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RAJKUMAR S. ADUKIA 1

Overview of Companies

(Auditors Report) Order2003

Rajkumar S. Adukia

093230 61049

[email protected]

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Agenda

1. Background

2. Focus of CARO

3. CAROParagraphs

4. Applicable Acts, regulations

5. Issues in CARO

6. Audit under CARO

7. Activities of ICAI

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Spectrum of Audit &

Assurance Services

Distinctions between investigation,certificate,audit,review,due

diligence,assurance,compilation,

Players in Accounting & Auditing process -Management & Auditor

Responsibility of management - to prepare true

and fair financial statements

Responsibility of Auditor -to express an opinion

on financial statements

Auditor is a watchdog & not a bloodhound

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Auditing Process

1. Pre Commencement Work (AAS 1,26)

2. Understanding the entitys business (AAS 6,20,21,22,23,24,29)

3. Audit Planning (AAS 2,3,8,12,15,16,17)

4. Substantive & Analytical Procedures

(AAS 4,5,7,9,10,11,13,14,18,19,30,34) 5. Audit Report

(AAS 27,28)

Audit & Assurance Standards are auditing acts

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Sec 227 is Audit Code for

Companies

227(1) Right of Auditors 227(1A) Inquire in 6 matters 227(1A) (a) to (f)

227(2) Report to the members about true andfair view of Balance Sheet & Profit & Loss

Account

227(3) 8 matters(a),(b),(bb),,(d),(e),(f),(g)

227(4) Reasons for the negative answers 227(2)

Clauses (i) & (ii)227(3) (a),(b),(bb),,(d)

227(4A) Central Government general or specialorder

227(5) Deeming Provision

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Few Provisions of Companies

Act 1956

Section 215 Authentication of Balance Sheet &Profit & Loss Account

Section 228 Audit of Accounts of Branch office

of companies Section 229 Signature of Audit Report

Section 233 Penalty for non compliance by

auditor of sections 227 & 229

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Background of Section 227

(4A)

section (1A) and sub-section(4A) in section 227inserted by the Companies Amendment Act,1965 w.e.f15-10-1965 on recommentdation of Daphtary-Sastricommittee

Reasons for Daphtary-Sastri committeerecommendations

Loans and advances with little or no interest

False book entries

Manipulations in share prices

Loss to investing public due to use of such dubiousmeans

Recommendation in 227(4A) is similar torecommendation in section 619(3) by CAG in case of

government companies

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CARO 2003 is wider compared to

MAOCARO 1988

Issues in Corporate governance

Streamlining of reporting,deleting

Redundant Paragraphs

Emphasis on Internal control,Internal Audit

Reporting on fraud

Widening the scope of reporting

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Non Applicability of

CARO,2003

Banking company Insurance company

Section 25 company

Private company

paid up capital and reserves upto fifty lakh

rupees and

Loan outstanding from bank or FI upto 25 lakhs

and

Turnover upto 5 crores

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Sub Paragraphs of

Paragraph 4(Contd.)

(ix)Depositing undisputed statutory dues PF,IEPF,IES,IT,Sales T,WT,Service

T,Customs,Excise,Cess & other statutory dues

(x) Sick Companies

(xi)Default in repayment of dues FI/Bank/Debentureholders

(xii)Documents for loans and advances granted

(xiii)Compliance of Chit fund act Nidhi/Mutual benefit fund/societies

(xiv)Dealing or trading in shares & securities

(xv) Guarantee for loans taken by others

(xvi)Application of Term Loan

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Sub Paragraphs of

Paragraph 4(Contd.)

xvii) Application of term loan fund raised forshort term basis

xviii)Preferential Allotment to parties &

companies covered by section 301 xix)Securities & charge on debenture issues

xx)Disclosure on the end use of money raised

by the public issue

xxi)Reporting on fraud on or by the company

Noticed or reported

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Paragraph 4(i)- Fixed

Assets

Questions Proper records with particulars like quantity and location

Physical verification at reasonable intervals

Dealing with discrepancies. if any

Disposal of substantial portion of FA Documentation

Fixed Assets Register showing classification

Management representation on physical verification

Evidence of verification and differences

Shareholders resolution for disposal [section 293(1)(a)]

References

Companies Act(section 293), AS 10, 24,and 26 and AAS16

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Paragraph 4(ii)- Inventory

Questions Physical verification at reasonable intervals

Verification procedure is adequate to companys sizeand nature of business

Proper records Discrepancies noted are properly dealt with

Documentation Evidence of physical verification

List of location & inventory Management representation regarding Verification

procedure

References

AS 2, AAS 34

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Paragraph 4(iii)- Loans

Documentation Details of loans taken from & given to persons

covered in register under section 301

Terms , conditions and rate of interest of above loans

prima facie prejudicial to the interest of company Repayments regular

Management representation on reasonable stepstaken for recovery of amounts >1 lakh

