in an industrial spare part used in the pharma companies. The company had carried out a costing exercise and concluded that the manufacturing activity should be discontinued and outsourced. Thus the company sold its manufacturing unit, the assets of which constituted a major portion of the fixed assets in the books. How should the auditor report?

27 xxi.t Pvt. Ltd., is engaged in the business of manufacturing. The management has decided to change its line of business and hence decided to sell the fixed assets at its factory. Due to recent renovation in its corporate office, the fixed assets at its factory constituted less than 20% of the total fixed assets reflected in the Balance Sheet of the company. As a precautionary measure, the company had taken approval of the shareholders u/s 293(1)(a) of the Companies Act, How should the auditor report?

28 xxii.u Pvt. Ltd., has maintained its fixed asset register in an excel file, with all the relevant columns. However the number of items being large, the company requests the auditor to ask for only certain extracts of the said register so as to satisfy that proper record have been maintained. As an auditor do you agree?

29 Clause (ii) - Inventory : a) whether physical verification of inventory has been conducted at reasonable intervals by the management; 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;

30 Clause (ii) - Inventory (Contd.) : 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;

31 xxiii.v Pvt. Ltd., is engaged in the business of civil construction as a contractor. The company has valued the inventory in accordance with the Accounting Standard 7. There are no qualifications in the auditors report under CARO, Discuss.

32 xxiv.w Pvt. Ltd., is engaged in the business of manufacturing machinery. Its inventory includes the work-in in-progress which is valued by the management on the basis of estimation. How should the auditors report thereon?

33 xxv.x Ltd., normally takes physical stock of inventory once a year at the end of the financial year. The auditors are informed that due to demand pressure, the company has not been able to physically verify the stock and requests the auditor to not qualify the report that physical verification was not carried out. Advise the auditors.

34 xxvi.in principle, a company carries out 100% physical verification once in three years. The company has no programme for such verification. The company had conducted physical verification one year back and the company claims that it will conduct the physical verification in the next year. What are the reporting requirements by the auditor.

35 Clause (iii) - Loans : a) has the company granted any loans, secured or unsecured to 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, and b) whether the rate of interest and other terms and conditions of loans given by the company, secured or unsecured, are prima facie prejudicial to the interest of the company; and c) whether receipt of the principal amount and interest are also regular; and

36 Clause (iii) - Loans (Contd.) : d) if overdue amount is more than rupees one lakh, whether reasonable steps have been taken by the company for recovery/payment of the principal and interest; e) has the company taken any loans, secured or unsecured 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, and

37 Clause (iii) - Loans (Contd.) : f) whether the rate of interest and other terms and conditions of loans taken by the company, secured or unsecured, are prima facie rejudicial to the interest of the company; and g) whether payment of the principal amount and interest are also regular; and

38 xxvii.y Pvt. Ltd., has advanced as well as taken loans to various parties, covered in the register required to be maintained u/s 301 of the Companies Act, 1956, which have operated the account as a current account. No interest is paid or received in respect thereof. Advise the auditor as to how he should report in respect of the same.

39 xxviii.in the above case, one of the parties, who is the daughter of the Managing Director of the company and has been studying, is advanced a sum of Rs. 2 Lakhs for a period of two years, which has expired, but there is no repayment. The company says that the Managing Director is the unstated guarantor of the amount and hence there is no question of taking any steps to recover the amount. How does the auditor report on this matter?

40 xxix.aa Pvt. Ltd., has a policy of giving loans to the employees at a concessional rate of interest. The auditor has not reported under this clause of the Order a case where such loan was given to an employee of the company who is also a relative of a director of the company. Advise?

41 xxx.reporting requirements of auditor where: a) Loans were given to or taken from parties at such time when the particulars of parties were required to be entered in the register maintained under section 301 of the Act, but thereafter ceased to be covered; b) loans given to or taken at such time when the particulars of parties were not required to be entered in the register maintained under section 301 of the Act, i.e., parties, at the relevant point of time when the loans were given, were not covered by the conditions imposed under section 297 and section 299 of the Act, but during the year came within the ambit of those sections; c) Loans were given or taken to parties after they ceased to be covered under sections 297 or 299 of the Act.

