REPORTING REQUIREMENTS FOR AUDITORS UNDER SECTION 227 OF THE COMPANIES ACT, 1956

1. REPORTING REQUIREMENTS FOR AUDITORS UNDER SECTION 227 OF THE COMPANIES ACT, 1956 Presentation By CA. ANIL SHARMA

2. DUTIES UNDER SECTION 227 duty to make certain enquiries- 227(1A), duty to make a report to the members- 227 (2) and (3) duty to make a statement in terms of the provisions of section 227 (4A)

3. POWERS UNDER SECTION 227 (1) right to have access to books of account and vouchers. right to call for information and explanations from officers of the company as deemed necessary.

4. Auditing Pronouncements • Statement on Reporting under Section 227(1A) of the companies Act, 1956. • SA-700 (AAS28) – The Auditor’s Report on Financial Statements • Statement on the Companies (auditor’s Report) Order ,2003 (issued under section 227(4A) of the Companies Act, 1956)

5. SECTION 227 (1A) Whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interests of the company or its members?

6. SECTION 227 (1A) whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company?

7. SECTION 227 (1-A) where the company is not an investment company within the meaning of section 372 or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company ?

8. SECTION 227 (1A) whether loans and advances made by the company have been shown as deposits?

9. SECTION 227 (1A) whether personal expenses have been charged to revenue account?

10. SECTION 227 (1A) where it is stated in the books and papers of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if not, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading ?

11. Reporting requirement u/s 227 (1A) These are specific enquiries to be made during the course of audit Not required to report unless has any special comment to make on any of the items. If satisfied, no further duty to report. Only enquiries and not investigation.

12. SECTION 227 (2) whether the said accounts give the information required by the Companies Act and in the manner so required and give a true and fair view : in the case of the balance sheet, of the state of the company’s affairs as at the end of its financial year and in the case of the profit and loss account, of the profit or loss for its financial year.

13. SECTION 227 (3) The auditors’ report shall also state: Whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purposes of his audit?

14. SECTION 227 (3) The auditors’ report shall also state: whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books, and proper returns adequate for the purposes of his audit have been received from branches not visited by him?

15. SECTION 227 (3) The auditors’ report shall also state: whether the report on the accounts of any branch office audited under section 228 by a person other than the company’s auditor has been forwarded to him as required by clause (c) of sub-section (3) of that section and how he has dealt with the same in preparing the auditor’s report?

16. SECTION 227 (3) The auditors’ report shall also state: whether the company’s balance sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns ?

17. SECTION 227 (3) The auditors’ report shall also state: whether, in his opinion, the profit and loss account and balance sheet comply with the accounting standards referred to in sub-section (3C) of section 211 ?

18. SECTION 227 (3) The auditors’ report shall also state: whether any director is disqualified from being appointed as director under clause (g) of sub-section (1) of section 274 ?

19. SECTION 227 (3) The auditors’ report shall also state: whether the cess payable under section 441 has been paid and if not, the details of amount of cess not so paid ?

20. SECTION 227 (3) & (4) The auditor to give in thick type or in italics the observations or comments on matters which have any adverse effect on the functioning of the company. where any of the matters referred to in section 227 (2) and section 227 (3) is answered in the negative or with a qualification, the auditor’s report shall state the reason for the answer.

21. SA 700 Introductory Para: Identification of financial statements audited A statement of the responsibility of the company’s management and the responsibility of auditor Scope Para: A reference to the auditing standards generally accepted in India A description of the work performed by the auditor Opinion Para: A reference to the financial reporting framework used to prepare the financial statements An expression of opinion

22. SA 700 Expression of opinion (the Auditor’s Report): Unqualified opinion Modified opinion Matters that do not affect the auditor’s opinion Matters that do affect the auditor’s opinion

23. SA 700 MODIFIED OPINION Matters that do not affect the auditor’s opinion: • emphasis of matters

24. SA 700 MODIFIED OPINION Matters that do affect the auditor’s opinion: • Qualified opinion • Disclaimer of opinion • Adverse opinion. • Circumstances for such modified opinion: • Limitation on the scope of the auditors’ work, • Disagreement wit hthe management regarding accounting policies selected, their method of application or inadequacy of disclosures

25. New Developments-Standards on Auditing • For audits of financial statements for periods beginning on or after April 1, 2011. • Revision based on ISAs. • SA-700 (Revised) Forming an Opinion and Reporting on Financial Statements. • SA- 705 Modifications to the Opinion in the Independent Auditor’s Report. • SA- 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report.

26. New Developments-New provisions in the Companies Bill, 2009 Clause 126(3) – the auditor’s report shall also state: • (a) (i) whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit; (ii) whether the company has failed to provide any information sought by the auditor and if so, the details thereof; (he should specifically indicate the likely effect of such non-receipt of information on the financial statements.)

27. New Developments-New provisions in the Companies Bill, 2009 Clause 126(3) – the auditor’s report shall also state: (c) (j) whether the balances in respect of every debtor, creditor, loan and advance, investment and bank balance in excess of Rupees five lakh have been confirmed in writing by such debtor, creditor, lender or investee, as the case may be.

28. New Developments-New provisions in the Companies Bill, 2009 Clause 126(3) – the auditor’s report shall also state: • any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith. • in case of listed companies, whether the company has complied with the internal financial controls and directions issued by the Board.

29. Duties of Auditors- Sec. 227(4A) • The powers of the Central government to direct auditors to include a statement on such matters as may be specified. • The Central Government may consult ICAI for matters proposed to be specified under this sub-section.

