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Issues in CARO






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IntroductionApplicability IssuesReporting RequirementsClause-wise Reporting Issues. CA Nilesh S. Vikamsey. Content . 2. CARO is an Order issued by Central Government u/s 227(4A)Section (1A) and sub-section(4A) in S 227 inserted by the Companies Amendment Act, 1965 w.e.f. 15-10-1965 on re
Issues in CARO

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2. Introduction Applicability Issues Reporting Requirements Clause-wise Reporting Issues CA Nilesh S. Vikamsey 2

3. CARO is an Order issued by Central Government u/s 227(4A) Section (1A) and sub-section(4A) in S 227 inserted by the Companies Amendment Act, 1965 w.e.f. 15-10-1965 on recommendation of Daphtary-Sastri Committee No general or special order between 15-10-1965 to 1975 Between 1975 to 1987 MAOCARO 1975 Between 1988 to 30-6-2003 MAOCARO 1988 Between 1-7-2003 to till date CARO 2003 ??..Process is on to introduce CARO 2011 Recommendation in S 227(4A) is similar to recommendation in S 619(3) by CAG in case of Government Companies CA Nilesh S. Vikamsey 3 Reasons for Daphtary-Sastri committee recommendations Loans and advances without security and at low or no interest False book entries Manipulations in share prices held by companies Loss to investing public due to use of such dubious means The report of the Commission of Inquiry has demonstrated that the investing public has lost heavily by contributing the capital of the public companies into whose affairs the commission inquired. The following, among other methods, were adopted by person, directly or indirectly, in control of the affairs of the company, to cause loss to the investing public: ???????????????I.??????Loans and advances were made without security and at low interest or no interest to private companies controlled by such individuals or to the individuals themselves, to the detriment of the public company.??Sometimes, facility was provided for repayment in many instalments spread over a long period without interest.??These loans were shown as repaid but the commission discovered that no cash was received in repayment of these loans and that there was nothing more than a mere book adjustment. ?????????????II.??????Payments for purchases and sales were shown as made in cash although in reality only book entries had been made in the respective only book entries had been made in the respective accounts. ????????????III.??????Manipulations were made in the purchase price or sale price of shares held by public companies in order fictitiously to create loss and the individuals in control of the concerns in which they were interested enjoyed the benefit. Reasons for Daphtary-Sastri committee recommendations Loans and advances without security and at low or no interest False book entries Manipulations in share prices held by companies Loss to investing public due to use of such dubious means The report of the Commission of Inquiry has demonstrated that the investing public has lost heavily by contributing the capital of the public companies into whose affairs the commission inquired. The following, among other methods, were adopted by person, directly or indirectly, in control of the affairs of the company, to cause loss to the investing public: ???????????????I.??????Loans and advances were made without security and at low interest or no interest to private companies controlled by such individuals or to the individuals themselves, to the detriment of the public company.??Sometimes, facility was provided for repayment in many instalments spread over a long period without interest.??These loans were shown as repaid but the commission discovered that no cash was received in repayment of these loans and that there was nothing more than a mere book adjustment. ?????????????II.??????Payments for purchases and sales were shown as made in cash although in reality only book entries had been made in the respective only book entries had been made in the respective accounts. ????????????III.??????Manipulations were made in the purchase price or sale price of shares held by public companies in order fictitiously to create loss and the individuals in control of the concerns in which they were interested enjoyed the benefit.

4. This report not meant to limit/restrict duty & responsibility of auditors, It only requires reporting on certain matters Applies to : All companies except as exempted in the Order (Banking, Insurance & Sec 25 Company) Also applies to Foreign Companies (Liaison Office, Branch, Project Office etc ) Also applicable to branch audits if separate branch auditor is there CA Nilesh S. Vikamsey 4 Applicability to Liaison office & project office of foreign company: As per paragraph 2 of the order, it shall apply to all companies including foreign company as defined u/s 591 of the company act. Earlier MAOCARO, 1988 is not applicable to Liaison office because that Maocaro applicability test was business activity while latest caro test is company. Branch Audit: 1st test is to check whether CARO is applicable to corporate, if yes - than branch auditor have same right as a company auditor u/s 227 Applicability to Liaison office & project office of foreign company: As per paragraph 2 of the order, it shall apply to all companies including foreign company as defined u/s 591 of the company act. Earlier MAOCARO, 1988 is not applicable to Liaison office because that Maocaro applicability test was business activity while latest caro test is company. Branch Audit: 1st test is to check whether CARO is applicable to corporate, if yes - than branch auditor have same right as a company auditor u/s 227

5. CARO is applicable to Private Limited Company, if all conditions are satisfied Paid-up capital + Reserves > Rs.50 Lakh Loans from Bank or Financial Institution of => Rs.25 Lakh Turnover > Rs.5 Crore Issues: When to Consider Above Criteria ? Whether at year end or at any time during the year? Applicable to all Private ?Unlimited? Companies CA Nilesh S. Vikamsey 5 What if the authorised capital or issued capital or subscribed capital exceeds Rs. 50 lacs? ? our criteria is paid up capital Private Co. ? Deposits ? 3(1)(iii) ? if accepts public deposits it will not be a Private Company.What if the authorised capital or issued capital or subscribed capital exceeds Rs. 50 lacs? ? our criteria is paid up capital Private Co. ? Deposits ? 3(1)(iii) ? if accepts public deposits it will not be a Private Company.