42 xxxi.suppose, a company advances Rs.1 crore to Mr. A, a party covered by section 301 of the Act. Mr. A forwards the amounts to Mr. B, also a party covered by section 301 of the Act and in turn, Mr. B advances that amount to Mr. C, again being a party covered by section 301 of the Act. What is the amount reportable under this clause Rs. 1 Crore or Rs. 3 Crore?

43 xxxii.whether the auditor is required to comment upon loan transactions entered into with another company where the directors are common but such directors do not hold more than two percent of the paid up share capital.

44 xxxiii.what are the reporting requirements where loans are repayable on demand (given or taken) by the company in respect of which no demand has been made by/on the company?

45 xxxiv.whether the transactions to be reported upon under this sub-clause are restricted only to the transactions covered under section 301 of the Act or apply to all the transactions?

46 Clause (iv) - Internal Control System : is there an adequate internal control system 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 and services. Whether there is a continuing failure to correct major weaknesses in internal control system;

47 xxxv.z Pvt. Ltd., is a closely held company which is controlled by its Managing Director. Every decision is taken by him and hence he claims that there is full control of the company. Whether the auditor can conclude that there is internal control system in place?

48 xxxvi.under clause 4 (iv) of the Order, the two requirements, i.e., adequacy of internal controls in regard to sale of goods, purchase of fixed assets and purchase of inventory and continuing failure in the internal controls are inter-related related. Accordingly, can the internal control procedures be said to be adequate when a major weakness has not been detected therein?

49 xxxvii.the auditor has not prepared any internal control questionnaire. There was a fraud in the cash section where the cashier was found guilty of teeming and lading. The auditor had orally warned that the internal control was weak. Thereafter there was no further action. In his report, the auditor proposes to qualify that major weakness was reported and that the company had continually failed to rectify the same. The company opposes this stance of the auditor. Advise. How is the terms continuing failure defined? Does it refer to only those weaknesses which are uncorrected for more than a year?

50 xxxviii.there is no internal audit function. The auditor disclaims that he is unable to trace out the continuing failure in correcting major weaknesses in internal controls in regard to purchase of inventory, fixed assets and sale of goods. Whether such position is correct or not?

51 Clause (v) - Contracts or arrangements referred to in Section 301 of Companies Act : 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 that section; and 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)

52 xxxix.the auditor has not obtained the list of parties entered in the register u/s 301 of the Companies Act, The company has not maintained the requisite register. During the year there was inspection by the concerned Registrar of Companies, wherein it was found that the company had not maintained the register and consequently the reportable transactions with such parties were in fact not reported. Is the auditor liable for negligence?

53 xl. The company has maintained a register and listed the parties therein. However the company has not called for any quotations of other parties, claiming that if it can purchase from known parties, why should it buy from outsiders. The auditor wants to report on whether the prices are reasonable having regard to the prevailing market prices. Advise.

54 xli.how can the auditor ensure that all the transactions required to be entered into the register maintained under section 301 of the Act have been so entered unless there is a check made before each transaction and also where such transactions are routed directly to the income/expense accounts without opening the parties accounts in the ledgers?

55 xlii.what are the reporting responsibilities of the auditor under this clause in case the company purchases goods from a limited company in which the directors of the auditee company are also directors. Further, for these purchases, the company pays huge amounts of advances, funded from bank borrowings to such directors.

56 xliii.ba Ltd., has entered into a transaction with AB Ltd., and A and B are directors of both the companies. The approval of the Central government was not obtained as required u/s 299. However, the register under section 301 of the Act is complete. Advise the auditor as to how he should report the same.

57 xliv.what is the value of the transactions in a case where a company makes purchases amounting to Rs. 5,20, from a party during the year and later gets a trade discount of Rs. 52,000 which is credited to the discount account?

58 Clause (vi) - Deposits from Public : in case the company has accepted deposits from the public, whether the directives issued by the Reserve Bank of India and the provisions of sections 58A, 58AA or any relevant provisions of the Act and the rules framed there under, where applicable, have been complied with. If not, the nature of contraventions should be stated; If an order has been passed by Company Law Board or National Company Law Tribunal or Reserve Bank of India or any Court or any other Tribunal, whether the same has been complied with or not?

59 xlv.e Pvt. Ltd has received security deposit from its clients, whether the same will considered as a Public Deposit? xlvi.whether deemed deposits, being loans from shareholders, relatives or other parties which are not exempted from the definition should also be examined and reported under this clause?