30. CARO,2003 • MAOCARO,1988 replaced by CARO,2003 in June 2003. • CARO,2003 amended by Companies (Auditor’s Report) Amendment Order, 2004- notified in November, 2004. • Four exemptions (Para 1(2). • Reporting Para 4 with 21clauses.

31. Management Representation • On matters on which the Order requires the auditor to make a statement. • Reply to the Questionnaire. • Written replies to Inquiries made. • Record of discussion.

32. Case Study –Para 4(i) • “ The company has generally maintained records of fixed assets…. The assets have been physically verified by the external agencies… Discrepancies, though not material, noticed on such verification, have been reconciled/adjusted in the books of account.”

33. Proper records of fixed assets • Record should contain, inter alia, the following details: • Sufficient description of the asset • Classification • Situation • Quantity • Original cost • Year of purchase • Adjustment on revaluation, if any • Date of revaluation • Particulars regarding impairment • Rate/basis of depreciation/amortisation • Depreciation/amortisation for the year and till date • Particular regarding impairment • Particulars regarding sale, discard, demolition, destruction etc.

34. Records of fixed assets maintained electronically- Whether constitutes compliance? • Yes provided the following conditions are met: • Existence of control not permitting alteration in records once entered • It can be retrieved in a legible form

35. Disposal of substantial part of fixed assets and its effect on “the going concern” • If the disposal of substantial part of fixed assets effect the company’s ability to continue its operation for the foreseeable future it shall considered to have effect on its ‘going concern’. • A substantial change in the nature of activities being carried on by the company, requiring it to dispose off its plant and machinery etc. • For example a company has disposed off its plant and equipment, it is still a going concern in the form of a trading company.

36. Case Study- Para 4(ii) • Physical verification of inventory has been conducted by external agenciesduring the year, except for the materials lying with contractors. In our opinion frequency of verification is reasonable. • The procedures of physical verification of inventories, followed by the Management are reasonable and adequate in relation to the size of the company and nature of its business. • The company has maintained proper records of inventory. The discrepancies noticed on physical verification of the inventory have been properly dealt with in the books of account except material lying with contractors where verification is not undertaken.

37. What constitutes ‘reasonable intervals’? • It depends on circumstances of each case, nature of inventories, their location & the feasibility of conducting a physical verification. • Normally, wherever practicable, all the items of inventories should be verified by the management of the company at least once in a year.

38. Reasonable and adequate procedure • Procedure must incorporate: a) written instructions given by the management to the concerned staff engaged in the verification process, b) physical verification inventory sheets duly authenticated by the field staff and responsible officials of the company, c) summary/consolidation sheets duly authenticated by the responsible officials, d) internal memos etc., with respect to the issues arising out of physical verification of inventory,

39. Related parties as per AS- 18 and parties listed in Register maintained under section 301- differences • Two different terms. • Clause to cover only parties to be listed in the Register maintained under section 301 of the Act.

40. Case Study-Para 4(iii)(e) • “ According to the information and explanations given to us, the company has not taken any loans, secured or unsecured during the year from a company covered in the register maintained under section 301 of the Act.”

41. What constitute “continuous failure” to correct major weaknesses in internal control? • Requirement in regard to adequacy of internal controls and continuing failure to correct major weaknesses are not interlinked. • Depends upon the facts and circumstances of the case. • Presumption of continuing from previous period and reporting to the management for correction.

42. Case Study- Para 4(v)(b) • “the transactions, referred to in Section 301, entered into during the financial year were made at prevailing market rates at the relevant time.”

43. How to examine “ reasonableness of prices” paid to parties listed in Registered maintained under section 301? • The auditor to use professional judgement After considering all the factors surrounding the transactions. • Not necessarily be the lowest price.

44. Case Study- Para 4(vi) • ‘The company has not accepted any deposits as defined under section 58A of the Companies Act, 1956 during the year under review.’

45. Internal audit system • commensurate with the size of the company and nature of its business: • the size of the internal audit department, • the qualifications of the internal auditor, • to whom the internal auditor report is to be submitted, • the areas covered by the internal audit, • adequacy of technical assistance with internal auditor, • evidence of work carried out by the internal auditor and • existence of adequate follow up system to ensure that the errors pointed out are corrected and remedial action taken on the deficiencies reported upon.

46. What constitute “statutory dues” and “ any other statutory dues”? • Any sum, which is to be regularly paid to an appropriate authority under a statute (whether central, state or local) applicable to the company should be considered as a ‘statutory dues’. • All types of dues under various statutes which may be applicable to the company having regard to the nature of its business should be considered as ‘other statutory dues’.

47. Reporting responsibility in case of statutory dues not recognised in books of the company • Reporting responsibility lies with the auditor • The auditor to perform procedures to mitigate risk of not detecting such non-compliance.

48. Reporting in case of delay of one or two days in depositing statutory dues • Need not specify each instance • He can indicate whether generally the deposits have been regular or other wise. • “ Undisputed statutory dues including………. Have not generally been regularly deposited with the appropriate authorities though the delay in deposit have not been serious.”

49. What are disputed dues? • Amounts involved in cases where a difference of opinion exists between the relevant department and the company • There has to be an appeal before the appellate authority

50. Case Study- Para 4(ix)(b) • “Details of dues towards sales tax, income tax and excise duty that have not been deposited on account of dispute are as stated in Note 19 on Notes to the Account forming part of the financial statements.”