ISSUES ON COMPANIES (AUDITOR’S REPORT) ORDER,2003

1. ISSUES ON COMPANIES (AUDITOR’S REPORT) ORDER,2003 Presentation By CA. ANIL SHARMA

2. Manner of reporting in cases of companies exempt by the Order • The auditor need not mention anything about the exemption from the applicability of the Order in his report.

3. Manner of reporting in case of a private limited company to which Order is not applicable • The auditor should mention in his report that the company is exempted from the applicability of the Order. • “This report does not include a statement on the matters specified in para 4 of the Companies (Auditor’s Report) Order,2003 issued by the Ministry of Corporate Affairs, in terms of section 227(4A) of the Companies Act,1956, since in our opinion and according to the information and explanation given to us, the said Order is not applicable to the company.”

4. Manner of reporting in case some of the clauses of the Order are not applicable • The auditor to make a suitable comment in his report bringing out the fact of non-applicability of a particular clause. • “ The Central government has not prescribed maintenance of cost records under section 209(1)(d) of the Act for any of the product of the company.”

5. Reporting responsibilities of the auditor of a branch of a private limited company • Conditions to be satisfied for being exempt from the applicability of the Order have been laid down in respect of the company taken as a whole. • If Order is applicable to the company, a branch of the company does not qualify to be exempt from the applicability of the Order.

6. Applicability of Order to a Liaison Office, branch office or project office of a foreign company • Para 2 of the Order- apply to all companies including foreign companies. • Same criteria is to be applied as adopted for a branch office of an Indian company.

7. For examining the applicability of Order, whether position at the close of the year is to be seen? • No. • Para 24 of the Statement clearly provides that the Order becomes applicable if at any point of time during the year the conditions are covered.

8. What constitute proper records of fixed assets? • The Order is silent as to what constitute “proper records”. • Subject matter of professional judgement after considering facts and circumstances of each case.

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

10. What constitutes “ substantial part of fixed assets” disposed off? • The Order does not define the word ‘substantial’ • Depends primarily upon the facts and circumstances of the case • It is not necessary that sale or disposal of whole or substantially the whole of undertaking of the company is same as sale of substantial part of the fixed assets

11. Disposal of substantial part of fixed assets and its effect on “the going concern” • If the disposal of substantial part of fixed assets effect the company’s ability to continue its operation for the foreseeable future it shall considered to have effect on its ‘going concern’.

12. What should “Inventory” consist of? • Inventories are assets: • Held for sale in the ordinary course of business. • In the process of production for such sale or • In the form of materials and supplies to be consumed in the production process or in the rendering of services.

13. Maintenance of Stock Register for work-in-progress • Cases where it is impracticable to maintain stock records of WIP • 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.

14. Loans granted or taken during the year or the opening balances of such loans also to be considered ? • Clause applicable to all loans taken/granted whether during the year or brought forward as opening balances

15. Loans taken or given without stipulation of repayment • For making comment on terms and conditions not prejudicial to the interest of the company, number of factors are to be considered including: • The company/borrowers’ financial standing, • Its ability to borrow/lend, • Nature of security, • Availability of alternative source of finance, • The urgency of the borrowing.

16. Reporting when the company has not maintained/updated Register as required by section 301 • Mention the fact in his report.

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

18. Reporting responsibility in case loan repayable on demand and demand has not yet made • The auditor to state the fact that he has not made any comments because the terms of the repayment have not been stipulated.

19. “ the above loan is interest free loan and no condition as to repayment of principal amount have been stipulated.” • The above comment is not complete. • The auditor has to comment: “whether the rate of interest and other terms and conditions of loans taken by the company, secured or unsecured, are prima facie prejudicial to the interest of the company and whether payment of principal amount and interest are also regular.”

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

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

22. “the transactions, referred to in Section 301, entered into during the financial year were made at prevailing market rates at the relevant time.” • The Order requires the auditor to report that transactions have been made at prices which are reasonable having regard to the prevailing market price at the relevant time. The reporting on reasonableness of prices is missing.

23. Deposit from public – how to treat deemed deposits? • Deemed deposits, being loan from shareholders, relatives or other parties which are not exempt from the definition should be examined and reported accordingly.