6. Whether CARO is applicable to private company which accepts public deposits? By virtue of the provisions of clause (iii) of sub section (I) of section 3 of the Act, if a private company invites/ accepts any deposit from persons other than its members, directors or relatives, it would not be covered by the definition of a ?private company? Therefore CARO would become applicable to such a Private Limited Company Is CARO applicable to Private Company not satisfying applicability criteria but accepting ?Inter Corporate Deposit?? CA Nilesh S. Vikamsey 6 ICD is not public deposit as per CDARICD is not public deposit as per CDAR

7. Paid-Up Capital Share Application Money ? Not to be considered as a part of the paid-up capital Forfeited Shares ? Amount originally paid up on forfeited shares to be added to the figure of paid up capital Preference share capital is part of Paid-up Capital Reserves Credit balance in P&L is part of the Reserve Debit balance in P&L Account ? Reduce only from Revenue Reserve Revaluation reserve and capital reserves will be considered as reserve to evaluate applicability of CARO CA Nilesh S. Vikamsey 7 Share Application is not issued and subscribed. Post issue and subscribed, share can be considered as paid-up Whether Bonus shares are covered? - since it is given by capitalising reserves. Forfeited Share : Sec 2(32) of company act define the paid-up capital, As per this section what capital credited as paid-up.Share Application is not issued and subscribed. Post issue and subscribed, share can be considered as paid-up Whether Bonus shares are covered? - since it is given by capitalising reserves. Forfeited Share : Sec 2(32) of company act define the paid-up capital, As per this section what capital credited as paid-up.

8. Loan Interest accrued & due is considered as Loan Bank overdrafts or other short-term bank loans would also be considered as loans outstanding Outstanding loan from financial institutions/ banks would include bank guarantees issued by the companies only if it invoke & enchased (only fund base) Will not include loans from NBFC & other than Bank / Financial Institution Would the order apply to Pvt. Ltd. Co?s, which has converted sales tax liability in to loan by execution of a document by an approved private authority or a state industrial development institution? The loans from Private / Foreign Bank be taken on to considered? When a dues from creditors is converted into security deposits, whether such deposits would be covered under Sec. 3(1)(iii)(d)? Whether deposits existing in a company on its conversion through the route Part IX of the act would be covered under Sec. 3(1)(iii)(d)? CA Nilesh S. Vikamsey 8 The balances of loans should be as per bank?s books or company?s books? How to determine the balance in case of cash credit facility sanctioned but not fully utilised? Answer: Consider the book balance after adjusting the reconciliation item (i.e. bank balance) where the loans from private parties say NBFCs exceeds Rs.25 lacs. ? NBFC is not Financial Institution. Financial Insituitions are as defined in Co?s Acceptance of Deposit Rules 1975. UTI, LIC, IDFC Sales Tax Liability Loan: The order would not apply since they are not covered by definition of bank or financial institutuion. Private and foreign banks are banking institution under the Banking Regulation Act, 1949 and hence would be required to be taken in to consideration. Dues from creditors: As per Rule 2(b)(vi) of the Companies (Acceptance of Deposits) Rules, 1975 such security deposits would not be covered under Sec.3(1)(iii)(d) of the act. Part IX of the act is on conversion of partnership firm into a company. The deposits existing in the company on its conversion through the route Part IX of the act would not be covered under Sec. 3(1)(iii)(d) since these deposits are neither invited nor accepted by the company. Such deposits are considered to be vested with the company. The balances of loans should be as per bank?s books or company?s books? How to determine the balance in case of cash credit facility sanctioned but not fully utilised? Answer: Consider the book balance after adjusting the reconciliation item (i.e. bank balance) where the loans from private parties say NBFCs exceeds Rs.25 lacs. ? NBFC is not Financial Institution. Financial Insituitions are as defined in Co?s Acceptance of Deposit Rules 1975. UTI, LIC, IDFC Sales Tax Liability Loan: The order would not apply since they are not covered by definition of bank or financial institutuion. Private and foreign banks are banking institution under the Banking Regulation Act, 1949 and hence would be required to be taken in to consideration. Dues from creditors: As per Rule 2(b)(vi) of the Companies (Acceptance of Deposits) Rules, 1975 such security deposits would not be covered under Sec.3(1)(iii)(d) of the act. Part IX of the act is on conversion of partnership firm into a company. The deposits existing in the company on its conversion through the route Part IX of the act would not be covered under Sec. 3(1)(iii)(d) since these deposits are neither invited nor accepted by the company. Such deposits are considered to be vested with the company.

9. Turnover No definition in CARO Sales of the Company = Goods + Service + Commission Treatment of excise duty, sales tax, other income Turnover ? if during the year it is Rs.5.50 crores but by year-end it drops to Rs. 4.90 Crore due to Sales Return - is CARO applicable? Treatment of Trade Discount ? Sales & Commission paid Treatment of Rent, Dividend and Interest CA Nilesh S. Vikamsey 9 Turnover Part II of Schedule VI to the co. act, define the term ?turnover? as the aggregate amount for which sales are effected by the company. Sales effected includes sale of goods as well as services rendered by the company. Hence other income is not consider in turnover. Sales return to be considered year in which return happens If excise and sales tax credited to separate account ? not to be considered for turnover, since its collected and paid Rent or interest: The income received by way of rent or interest would not form part of turnover except in cases where the principal business of the company is letting out of property of the company or it is an investment companyTurnover Part II of Schedule VI to the co. act, define the term ?turnover? as the aggregate amount for which sales are effected by the company. Sales effected includes sale of goods as well as services rendered by the company. Hence other income is not consider in turnover. Sales return to be considered year in which return happens If excise and sales tax credited to separate account ? not to be considered for turnover, since its collected and paid Rent or interest: The income received by way of rent or interest would not form part of turnover except in cases where the principal business of the company is letting out of property of the company or it is an investment company

10. Total 21 main points & 15 sub points, totally 36 points Unfavorable or qualified Auditor's Report to state: Reasons for such unfavorable or qualified answers If unable to express any opinion on a particular question, report to indicate such fact together with reasons Co?s Exempt by Order ? No Disclosure (e.g. Banking, Insurance and S/25 Companies) Pvt. Co?s not satisfying applicability criteria ? To disclose fact of Non applicability If certain clauses are not applicable: Every clause may be specifically replied to, stating that the clause is not applicable FRRB comment that reporting in one sentence about all clauses not applicable is not proper CA Nilesh S. Vikamsey 10 Point no 2: We should mention the company i.e. private company because company which are directly exempt (i.e. banking company, insurance company & sec 25); we are not mention the fact that caro not applicable. Point no 2: We should mention the company i.e. private company because company which are directly exempt (i.e. banking company, insurance company & sec 25); we are not mention the fact that caro not applicable.