60 xlvii.during the year, K. Mahindra Ltd, a non-banking financial company, has been converted into a private bank after receiving the necessary approvals from RBI and other regulatory authorities. The company is listed on a recognized stock exchange. As on the balance sheet date, it is a banking company. Is the reporting under CARO, 2003 applicable.

61 xlviii.during the year, AC Ltd., a public company was converted into a private limited company. From the date of converting, the private limited company satisfies all the conditions for exemption from the Order. Is the reporting under CARO, 2003 applicable.

62 Clause (vii) - Internal Audit System : in the case of listed companies and/or other companies having a paid-up capital and reserves exceeding Rs.50 lakhs as at the commencement of the financial year concerned, or having an average annual turnover exceeding five crore rupees 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;

63 xlix.ad Pvt. Ltd., has a average annual turnover of Rs. 6 crores. The paid-up capital and the reserves of the company amount to Rs. 2 crores and the company enjoys a credit facility of the bank to the tune of Rs. 1 crores. The company is dealing in manufacture of machines involving more than 4,000 spare parts. The company has neither appointed an internal auditor, nor des it have an internal audit department. The auditor wants to qualify the report. Do you agree?

64 l. AE Ltd., is dealing in diamonds and has an average annual turnover of Rs. 100 crores. However the number of transactions are very few and he has a minimal staff. The company does not have any internal audit department. What are the reporting requirements of the company.

65 Clause (viii) - Cost Records : where maintenance of cost records has been prescribed by the Central Government under clause (d) of sub-sectionsection (1) of section 209 of the Act, whether such accounts and records have been made and maintained;

66 li. AF Pvt. Ltd., maintains cost records. However it does not carry out the cost audit as the same is not required by law. How should the auditor report? lii. AG Pvt. Ltd., is engaged in an industry where normally cost audit is conducted. However the company does not maintain cost records as the same is not required by law. How should the auditor report?

67 Clause (ix) - Statutory Dues : a) 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.

68 Clause (ix) - Statutory Dues (Contd.) : b) in case dues of income tax/sales tax/wealth tax/service tax/ customs duty/ excise duty/cess have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending shall be mentioned. (A mere representation to the Department shall not constitute the dispute).

69 liii. AH Pvt. Ltd., has not deducted tax at source as required by law. Accordingly the same are subjected to disallowances while filing the return of income. Whether for the purposes of reporting under this clause income tax includes taxes deduced at source? a) Does non-payment of advance income tax constitute default in payment of statutory dues reportable under this clause? b) How is the term statutory dues defined? c) What constitutes other statutory dues? d) Whether tax and cess collected by the State Governments through electricity bills constitute other statutory dues?

70 liv. What are the reporting responsibilities of the auditor under this clause in case the company had five years back imported material and had placed them under a bond and even till the current financial year, has not removed the goods there from? Further, interest and rent liability thereon is being provided by the company each year. However, after issuance of Accounting Standard 2, the fact that the company is not loading customs duty appears as a qualification in the auditor s report?

71 lv. What are the reporting responsibilities of the auditor in case the company has not paid the service tax to a transporter for the transportation services availed from him?

72 lvi. What are the reporting responsibilities of the auditor under this clause in case a company was statutorily required to get itself registered under the Provident Fund Act, but has not got itself so registered? Further, what would be manner of qualification and the quantification thereof?

73 lvii.are the following payments covered by this clause of the Order: a) Bonus payable under the payment of Bonus Act, 1965 b) Turnover Fees payable to SEBI by brokers c) APMC charges d) Service Tax e) Penalty/interest on service tax f) Gratuity liability under the payment of Gratuity Act not funded by the company g) cess payable by a company under section 441A of the Companies Act, 1956

74 lviii.what are the auditor s reporting responsibilities under this clause in case there are dues outstanding for a little less than six month as at the balance sheet date as well as in case of previous dues, which though late, were deposited just before the close of the financial year?

75 lix. What are the auditor s reporting responsibilities under this clause in case the company has not provided for the statutory dues payable, as the company is accounting taxes on cash basis?

76 lx. Does regular means 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?

77 lxi. Whether, having regard to the materiality considerations, minor amounts need to be reported under this clause? If yes, then can these amounts be clubbed and reported in one line? lxii.how is the term disputed dues defined?

78 lxiii.should the amounts, which has been disputed at a forum, but which have already been provided for in the books, be reported under this clause?