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

25. Reporting responsibility in case of bonus and gratuity payable under respective Acts • not to be reported.

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

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

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

29. procedure for computing “cash losses” • The figure of profit/loss as per P & L Account adjusted for the effect of non-cash transactions such as depreciation, amortization, deferred revenue expenses written off, etc.

30. Implications in the cases of a trading or a consulting company whose accumulated losses are more than 50% of its net worth • No distinction for trading or service providing companies.

31. What are the reporting responsibilities of the auditors under this clause in case the company does not have cash losses in both the years (that is, the current financial year and the preceding financial year) but only in one of these years? • A prudent interpretation would be to comment on the two years seperately.

32. whether the guarantee given by the company on behalf of others can be prejudicial to the interests of the Company? • Yes. • The financial state of affairs of the other party, purpose of loan taken, financial impact in case of default by the other party, guarantee commission are some of the important aspects that will determine.

33. Whether term loansobtained from entities/persons other than banks/financial institutions are also covered? • Yes. • The clause does not make any distinction between terms loans or other loans • Debentures would not be covered. • Guarantees given for loans taken from sources other than bank and financial institutions are not covered.

34. whether reporting is to be made on the term loans obtained during the year or outstanding as at the end of the year irrespective of the year in which they are obtained? • Comments are required upon utilisation of all loans • The distinction of the term loans obtained during the year or outstanding as at the end of the year is irrelevant.

35. What procedures to be adopted in case of term loans from banks, raised against title deeds, long term FDRs, NSCs etc., where the bank is not concerned with the purpose for which it is being obtained? • The auditor to report the fact that in the absence of any stipulation regarding the utilisation of loans, he is not in a position to comment whether the term loans have been applied for the purpose for which they were obtained.

36. How to comply with reporting requirement under clause 4(xvii)? • Position to be seen on cumulative basis. • Based on Balance sheet determine long term sources and long term uses and compare • Requirement is only to highlight the facts.

37. Whether a situation, where a limited company has already issued shares at a premium to outsiders and later on issued shares(at par or book value) to parties listed under section 301 of Act, the latter issue of share would be treated as being prejudicial to the interests of the company? • Not always. • The auditor to examine all the facts and circumstances of the case and use his professional judgement to form an opinion in this regard.

38. Where a private limited company having four shareholders (being relatives )holding 25per cent each of the share capital of the company , are allotted shares in equal proportions at a value of , say, Rs.10 while the book value of shares is, Rs. 50, would it be reportable under this clause? • This shall not be considered as preferential allotment and therefore , not covered by the clause.

39. Will issue of ESOPs by private companies be considered as preferential allotment? • If as per SEBI guidelines, not prejudicial to the interest of the company. • It would be illogical to consider ESOP by unlisted public and private limited companies.

40. whether reporting is required to be done in respect of debentures issued during the year or outstanding as on the year end irrespective of the year in which they were issued? • The clause does not refer to debentures issued during the year. Therefore, reporting is required for all debentures issued by the auditee company.

41. If the debentures have been issued towards the end of the year and the securities are created subsequently, what are the reporting responsibilities of the auditor under this clause? • Mention the fact and reasons. • Ensure the delay is not deliberate or inadvertent.

42. How to report in a case where the company has invested surplus funds, not immediately required, in short-term loans/investments? • Mention the fact that pending utilisation of the funds raised through public issue for the stated purposes, these were temporarily used for the purpose other than stated but ultimately utilised for stated-end-use.

43. Does this clause apply to monies raised by public issues during the year or even earlier years? • Clause applies to all monies raised through public issues - raised during the year as well as remaining unutilized at the beginning of the period under report.

44. What are the reporting responsibilities in case 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 auditors from private sources? • The auditor to comply with AAS- 4 and AAS-27.

45. Whether the total amount of frauds and the each major can be clubbed and disclosed? Whether individual amount involved in each fraud is to be separately listed out with the corresponding nature of fraud? • Each fraud to be disclosed separately disclosing the amount involved . • The fraud of similar nature may be combined.

46. Manner of reporting in the main auditors’ report in case any of the reply to any of the clauses under the Order is in adverse • Auditor to consider whether his comment has a bearing on the true and fair view presented by the financial statements • If yes, he may prefer to preface his report under sub-sections (2),(3) and (4) of section 227 by stating the qualification in addition to qualification made against the specific item being qualified.

47. THANK YOU.