11. Fixed Assets Clause Maintenance of proper records of fixed assets showing full particulars including quantitative details & Situations Physical verification of fixed assets at reasonable intervals, material discrepancies and accounting thereof Disposal of substantial part of fixed assets have been disposed off, whether affecting ?going concern? Issues ?Proper Records? not defined ? matter of professional judgment Records in electronic form ? Adequate documentation evidencing evaluation of internal controls to ensure completeness, accuracy and inalterability of the register CA Nilesh S. Vikamsey 11 Proper Records : Description of assets, classification ( P & M, office equipment, etc.), situation, quantity, original cost, year of purchase adjustment for revalutation & foreign exchange, rate of depreciation, particular regarding impairment, accumulated depreciation Proper Records : Description of assets, classification ( P & M, office equipment, etc.), situation, quantity, original cost, year of purchase adjustment for revalutation & foreign exchange, rate of depreciation, particular regarding impairment, accumulated depreciation

12. Fixed Assets Issues? Fixed assets register details should tally with figure in books of accounts Details of assets fully depreciated, costing below Rs.5000, impaired assets and held for disposal should also be maintained Special situations Assets taken on finance lease Assets held for disposal Impaired assets Jointly owned assets CA Nilesh S. Vikamsey 12

13. Fixed Assets Issues? Physical verification by management Reasonable intervals : once a in a year / 2 year / 3 year Any material discrepancies noticed ; whether properly accounted or not Use of experts Assets at multiple locations Movable assets like vehicles, etc. Material discrepancies noticed ? Whether properly accounted for FRRB Comment FRRB commented that auditor should not rely on the explanation of the management , instead auditor should use his own judgment with respect to verification of fixed assets. CA Nilesh S. Vikamsey 13 Multiple Location ? Proper programme for Physical verification Movable ? Proper taggingMultiple Location ? Proper programme for Physical verification Movable ? Proper tagging

14. Fixed Assets Issues? For assets disposed off -what constitutes ?substantial part?? whether same can be linked to section 293(1)(a) of the Act? Professional judgement Sufficient appropriate audit evidence Prior permission of shareholders to dispose off Whether disposal or sale of the assets which have not been put to use but held for sale or abandoned because of non-viability of the project or for any other reason and may form substantial part of fixed assets, affects the ?going concern?? It may be noted that though these assets may form substantial part of fixed assets but their disposal or sale might not affect the ?going concern? Is going concern affected -if a company sells substantial fixed assets but starts another activity e.g. trading activity SA 570 on ?Going Concern? to be considered CA Nilesh S. Vikamsey 14 293(1)(a) ? Not applicable to Private Companies. Not Always, It may be different Non-existence of intention and necessity of liquidation or of curtailing materially the scale of its operations SA570 ? Documents to be reviewed to evaluate going concern assumption.like agreements, minutes etc? 293(1)(a) ? Not applicable to Private Companies. Not Always, It may be different Non-existence of intention and necessity of liquidation or of curtailing materially the scale of its operations SA570 ? Documents to be reviewed to evaluate going concern assumption.like agreements, minutes etc?

15. Inventory? Clause Physical verification of ?inventory? at reasonable intervals Whether physical verification procedures reasonable and adequate? Report deficiencies Whether proper records of inventory maintained and material discrepancies noticed are properly dealt with Issues Reasonable intervals : At least once a year or more often (ABC classification) CA Nilesh S. Vikamsey 15 Nature, location, feasibility to be considered Continuous vs. periodic verification To review instructions issued by management to person carrying verification Reliance on work of expert ? SA620 to be considered Cut-off procedures. To verify documents. Check documents pertaining to period shortly before or after verification Nature, location, feasibility to be considered Continuous vs. periodic verification To review instructions issued by management to person carrying verification Reliance on work of expert ? SA620 to be considered Cut-off procedures. To verify documents. Check documents pertaining to period shortly before or after verification

16. Inventory? Issues? Adequacy of verification procedures ? documents Special considerations Inventory in custody of 3rd parties / locations Inventory at multiple locations Large variety of inventory items Intangibles such as music and theatrical rights Use of experts for Volumetric measurements ? oil / petroleum Validating technical characteristics - construction Assessing quality of inventory - diamonds CA Nilesh S. Vikamsey 16

17. Inventory? Issues? Verification of WIP and stores / spares Estimating stage of completion for WIP Voluminous nature of stores / spares What are ?proper records?? What constitutes a ?material discrepancy? CA Nilesh S. Vikamsey 17 WIP : How to report where there are practical difficulties to maintain records of WIP. Ans : Can at any point of time one can arrive or calculate the quantity and amount involved in WIP? If yes, the auditor may form an opinion that stock records are being maintained. Proper records : nature, code, location, quantity details (receipt, issue & balances) & dates Material Discrepancy : Check with ABC analysis, if discrepancy regarding c category than discrepancy might not be material otherwise it will be material. Discrepancies adjusted at year end ? impact ? future results? GN ? Audit of inventories WIP : How to report where there are practical difficulties to maintain records of WIP. Ans : Can at any point of time one can arrive or calculate the quantity and amount involved in WIP? If yes, the auditor may form an opinion that stock records are being maintained. Proper records : nature, code, location, quantity details (receipt, issue & balances) & dates Material Discrepancy : Check with ABC analysis, if discrepancy regarding c category than discrepancy might not be material otherwise it will be material. Discrepancies adjusted at year end ? impact ? future results? GN ? Audit of inventories

18. Inventory? Issues? Whether this clause be applicable to the construction companies governed by Accounting Standard (AS) 7, ?Accounting for Construction Contract?? For the purpose of reporting under this clause, can the statutory auditor rely on the report of the internal auditor? CA Nilesh S. Vikamsey 18 AS 7: It would be seen that even a construction company would have inventories (assets which meet the criteria laid down in AS 2) e.g flats/ complex under construction, building materials awaiting use, etc. Hence the clause would thus seem to apply to inventories of construction company. Internal auditor report: the auditor can rely upon the work of the internal auditor provided the auditor complies with the requirement of SA 610 (AAS 7) ?Relying upon the work of the internal auditor?. AS 7: It would be seen that even a construction company would have inventories (assets which meet the criteria laid down in AS 2) e.g flats/ complex under construction, building materials awaiting use, etc. Hence the clause would thus seem to apply to inventories of construction company. Internal auditor report: the auditor can rely upon the work of the internal auditor provided the auditor complies with the requirement of SA 610 (AAS 7) ?Relying upon the work of the internal auditor?.