79 lxiv.ai Pvt. Ltd., has received a show- cause notice as why penalty should not be levied u/s 271(1) (c) of the Income Tax Act, The company is in the process of replying the same. Should the auditor report about the same. What if the penalty is levied or demand for tax on additions made by the AO has been made, which is under the dispute. The company is in the process of filing an appeal but the time limit for filing the appeal has lapsed?

80 lxv.should such statutory dues, the demands of which have been set aside/referred for reassessment or stayed be disclosed or will a statement clarifying that the disclosure excludes the disputes which have been stayed/remanded, along with the aggregate amount, suffice?

81 lxvi.whether the disclosure requirements of the disputed statutory dues, require that each dispute be reported separately or can various disputes of the same nature (and also pertaining to the same authority) be aggregated?

82 Clause (x) - Sick Companies : 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;

83 lxvii.how to compute cash losses as required under this clause? lxviii.the definition of net worth refers to the reduction of provision or expenses as may be prescribed. What are the provisions of expenses prescribed or to be prescribed and why? What are the implications in the case of a trading or a consulting company whose accumulated losses are more than 50% of its net worth?

84 lxix.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 the 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 two consecutive years?

85 lxx.with reference to paragraphs 62 (c) and (d) of the statement: a) What would happen if the qualifications are not quantified though quantifiable? b) How many years financial statements are to be reviewed to consider quantified qualification?

86 Clause (xi) - Dues to Banks, etc.: 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;

87 lxxi.would the Company be construed as having defaulted in repayment of dues in case it has defaulted in repayment of debentures/institutional dues? If yes, then the concept of going concern itself it would be at stake as the lenders have recourse to the assets under the Securitization Act.

88 Clause (xii) - Loans against pledge of shares : whether adequate documents and records are maintained in cases where the company has granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities; If not, the deficiencies to be pointed out;

89 lxxii.how does the auditor determine the adequacy of documents and records where the company has granted loans on the basis of security by way of pledge of Shares, Debentures and other securities? lxxiii.does this clause has any relevance of reporting under Section 227 (1A)?

90 Clause (xiii) - Chit Funds, etc : whether the provisions of any special statute applicable to chit fund have been duly complied with? In respect of nidhi/mutual benefit fund/societies; a) whether the net-owned funds to deposit liability ratio is more than 1:20 as on the date of balance sheet; b) whether the company has complied with the prudential norms on income recognition and provisioning against sub-standard/doubtful/loss standard/doubtful/loss assets; c) whether the company has adequate procedures for appraisal of credit proposals/requests, assessment of credit needs and repayment capacity of the borrowers; d) whether the repayment schedule of various loans granted by the nidhi is based on the repayment capacity of the borrower;

91 Clause (xiv) - Companies dealing in shares : if the company is dealing or trading in shares, securities, debentures and other investments, whether proper records have been maintained of the transactions and contracts and whether timely entries have been made therein; also whether the shares, securities, debentures and other investments have been held by the company, in its own name except to the extent of the exemption, if any, granted under section 49 of the Act;

92 lxxiv.how does the auditor determine whether he is required to report under this clause for a company. lxxv.how does the auditor express his opinion as whether timely entries have been made

93 Clause (xv) - Terms and conditions of guarantees given : whether the company has given any guarantee for loans taken by others from bank or financial institutions, the terms and conditions whereof are prejudicial to the interest of the company;

94 lxxvi.the question whether the guarantee given by the company on behalf of others is prejudicial to the interests of the company or not is already covered under section 372A of the Companies Act, What, therefore, is the reason behind including it in the Order also?

95 lxxvii.would the guarantee given by the company to any of its personnel or to an entity, for loans taken from sources other than a bank or a financial institution, be deemed to be prejudicial to the interests of the company?

96 lxxviii.this clause requires the auditors to determine whether the company has given any guarantee for loans taken by others from banks or financial institutions. AJ Pvt. Ltd., does not maintain a minute book or a register of guarantee, if maintained by the company. What procedures should the auditor adopt where he has o report under this clause?

97 Clause (xvi) - Utilisation of term loans : whether term loans were applied for the purpose for which the loans were obtained;

98 lxxix.how is the loans defined? expression term 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?

99 lxxx.what procedures should be adopted by the auditor for reporting under this clause incase of general borrowings or loans for financing working capital where it might not be possible to track the end use of loan on a one-to to-one one basis?

