RAJKUMAR S. ADUKIA1 Overview of Companies (Auditor’s Report) Order 2003 Rajkumar S. Adukia

RAJKUMAR S. ADUKIA2 Agenda 1. Background 2. Focus of CARO 3. CARO Paragraphs 4. Applicable Acts, regulations 5. Issues in CARO 6. Audit under CARO 7. Activities of ICAI

RAJKUMAR S. ADUKIA3 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

RAJKUMAR S. ADUKIA4 Auditing Process 1. Pre Commencement Work –(AAS 1,26) 2. Understanding the entity’s 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

RAJKUMAR S. ADUKIA5 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 and fair 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 special order 227(5) Deeming Provision

RAJKUMAR S. ADUKIA6 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

RAJKUMAR S. ADUKIA7 Background of Section 227 (4A) section (1A) and sub-section(4A) in section 227 inserted by the Companies Amendment Act,1965 w.e.f on recommentdation of Daphtary-Sastri committee Reasons for Daphtary-Sastri committee recommendations –Loans and advances with little or no interest –False book entries –Manipulations in share prices Loss to investing public due to use of such dubious means Recommendation in 227(4A) is similar to recommendation in section 619(3) by CAG in case of government companies

RAJKUMAR S. ADUKIA8 History of 227(4A) No general or special order between to 1975 Between 1975 to 1987 MAOCARO 1975 Between 1988 to MAOCARO 1988 Between to till date CARO 2003 MAOCARO 1975 –Central Government issued the Manufacturing and Other Companies (Auditor’s report) order, 1975 –applied to all manufacturing, service, trading and finance companies. –Auditor to report on 22 items MAOCARO 1988 –Auditor to report on 27 items CARO 2003 issued originally on 12 th Jedune 2003 & Amended on 25 th November 2004 paragraph 4 has 21 sub paragraphs and 37 questions

RAJKUMAR S. ADUKIA9 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

RAJKUMAR S. ADUKIA10 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

RAJKUMAR S. ADUKIA11 Sub Paragraphs of Paragraph 4 Auditor to respond to 21 items relating to –(i)Fixed Assets –(ii)Inventories –(iii)Terms, conditions of loans and advances(granted & taken) –(iv)Adequacy of internal control system –(v)Particulars of contracts or arrangements referred in section 301 –(vi)Compliance of 58A,58AA –(vii)Internal Audit System in listed companies/certain specified companies –(viii)Maintenance of Cost Records

RAJKUMAR S. ADUKIA12 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/Debenture holders –(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

RAJKUMAR S. ADUKIA13 Sub Paragraphs of Paragraph 4(Contd.) –xvii) Application of term loan fund raised for short 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

RAJKUMAR S. ADUKIA14 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 AAS 16

RAJKUMAR S. ADUKIA15 Paragraph 4(ii)- Inventory Questions –Physical verification at reasonable intervals –Verification procedure is adequate to company’s size and 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

RAJKUMAR S. ADUKIA16 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 steps taken 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)

RAJKUMAR S. ADUKIA17 Paragraph 4(iv)- internal control system Questions –Adequacy of internal control system commensurate with company size and business for purchase of inventory and fixed 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 correct major weaknesses –Internal audit reports References –AAS 6

RAJKUMAR S. ADUKIA18 Paragraph 4(v)-Contracts Questions –Details of contracts/arrangements referred in section 301 entered in register –Transactions made at reasonable prices with regard to prevailing 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

RAJKUMAR S. ADUKIA19 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)

RAJKUMAR S. ADUKIA20 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

RAJKUMAR S. ADUKIA21 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)

RAJKUMAR S. ADUKIA22 Paragraph 4(ix)-Statutory dues Questions Regular payment of undisputed statutory dues including PF, ESI,Income tax, Sales tax, service tax, custom duty, excise duty, 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 of information –List of disputed dues –Schedule of contingent liability Reference –Companies Act(section 205C), Income tax (section 44AB)

RAJKUMAR S. ADUKIA23 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 and preceding financial year Documentation –Statement of net worth and accumulated losses, if any Reference –Companies Act[section 2(29A)]