19. Loans relating to 301 parties? Clause Reporting on loans granted to parties listed in S.301 register, along with number of parties and amount involved Whether rate of interest and terms and conditions are prima facie prejudicial to the interest of the company Whether receipt of principal amount and interest are regular Whether reasonable steps taken in case overdue amount is more than Rs.1 Lakh Reporting on loans taken from section 301parties with number of parties and amount involved Whether rate of interest and terms and conditions are prima facie prejudicial to the interest of the company Whether the payment of principal amount and interest are regular CA Nilesh S. Vikamsey 19 What should happen, if parties cease to 301 parties during the year : As per my opinion transaction with the party when he is covered in 301 register should only reported. What about loans repayable on demand? : a loan repayable on demand falls due as and when the lendor demand the loan. If the lending company has not demanded the loan, auditor can not comment negatively under this sub clause.What should happen, if parties cease to 301 parties during the year : As per my opinion transaction with the party when he is covered in 301 register should only reported. What about loans repayable on demand? : a loan repayable on demand falls due as and when the lendor demand the loan. If the lending company has not demanded the loan, auditor can not comment negatively under this sub clause.

20. Loans relating to 301 parties? Clause Issues Completeness of the register maintained u/s 301 Register maintained but not updated Reliance on Form 24AA ? obtain list of parties u/s 301 Loans Squared-up during the year Opening loan, No transaction during the year Loans in kind e.g. inventories CA Nilesh S. Vikamsey 20 What about loans repayable on demand? Ans: A loan repayable on demand falls due as and when the lender calls back the loan. The auditor can make an assessment of the regularity only if the loan is demanded by the company since the question of regularity would be judged by the consequent action of the company ( payment or non-payment). If the lending company has not called back the loan, the auditor cannot comment under this sub-clause. What about loans repayable on demand? Ans: A loan repayable on demand falls due as and when the lender calls back the loan. The auditor can make an assessment of the regularity only if the loan is demanded by the company since the question of regularity would be judged by the consequent action of the company ( payment or non-payment). If the lending company has not called back the loan, the auditor cannot comment under this sub-clause.

21. Loans relating to 301 parties? Issues? Amount involved : maximum amount during the year and year end balance Prima facie ?prejudicial? circumstances Rate of interest Unreasonable tenor or re-payment schedule Terms not specified ? e.g. security, period of repayment, restrictive covenant Terms frequently re-negotiated Unsecured loans CA Nilesh S. Vikamsey 21 Loan given to employees at concessional rate and at the same rate loan given to employee who is relative of the director ? not to be considered as prejudicialLoan given to employees at concessional rate and at the same rate loan given to employee who is relative of the director ? not to be considered as prejudicial

22. How to evaluate reasonability of steps for recovery of loans Whether advances in the nature of loans be considered under this clause Overlap with related party disclosures as per AS-18 Reporting is on a continuing basis, not just for loans taken / granted during the year Regularity / repayment of principal and interest ? if not specified Current Accounts CA Nilesh S. Vikamsey 22 Reasonability step: Reasonable step depend upon the circumstances, issue of reminders or sending of an advocate?s notice may amount to ?reasonable steps? even though no legal action is taken. The auditor should ask the management to give in writing (MRL), the steps taken by them. What if there are no stipulations as to rate of interest and repayment or other terms? Ans. :In case of Interest, if no stipulation, than it would be payable annually. In case of repayment & other term,the auditor is not in a position to make any specific comment where no stipulation has been made. The auditor should state the fact on the same. Demand loan, only on demand, if not demanded no comment. To mention fact that loan is demand loan. Reasonability step: Reasonable step depend upon the circumstances, issue of reminders or sending of an advocate?s notice may amount to ?reasonable steps? even though no legal action is taken. The auditor should ask the management to give in writing (MRL), the steps taken by them. What if there are no stipulations as to rate of interest and repayment or other terms? Ans. :In case of Interest, if no stipulation, than it would be payable annually. In case of repayment & other term,the auditor is not in a position to make any specific comment where no stipulation has been made. The auditor should state the fact on the same. Demand loan, only on demand, if not demanded no comment. To mention fact that loan is demand loan.

23. Adequacy of internal control? Clause Adequacy of internal control system over purchase of inventory and fixed assets and sale of goods and services. Is there continuing failure to correct major weaknesses in internal control system Issues When is internal control ?adequate?? Linkage with internal controls over financial reporting Implications for CEO / CFO certification pursuant to clause 49 of listing agreement Authoritative guidance ? SA 315 & SA 330 ?Identifying & Assessing Risk?.? & ?Auditor responses to assessed risk? What is ?continuing failure? and ?major weaknesses? Whether continuing failure only in relation to aforesaid items What about internal control in the other areas? CA Nilesh S. Vikamsey 23 Questionnaire, checklist, flowchart, etc..(Documentation) Continuing failure and major weaknesses ? Professional judgment, reports, internal control, Audit committee, previous year observation of Statutory auditors. Questionnaire, checklist, flowchart, etc..(Documentation) Continuing failure and major weaknesses ? Professional judgment, reports, internal control, Audit committee, previous year observation of Statutory auditors.