100 lxxxi.what procedures and reporting 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?

101 Clause (xvii) - Utilisation of short term funds: whether the funds raised on short-termterm basis have been used for long-term investment; If yes, the nature and amount is to be indicated;

102 lxxxii.how does the auditor determine that short term funds are used for long term applications? Should the auditor restrict to the data given in the financial statements of the company or should be go beyond that?

103 lxxxiii.how is the term working capital defined? core Whether normal debt collection period or normal credit terms allowed to creditors can be taken as permanent working capital.

104 lxxxiv.are the loans raised against the fixed deposits with banks reportable under this clause? 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 cancelable, be considered as long term investment?

105 lxxxv.in view of the bleak economic scenario, AK Pvt. Ltd., has decided to reduce its activity and thus has reduced its level of current assets and has repaid long-term loans (assuming that it has no short- term loans or bank limits). Would this mean that the company has used short-term term funds for long-term purposes?

106 Clause (xvii) - Preferential Allotments : 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;

107 lxxxvi.al Ltd., issued shares at a premium to outsiders and subsequently, proceeded to issue shares (at par or book value) to parties listed under section 301 of the Act. Would the latter issue of shares would be treated as being prejudicial to the interests of the company?

108 lxxxvii.am Pvt. Ltd., has four shareholders (being relatives) holding 25 percent each of its share capital. The shareholders are allotted shares in equal proportions at a value of, say, Rs. 10 while the book value of shares is, say, Rs.50 50, would be reportable under this clause?

109 lxxxviii.does this clause apply to a) convertible bonds? b) ESOPs by private companies be considered as preferential allotment?

110 Clause (xix) - Creation of security for debentures: whether security or charges has been created in debentures issued? respect of

111 lxxxix.if the debentures have been issued towards the end of the year and the securities are 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?

112 Clause (xx) - End use of public issues : whether the management has disclosed on the end use of money raised by public issues and the same has been verified;

113 xc.how should the auditor report under this clause in a case where the company has invested surplus funds of its public issue, not immediately required, in short-term term loans/investments?

114 xci.reporting requirement where: 1) the end use of money is made in current year and the public issue was made in earlier year(s)? If yes, for how many years back, is the auditors required to verify? 2) The public issue is made during the year but the end use of money is in the subsequent year(s). Should the amount required to disclosed under this clause be the amount utilized during the year or the cumulative amount utilised?

115 xcii.with reference to the guidance given in respect of clause 4 (xx) of the Order, in paragraphs 73(b) and (d), whether the disclosure in regard to the end use of money in the financial statements be made by way of notes?

116 Clause (xxi) - Reporting on fraud : Whether 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.

117 xciii.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 reported under this clause? Should the auditor consider materiality of the amount involved for reporting under this clause? Should a fraud risk committed in one quarter but rectified in the other quarter (2nd Quarter) of the year be reported under this clause? Should teeming and lading frauds be reported under this clause?

118 xciv.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?

119 xcv.whether, for the purpose 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 major frauds can be clubbed and disclosed? Or whether individual amount involved in each fraud is to be separately listed out with the corresponding nature of fraud?

120 xcvi.is it enough if the auditor expresses his opinion on the frauds noticed and reported by a detective appointed to approach his work with suspicion?

121 xcvii. xcvii.what What are are the the reporting reporting responsibilities responsibilities of of the the auditor auditor as as well well as as the the disclosure disclosure requirements requirements in in case case of of a private private limited limited company company to to private private limited limited company company to to which which the the Order Order is is not not applicable? applicable?

122 xcviii.what are the reporting responsibilities of the auditor of a branch of a private limited company under the Order in case such a branch fulfills the conditions for exemption from the applicability of the Order?

123 xcix.what is the manner of reporting or disclosure in case of liaison offices, project offices and branch offices of foreign companies for the purposes of the Order?

124 c. Whether the auditor has to comment separately on each of the clauses such that the total number of clauses reported upon is 21? Should we maintain the sequence of the clauses as contained in the said Order?

125 ci. What should be the manner of reporting in the main auditor s report in case any of the reply to any of the clauses under the Order is in adverse, especially with respect to statutory dues and disposal of fixed assets.

126 BY CA ABHAY VASANT AROLKAR BCOM (HONS.), LLB, ACS, FCA