References Companies Act(section 227,297,299,301)

Non-Banking Financial Companies Prudential Norms(Reserve Bank) Directions, 1998 (Paragraph 6A)

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Paragraph 4(iv)- internal control

system

Questions Adequacy of internal control system commensurate with

company size and business for purchase of inventory andfixed assets and for sale of goods and services

Continuing failure to correct major weaknesses Documentation

Internal control questionnaire, flowchart

Management representation on steps taken to correctmajor weaknesses

Internal audit reports

References AAS 6

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Paragraph 4(v)-Contracts

Questions Details of contracts/arrangements referred in section 301

entered in register

Transactions made at reasonable prices with regard toprevailing market prices

Documentation List of companies, firms, parties covered u/s 301

Copy of Form 24AA

Details of statement of contracts u/s 301

Prevailing market prices of similar items

management representation on reasonableness of prices

References Companies Act(section 301), AS 18, AAS 23

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Paragraph 4(vi)-Deposits

Questions Compliance with RBI directives , section 58A,58AA & other

relevant provisions of the Act

Details of nature of contraventions

Compliance with orders of CLB, NCLT, RBI or any Court Documentation

Return filed with ROC

Checklist for rules u/s 58A & 58AA

Copy of order of CLB, NCLT, RBI or any Court Management representation for compliance with RBI

directives

References Companies Act(section 58A & 58AA)

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Paragraph 4(vii)-Internal control

system

Questions Existence of internal audit system commensurate with

size & nature of business for: Listed companies or,

Companies with paid up capital and reserves >50 lakhs or, Average annual turnover >5 crores for 3 consecutive years

Documentation Existence of internal audit department

Its organisational chart Internal audit reports

References AAS 7

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Paragraph 4(viii)-Cost

records

Questions Maintenance of cost records prescribed by

Central Government u/s 209 (1)(d)

Documentation List of records maintained u/s 209 (1)(d)

Reference

Companies Act(section 209)

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Paragraph 4(ix)-Statutory

dues

Questions Regular payment of undisputed statutory dues including PF,

ESI,Income tax, Sales tax, service tax , custom duty, exciseduty, cess or other statutory dues

Auditor to give details of Arrears of outstanding statutory dues for

more than 6 months

Details of disputed dues

Documentation List of statutory dues with details and evidence of payment

Management representation regarding completeness ofinformation

List of disputed dues

Schedule of contingent liability

Reference Companies Act(section 205C), Income tax (section 44AB)

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Paragraph 4(x)-Sickness

Questions For a company registered for not < 5 years

Accumulated losses not < 50% of net worth

Cash losses in current financial year andpreceding financial year

Documentation

Statement of net worth and accumulated

losses, if any

Reference Companies Act[section 2(29A)]

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Paragraph 4(xi)-Default in

repayment

Questions Details of default, if any , in repayment of dues to financial

institutions, banks or debenture holders

Period and amount of default

Documentation Schedule showing loans taken with terms, conditions &

repayment schedule

Details of debentures with redemption date, payment dateetc

Loan agreement, debenture trust deeds

Reference Companies Act, 1956 (section 372A)& SEBI DIP

Guidelines, 2000(chapter X)

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Paragraph 4(xii)-Loans on

security

QuestionsAdequacy of records & documents where loans &

advances granted on security of shares,debentures & other securities

Details of deficiencies , if any

Documentation List of loans & advances granted by pledge of security

List of records maintained by company

Statement of holding stating registration in companysname( D-mat shares & securities)

Reference Companies Act, 1956 (section 125, 372A and Schedule

VI)

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Paragraph 4(xiii)Chit Fund/Nidhi/

Mutual benefit fund / societies

Documentation Management representation on applicability of

special statute

Procedure of company for credit appraisal,credit needs, borrowers repayment capacity

Statement showing net owned funds vis a vis

liability ratio

Reference

Companies Act (section 620A),Chit Fund Act

,1982

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Paragraph 4 (xv)- Guarantees

QuestionsWhether the company has given guarantee for loans taken

by others from bank or financial institutions, the termsand conditions whereof are prejudicial to the interest ofthe company

Documentation List of guarantees provided with details of name,

amount ,period and purpose

Board resolution

Management representation stating reason forguarantee

Reference Companies Act (section 372A)

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Paragraph (xvi)Application of