24. Adequacy of internal control? Issues? If there is no internal audit function, the auditor would obviously have to disclaim that he is unable to trace out the continuing failure in correcting major weakness in internal controls in regard to purchase of inventory, fixed assets and sale of goods. Whether such a position is correct or not? FRRB Comment While reporting on adequacy on internal control, the auditor should note that there are two aspects on which auditor should comment separately; first is on the adequacy of the internal control and the second aspect is whether there was a continuing failure to correct a major weakness in such internal controls CA Nilesh S. Vikamsey 24 Ans.:- Determination of continuing failure in correcting a major weakness in internal control is required to be done by the auditor and commented upon by him in his report irrespective of the existence of the internal audit function. This requirement has no relation with the existence of an internal audit function in the company. Therefore if there is no internal audit function, it would not be appropriate to disclaim that he is unable to trace out the continuing failure in correcting major weakness in internal controls. SA 400 (AAS 6) ? Risk Assessment and Internal Control? should also be considered. Ans.:- Determination of continuing failure in correcting a major weakness in internal control is required to be done by the auditor and commented upon by him in his report irrespective of the existence of the internal audit function. This requirement has no relation with the existence of an internal audit function in the company. Therefore if there is no internal audit function, it would not be appropriate to disclaim that he is unable to trace out the continuing failure in correcting major weakness in internal controls. SA 400 (AAS 6) ? Risk Assessment and Internal Control? should also be considered.

25. Contracts with Section 301 parties? Clause Whether contracts / arrangement that need to be entered in section 301 register have been so entered ( if not entered, Report ) Whether such transactions* are made at prices that are reasonable having regard to the prevailing market prices at relevant time where transaction* value per party exceeds Rs.5 lakh CA Nilesh S. Vikamsey 25 As per sec 299(6) : Sec. 301 is not applicable to situation where two companies have common directors who do not hold more than 2% of the paid-up share capital of the other company Public to Public is not covered in 297 Obtain list of party under 301 Verify during course of audit if any transaction with any of their party Check the register u/s 301 for all entry Managerial Representation As per sec 299(6) : Sec. 301 is not applicable to situation where two companies have common directors who do not hold more than 2% of the paid-up share capital of the other company Public to Public is not covered in 297 Obtain list of party under 301 Verify during course of audit if any transaction with any of their party Check the register u/s 301 for all entry Managerial Representation

26. Contracts with Section 301 parties? Issues?. Special situations when such transactions have no comparable market price Goods or services are of a special nature and hence not comparable with other sources Sole Supplier Identifying transactions not routed through party accounts, but directly booked as income / expense (Bank Book / Cash Book / Narrations) Reporting requirement when 301 register is updated but relevant Central Govt. permission not obtained u/s 297 Overlap with related party disclosures as per AS-18 CA Nilesh S. Vikamsey 26 Quotation, party list, transaction with other party. Terms of contract ? Delivery time, credit period, quality, etc .Quotation, party list, transaction with other party. Terms of contract ? Delivery time, credit period, quality, etc .

27. Contracts with Section 301 parties? Issues? Suppose, a company advances Rs.1Crore to Mr. A, a partner covered by Sec. 301 of the act. Mr. A forwards the amount to Mr. B, also a party covered by Sec. 301 of the Act and in turn Mr. B advances the amount to Mr. C, again being a party covered by Sec.301 of the act. What is the amount reportable under this clause Rs.1 crore or Rs.3 crore? CA Nilesh S. Vikamsey 27 Ans.: In the instant case the company has given loan of Rs.1 crore to Mr. A. Subsequent disbursement of the amounts is not done by the company and therefore, it cannot be said that the amount involved is Rs.3 crore.Ans.: In the instant case the company has given loan of Rs.1 crore to Mr. A. Subsequent disbursement of the amounts is not done by the company and therefore, it cannot be said that the amount involved is Rs.3 crore.

28. Public deposits Clause In case the Co has accepted deposit from the public, whether directives issued by RBI and provisions of Sections 58A, 58AA or any other relevant provisions of the Companies Act, 1956 have been complied with. If not, nature of contraventions should be stated. Compliance of Company Law Board Order/ National Co Law Tribunal/ RBI / Court / Tribunal if any, has to be reported Issues Deemed deposits, being loans from shareholders, relatives or other parties which are not exempted from the definition, should be covered for reporting Status of deposits on conversion of partnership firm to a Pvt. Ltd. Co. Check compliance with RBI Directions, Companies (Acceptance of Deposits) Rules in case deposits are accepted CA Nilesh S. Vikamsey 28 58A ? Empowers CG with consultation of RBI to prescribe rules for deposit. Companies (Acceptance of Deposits) Rules, 1975. - Limit is 10% of the paid up share capital & free reserves of co., rate of interest should not exceed 12.5% p.a, Advertisement, Register, Nature & terms of deposits, ROC return, etc. 58AA- Small Deposit. Deposit less than 20k. How to report under this clause, in case where NBFC converted into bank or vice versa? Ans. If the NBFC converted in banking company during the financial year, the status of such company will be a banking company as at the balance sheet date. Since the order is not applicable to banking company hence order is not applicable on the same. NBFC ? various directions under RBI - Direct report to RBI58A ? Empowers CG with consultation of RBI to prescribe rules for deposit. Companies (Acceptance of Deposits) Rules, 1975. - Limit is 10% of the paid up share capital & free reserves of co., rate of interest should not exceed 12.5% p.a, Advertisement, Register, Nature & terms of deposits, ROC return, etc. 58AA- Small Deposit. Deposit less than 20k. How to report under this clause, in case where NBFC converted into bank or vice versa? Ans. If the NBFC converted in banking company during the financial year, the status of such company will be a banking company as at the balance sheet date. Since the order is not applicable to banking company hence order is not applicable on the same. NBFC ? various directions under RBI - Direct report to RBI

29. Adequacy of internal audit system Clause In case of listed companies or companies with opening paid-up capital and reserve exceeding Rs.50 lacs or average turnover exceeds Rs.5 Crore of preceding 3 years, whether the company has an internal audit system commensurate with its size and nature of its business Issues Based on turnover criteria, applicability can change every year Meaning of ?paid-up capital? and ?free reserves? Adequacy of the Internal Audit System ? Verify internal audit report, team size, qualification, areas covered, follow up, Audit Committee Minutes, etc. CA Nilesh S. Vikamsey 29 Whether non-existence of internal audit amounts to qualification in the report? Ans.: The order requires the auditor to mention the fact in his audit report.Whether non-existence of internal audit amounts to qualification in the report? Ans.: The order requires the auditor to mention the fact in his audit report.