RAJKUMAR S. ADUKIA24 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 date etc –Loan agreement, debenture trust deeds Reference –Companies Act, 1956 (section 372A)& SEBI DIP Guidelines, 2000(chapter X)

RAJKUMAR S. ADUKIA25 Paragraph 4(xii)-Loans on security Questions Adequacy 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 company’s name( D-mat shares & securities) Reference –Companies Act, 1956 (section 125, 372A and Schedule VI)

RAJKUMAR S. ADUKIA26 Paragraph 4(xiii) – Chit Fund/Nidhi/ Mutual benefit fund / societies Questions Compliance with provisions of any special statutes applicable –Check a)Net Owned Funds to Deposit Liability Ratio > 1:20 as on date of Balance Sheet b)Compliance with prudential norms on income recognition and provisioning against Non Performing Assets c)Existence of proper credit appraisal procedures d) Repayment schedule of various loans granted by nidhi based on the borrowers capacity to repay

RAJKUMAR S. ADUKIA27 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

RAJKUMAR S. ADUKIA28 Paragraph 4(xiv) – Companies Dealing in shares etc. Questions Maintenance of proper records of transactions and contracts and timely recording of entries by companies who deal or trade in shares, securities, debentures and other investments. –securities to be held in company’s own name subject to exemption under Section 49 of the Companies Act Documentation –List of records maintained –Statement of holding stating registration in company’s name( D-mat shares & securities) Reference –Companies Act (section 49),AS 13

RAJKUMAR S. ADUKIA29 Paragraph 4 (xv)- Guarantees Questions Whether the company has given guarantee for loans taken by others from bank or financial institutions, the terms and conditions whereof are prejudicial to the interest of the company Documentation –List of guarantees provided with details of name, amount,period and purpose –Board resolution –Management representation stating reason for guarantee Reference –Companies Act (section 372A)

RAJKUMAR S. ADUKIA30 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)]

RAJKUMAR S. ADUKIA31 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 be indicated Documentation –Prepare statement showing long term sources of funds vis a vis long term application of funds

RAJKUMAR S. ADUKIA32 Paragraph (xviii) – Preferential Allotment Questions Preferential allotment of shares to parties and companies covered in the Register maintained under section 301 of the Companies Act –Issue price of shares is prejudicial to the interest of the company 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

RAJKUMAR S. ADUKIA33 Paragraph (xix) – Security for Debentures Questions Creation 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

RAJKUMAR S. ADUKIA34 Paragraph (xx) – End Use of Money Questions Disclosure of end use of money raised by public issues –Verification of same by auditor Documentation –Copy of prospectus –Management representation on completeness of disclosure

RAJKUMAR S. ADUKIA35 Paragraph (xxi) - Fraud Questions 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 Documentation –List of debentures issued –Board resolution for creation of charge or security –Verify creation of charge from ROC documentation Reference –AAS 4

RAJKUMAR S. ADUKIA36 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 to case basis, reporting of whether the short-term funds are used for long-term investment will be complicated Reporting on frauds –Construction is vague and auditor’s responsibilities not clear

RAJKUMAR S. ADUKIA37 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

RAJKUMAR S. ADUKIA38 Committees 1.Accounting Standards Board 2.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 Investor’s Protection 10.Committee on Information Technology 11.Research Committee 12.Committee on Corporate Governance

RAJKUMAR S. ADUKIA39 Committees (Contd) 13.Committee on Insurance 14.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 Committee 20.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 Committee 26.Professional Development Committee 27.Committee on Accounting Standards for Local Bodies

RAJKUMAR S. ADUKIA40 Committee on Trade laws and WTO Background Material on following subjects/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

RAJKUMAR S. ADUKIA41 Peer Review Audit Manual Company Audit Manual Tax Audit Manual Guidance Note on Peer Review Office Records and Procedures Reporting

RAJKUMAR S. ADUKIA42 Research Committee 1)Accounting and Auditing of Telecom industry 2)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 industry 6)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

RAJKUMAR S. ADUKIA43 Research Committee 10)Accounting and Auditing of Cement industry 11)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 Industry 18)Accounting and Auditing of Computer Hardware Industry

RAJKUMAR S. ADUKIA44 Questions

RAJKUMAR S. ADUKIA45 THANK YOU