Term Loans

Questions

Whether term loan applied for purpose

obtained

Documentation

List of loans taken

Board resolution

Sanction letter to verify the purpose of loan

Reference

The Companies Act [section 227(1A)]

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Paragraph (xvii)Short term

Funds

Questions

Verify whether the funds raised on short-

term basis used for long term investment;

if yes, the nature and amount is to beindicated

Documentation

Prepare statement showing long term sourcesof funds vis a vis long term application of

funds

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Paragraph (xviii)Preferential

Allotment

QuestionsPreferential allotment of shares to parties and

companies covered in the Register maintainedunder section 301 of the Companies Act

Issue price of shares is prejudicial to the interest of thecompany

Documentation List of companies, firms, parties covered u/s 301

Board resolution for preferential allotment Valuation report

Reference The Companies Act (section 301),SEBI DIP Guidelines,

2000

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Paragraph (xix)Security for

Debentures

QuestionsCreation of security or charge for debentures

issued

Documentation List of debentures issued Board resolution for creation of charge or security

Verify creation of charge from ROC

documentation Reference

The Companies Act , SEBI Act, 1992

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Paragraph (xx)End Use of

Money

QuestionsDisclosure of end use of money raised by

public issues

Verification of same by auditor

Documentation

Copy of prospectus

Management representation on completeness ofdisclosure

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Paragraph (xxi) - Fraud

Questionswhether 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

Documentation

List of debentures issued

Board resolution for creation of charge or security

Verify creation of charge from ROC documentation Reference

AAS 4

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Issues in CARO

Terms not defined Paid up share capital and reserves

turnover

Time periods not provided for calculation of

paid-up capital and reserves borrowings of a private limited company

End use of funds

Difficult to track the end use of funds on one-to one basis

Meaning of long-term investment may vary on a case tocase basis, reporting of whether the short-term funds areused for long-term investment will be complicated

Reporting on frauds

Construction is vague and auditors responsibilities not

clear

C t ib ti i A ti iti f

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Contribution in Activities of

ICAI

Technical

- Background material

Articles in CA Journals

Representation matter

Leading a discussion in a study circle

Presentation in a seminar

Leadership Coordinating a programme

Convenors of study circle

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Committees

1. Accounting Standards Board2. Audit Committee

3. Auditing and Assurance Board

4. Board of Studies

5. Committee for members in the Industry

6. Committee for review of Education and Training

7. Committee on Commerce Education and career Counseling.

8. Committee on Ethical Standards

9. Committee on Financial Markets and Investors Protection

10. Committee on Information Technology

11. Research Committee

12. Committee on Corporate Governance

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Committees (Contd)

13. Committee on Insurance14. Committee on Internal Audit

15. Committee on Trade laws and WTO

16. Continuing Professional Education Committee

17. Corporate and Allied Laws Committee

18. Editorial Board

19. Expert Advisory Committee20. Financial Reporting Review Board

21. Fiscal Laws Committee

22. ICAI-ICWAI-ICSI Coordination Committee

23. International Affairs Committee

24. Peer review Board

25. Public Relations Committee26. Professional Development Committee

27. Committee on Accounting Standards for Local Bodies

C itt T d l

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Committee on Trade laws

and WTO

Background Material on followingsubjects/seminars/monthly e-newsletters :-

International Commercial Arbitration

Intellectual Property Rights

Anti Dumping,Safeguard measures

Trade in Tax Heaven Countries

Special Economic Zones(SEZ)

Import & Export Procedures(Foreign Trade Policy) Trade in Free Trade Areas(FTA)

Competition/MRTP

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Peer Review

Audit Manual

Company Audit Manual

Tax Audit Manual

Guidance Note on Peer Review

Office Records and Procedures

Reporting

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Research Committee

1) Accounting and Auditing of Telecom industry2) Accounting and Auditing of Media industry

3) Accounting and Auditing of Power industry

4) Accounting and Auditing of Oil industry

5) Accounting and Auditing of Pharma industry6) Accounting and Auditing of Automobile

industry

7) Accounting and Auditing of Sugar industry

8) Accounting and Auditing of Paper industry

9) Accounting and Auditing of NBFC

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Research Committee

10) Accounting and Auditing of Cement industry11) Accounting and Auditing of BPO Industry

12) Accounting and Auditing of Software Industry

13) Accounting and Auditing of Hotel Industry

14) Accounting and Auditing of Jewellery Industry

15) Accounting and Auditing of Textile Industry

16) Accounting and Auditing of BPO Industry

17) Accounting and Auditing of Tea Industry18) Accounting and Auditing of Computer

Hardware Industry

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Questions

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Date post:	04-Jun-2018
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