30. Cost records Clause Where maintenance of cost records are prescribed, whether such accounts and records have been made and maintained Issues Reporting responsibility in cases where records are under updation ICAI Guidance Note recommendation ? ?broadly reviewed? records CA Nilesh S. Vikamsey 30 Production, Processing, Manufacturing and Mining 1.Old / recent cost records order by MCA ? Which company. 2. Auditor make a suitable comment in his report regarding incompleteness of records. 3. As per clause 9, auditor have obligate to report whether cost record have been made & maintain. Therefore ICAI suggest the following wording ? We have broadly reviewed the books of a/c maintained by the company?? and are the opinion that Prima facie, the prescribe records??) The Ministry of Corporate Affairs has issued two circulars in May 2011 making cost audit mandatory for some selected industries. All listed companies and companies with net worth exceeding Rs five crores or turnover exceeding Rs 20 crores, operating in any of the following industries, will be covered under mandatory cost audit effective from April 1, 2011: Bulk drugs, Formulations, Fertilisers, Sugar, Industrial alcohol, Electricity, Petroleum and Telecommunication. Similarly, all listed companies and companies with turnover exceeding Rs 100 crores, operating in any of the following industries will be covered under mandatory cost audit effective from April 1, 2011: Cement, Tyres and Tubes, Steel Plant, Steel Tubes and Pipes, Paper and Insecticides. Daily books for material, labour, machine hours, etc. Cost statement at end of year. Production, Processing, Manufacturing and Mining 1.Old / recent cost records order by MCA ? Which company. 2. Auditor make a suitable comment in his report regarding incompleteness of records. 3. As per clause 9, auditor have obligate to report whether cost record have been made & maintain. Therefore ICAI suggest the following wording ? We have broadly reviewed the books of a/c maintained by the company?? and are the opinion that Prima facie, the prescribe records??) The Ministry of Corporate Affairs has issued two circulars in May 2011 making cost audit mandatory for some selected industries. All listed companies and companies with net worth exceeding Rs five crores or turnover exceeding Rs 20 crores, operating in any of the following industries, will be covered under mandatory cost audit effective from April 1, 2011: Bulk drugs, Formulations, Fertilisers, Sugar, Industrial alcohol, Electricity, Petroleum and Telecommunication. Similarly, all listed companies and companies with turnover exceeding Rs 100 crores, operating in any of the following industries will be covered under mandatory cost audit effective from April 1, 2011: Cement, Tyres and Tubes, Steel Plant, Steel Tubes and Pipes, Paper and Insecticides. Daily books for material, labour, machine hours, etc. Cost statement at end of year.

31. Statutory dues? Clause Is the company regular in depositing undisputed statutory dues with the appropriate authorities. Arrears outstanding for more than six months at year end shall be indicated if dues of sales tax, income tax, customs duty, wealth tax, income tax, excise duty, cess is not deposited on account of any dispute, the amounts involved and the forum where dispute is pending shall be mentioned Issues Irregularity of payments during the year to be commented on, even if no arrears at year-end ? ?generally regular , except for delays of payment few cases? Report arrears outstanding for more than 6 months Any other statutory dues : Property Tax, Municipal Tax, TDS, License fess, etc. Cess u/s 44 1 A for Rehab of Sick Industries ? 0.005% to 0.01% of annual turnover CA Nilesh S. Vikamsey 31 Materiality to be evaluated ? Generally regular Statement says state ?report that rules not notified issue-?CARO says do not report Bonus, Gratuity liability not funded are not covered under statutory dues for CARO reporting PF, IEPF, FSI, IT, ST, WT, ST, ED,CD, Cess and other statutory dues. Materiality to be evaluated ? Generally regular Statement says state ?report that rules not notified issue-?CARO says do not report Bonus, Gratuity liability not funded are not covered under statutory dues for CARO reporting PF, IEPF, FSI, IT, ST, WT, ST, ED,CD, Cess and other statutory dues.

32. Statutory Dues.. Issues? Items covered under ?any other statutory dues? Materiality should be considered in reporting on regularity of payment Amount deposited Delays in deposition of dues Whether non-payment or delayed payment of advance income tax or tax deducted at source is covered What is covered by the term ?dispute? CA Nilesh S. Vikamsey 32 Advance Tax or TDS ? Advance tax not to report. TDS deducted and not deposited to be reported. Positive evidence or action by co. that it has not accepted demand and appealed same.Advance Tax or TDS ? Advance tax not to report. TDS deducted and not deposited to be reported. Positive evidence or action by co. that it has not accepted demand and appealed same.

33. Statutory Dues Issues? For reporting, can amounts be aggregated by year, dispute, statute or forum where pending Reporting of disputed amounts deposited but not provided provided but not deposited Is CARO and Contingent Liability Amount is same or different? Reporting for Show-cause notices Show-cause-cum demand notice Demands set aside / referred for reassessment / stayed / pending appeal CA Nilesh S. Vikamsey 33 Normally issuance of notice by the concerned department should not be construed to be demand payable by the company. In case of show cause cum demand notice the demand would not be construed to have arisen till the time the assessee has disposed off the requirements of the show cause order.tax demand that have been set aside are clearly not dues. If the demand referred for reassessment is not cancelled it will remain disputed dues. Demands that have been stayed should be regarded as disputed dues. Where the amount is pending for appeal and the time limit for filing apeal has lapsed, the disputed amount would become a a statutory dues. Deposited on account of dispute, Fact to be mentioned in reportNormally issuance of notice by the concerned department should not be construed to be demand payable by the company. In case of show cause cum demand notice the demand would not be construed to have arisen till the time the assessee has disposed off the requirements of the show cause order.tax demand that have been set aside are clearly not dues. If the demand referred for reassessment is not cancelled it will remain disputed dues. Demands that have been stayed should be regarded as disputed dues. Where the amount is pending for appeal and the time limit for filing apeal has lapsed, the disputed amount would become a a statutory dues. Deposited on account of dispute, Fact to be mentioned in report

34. Statutory Dues Issues? What are the reporting responsibilities of the auditor in case the company has not paid the service tax to a service provider for services availed from him? Does non-payment of advance tax constitute default in payment of statutory dues reportable under this clause? FRRB Comment While reporting on Statutory Dues auditor should comment separately in his report whether the company was regular in depositing undisputed statutory dues or not While reporting on Disputed Statutory Dues auditor should give details of name of the statute, nature of dues, amount, period to which the amount relates, forum where the dispute is pending CA Nilesh S. Vikamsey 34 Service tax: The liability to collect service tax is that of service provider (i.e., in this case, the transporter ). In so far as the company is concerned, it?s not a statutory due for the company. Advance Tax: Non payment of advance tax would constitute default in payment of statutory dues. It may however, happen that the company might not have any taxable income at the due dates on which advance tax is required to be paid. If such company has an income after the last date on which advance tax is required to be paid and consequently co. incurs interest u/s 234 of I.T. Act, it should not be construed that the company is not regular in depositing advance tax. Service tax: The liability to collect service tax is that of service provider (i.e., in this case, the transporter ). In so far as the company is concerned, it?s not a statutory due for the company. Advance Tax: Non payment of advance tax would constitute default in payment of statutory dues. It may however, happen that the company might not have any taxable income at the due dates on which advance tax is required to be paid. If such company has an income after the last date on which advance tax is required to be paid and consequently co. incurs interest u/s 234 of I.T. Act, it should not be construed that the company is not regular in depositing advance tax.

35. Sick Companies? Clause For a company registered for not less than 5 years, whether accumulated losses not less than 50% of the net worth and whether it has incurred cash losses in current year and preceding year Issues Net worth ? as per Section 2(29A) Paid-up capital + free reserves less specified expenses/ provisions ?Specified expenses / provisions?? not yet prescribed Accumulated Loss at End of Year or Beginning of Year Net worth and Cash Loss should be adjusted for qualifications in audit report, to the extent quantified Cash losses not defined CA Nilesh S. Vikamsey 35

36. Dues to Banks, etc. Clause Whether company has defaulted in repayment of dues to a Financial Institution, Bank or Debenture holders. If yes, then the period and amount has to be reported Issues Application for reschedulement /restructuring proposals ? whether to be considered as default Defaults on post shipment credit, bills discounted are covered Default of PY ? is it required to be reported? If there are numerous defaults of different periods, can a generalised statement be made Disputes with lenders CA Nilesh S. Vikamsey 36 Submission of application for reschedulment/restructuring should be considered as default. PY if continuing, need to be reported Period wise reporting to be done, Same period, it can be generalized In case of disputes with lenders the auditor should give a disclaimer that since there is a dispute between the co. and lender, he is unable to determine whether there is a default in payment of dues to the lender concerned.Submission of application for reschedulment/restructuring should be considered as default. PY if continuing, need to be reported Period wise reporting to be done, Same period, it can be generalized In case of disputes with lenders the auditor should give a disclaimer that since there is a dispute between the co. and lender, he is unable to determine whether there is a default in payment of dues to the lender concerned.

37. Loans against pledge of shares Clause Whether adequate records are maintained in case of loans given against pledge of shares, etc. If not, deficiencies have to be reported Issues Whether reporting to be done in case of hypothecation, guarantee, etc CA Nilesh S. Vikamsey 37 No reporting is to be done in case of hypothecation, guarantee, etc. Pledge ? Physical possession along with power to transfer. No reporting is to be done in case of hypothecation, guarantee, etc. Pledge ? Physical possession along with power to transfer.

38. Chit fund, etc. Clause Whether provisions of any special statute applicable to chit fund have been duly complied with? Additional reporting requirements of nidhi/ mutual benefit fund / societies Issues Whether applicable only to the accounts of the chit fund company or other areas also Special statutes applicable to chit fund companies differ from state to state CA Nilesh S. Vikamsey 38 It may be noted that clause is required to be commented upon by the auditor only on case of chit fund company. The auditor should obtain understanding of the relevant acts and the rules which are applicable to the company situated in particular state / union territory. It may also happen that the company's branches situated in more than one state, in which case, the provisions of different states acts and rules may be applicable to the respective branches/offices. It may be noted that clause is required to be commented upon by the auditor only on case of chit fund company. The auditor should obtain understanding of the relevant acts and the rules which are applicable to the company situated in particular state / union territory. It may also happen that the company's branches situated in more than one state, in which case, the provisions of different states acts and rules may be applicable to the respective branches/offices.

39. Companies dealing in shares Clause Companies dealing or trading in shares, securities etc. whether proper records are maintained and timely entries made therein. Whether shares, etc. are held in own name, except to the extent permitted u/s 49 Issues Whether investment of surplus funds in units, shares etc be covered under the term `dealing? Applicability to Broking Company CA Nilesh S. Vikamsey 39 This clause is not apply to companies which are not dealing or trading in investments but which purchase investments with a view to hold such investments and earn income from dividend or interest thereon. Deal and Trade is only in view of profit. Broking is on behalf of others Whether applicable to units of mutual funds? This clause is not apply to companies which are not dealing or trading in investments but which purchase investments with a view to hold such investments and earn income from dividend or interest thereon. Deal and Trade is only in view of profit. Broking is on behalf of others Whether applicable to units of mutual funds?

40. Guarantees given for loans Clause Whether terms and conditions are prejudicial for guarantees given by the company for others borrowings from banks and financial institutions Issues Whether guarantees for loans taken from borrowers other than banks and financial institutions be covered What constitutes prejudicial circumstances? CA Nilesh S. Vikamsey 40 The scope of the auditors inquiry under this clause does not extend to guarantees given by the auditee company for loans taken by ?others? from sources ?other than bank or financial institutions?. The guarantee is prejudicial to interest depends on the number of factors like financial standing of the party on whose behalf the company has given guarantee , party's ability to borrow, the availability of alternate source of finance, etc.The scope of the auditors inquiry under this clause does not extend to guarantees given by the auditee company for loans taken by ?others? from sources ?other than bank or financial institutions?. The guarantee is prejudicial to interest depends on the number of factors like financial standing of the party on whose behalf the company has given guarantee , party's ability to borrow, the availability of alternate source of finance, etc.

41. Utilisation of term loans Clause Whether the term loans were applied for the purpose for which loans were obtained Issues Whether applicable for term loans availed from other than banks / financial institutions ?Term loan? of less than 36 months Reporting in case of term loan sanctioned for general corporate purposes Whether to comment on utilisation during the year, of previous years term loans Would debentures be covered ? CA Nilesh S. Vikamsey 41 A strict interpretation of the clause would mean that this clause is applicable for term loans availed from other than banks / financial institutions . Debenture not covered as term loan A strict interpretation of the clause would mean that this clause is applicable for term loans availed from other than banks / financial institutions . Debenture not covered as term loan

42. Utilisation of funds Clasue Whether funds raised on short-term basis have been used for long-term investment Issues Difficulty in identifying the nature and application of funds Whether reporting only of year-end position or during the year transactions also be mentioned CA Nilesh S. Vikamsey 42 Example ? WC funds utilised for FA or long term investmentExample ? WC funds utilised for FA or long term investment

43. Issue of shares to 301 parties? Clause In case of preferential allotment of shares to 301 parties, whether the issue price is prejudicial to the interest of the company Issues ?Preferential allotment? has not been defined Whether it includes preference shares / convertible bonds Reporting responsibility in case shares are being issued at price lower than price at which shares have been issued to third parties but higher than fair value Reporting requirement if all shares issued to 301 parties Whether ESOP granted to employees covered? CA Nilesh S. Vikamsey 43 Preference Shares: Preferential allotment of shares include Pref. shares and hence this clause applicable to pref. shares. Convertible Bonds: Preferential allotment of shares does not include Convertible Bonds and hence this clause is not applicable to convertible bonds. Listed Co governed by SEBI, Unlisted public Co rules Avg weekly high low for past 6 months or past 2 weeks ESOP ? ESOP covered SEBI guildlines and not covered in SEBI Pref guidlinesPreference Shares: Preferential allotment of shares include Pref. shares and hence this clause applicable to pref. shares. Convertible Bonds: Preferential allotment of shares does not include Convertible Bonds and hence this clause is not applicable to convertible bonds. Listed Co governed by SEBI, Unlisted public Co rules Avg weekly high low for past 6 months or past 2 weeks ESOP ? ESOP covered SEBI guildlines and not covered in SEBI Pref guidlines

44. Creation of security for debentures Caluse Whether securities have been created in respect of debentures issued Issues Reporting requirement where creation of security is in process Whether reporting required for debenture issued during the year or also for issue of earlier years CA Nilesh S. Vikamsey 44 To evalaute debenture trust deed executed under section 117A To evalaute debenture trust deed executed under section 117A

45. End-use of funds Clause Whether the management has disclosed the end-use of money raised by public issues and the same has been verified Issues Public issue is not defined Whether public issues of debentures/ bonds covered Whether utilisation during the year, of money raised in earlier year be covered Disclosure of end-use of money is not mandatory on the companies, only disclosure in board report rquired. As per Sc h VI only unutilised money needs to be reported Whether money raised through rights issue will be included CA Nilesh S. Vikamsey 45 If not been able to verify , to mention fact of same.If not been able to verify , to mention fact of same.

46. End-use of funds Issues? How should the auditor report under this clause where the company has invested surplus fund, not immediately required, in short term loans / investments? Does this clause apply to monies raised by public issues during the year or even earlier years? If yes, for how many years back, is the auditor required to verify? CA Nilesh S. Vikamsey 46 Ans.: The auditor should mention the fact that pending utilisation of the funds raised through public issues for the stated purpose, the funds were temporarily used for the purpose other than for which they were raised but were ultimately utilised for the stated end-use. Ans.: This clause applies to all monies raised through public issues that were unutilized at the beginning of the period covered by the audit report or were raised through an issue in the period covered by the auditor. Ans.: The auditor should mention the fact that pending utilisation of the funds raised through public issues for the stated purpose, the funds were temporarily used for the purpose other than for which they were raised but were ultimately utilised for the stated end-use. Ans.: This clause applies to all monies raised through public issues that were unutilized at the beginning of the period covered by the audit report or were raised through an issue in the period covered by the auditor.

47. Reporting on fraud Clause Whether any fraud has been noticed or reported during the year. If yes, the nature and amount be indicated Issues If not ?Noticed or Reported?? Sources of knowing the occurrence/ reporting of fraud Concept of materiality in reporting Reporting on misstatements in financial statements Reporting responsibility when amount of fraud cannot be quantified Mechanisms such as ?whistle blower policy?, ?fraud hotline?, etc. CA Nilesh S. Vikamsey 47

48. Reporting on fraud Issues? 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 resources? CA Nilesh S. Vikamsey 48 Ans.: In such a case, the auditor should comply with the SA 240 (AAS 4), ? The Auditor?s Responsibility to consider Fraud & Error in an Audit of Financial Statement? and SA 260 (AAS 27), ?Communication of Audit Matters with those Charged with Governance?. Ans.: In such a case, the auditor should comply with the SA 240 (AAS 4), ? The Auditor?s Responsibility to consider Fraud & Error in an Audit of Financial Statement? and SA 260 (AAS 27), ?Communication of Audit Matters with those Charged with Governance?.

49. CA Nilesh S. Vikamsey 49

50. CA Nilesh S. Vikamsey 50


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