Overview of Companies (Auditors Report) Order 2003
RAJKUMAR S. ADUKIA 1
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. ADUKIA 2
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. ADUKIA 3
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
RAJKUMAR S. ADUKIA 4
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. ADUKIA 5
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. ADUKIA
Background of Section 227 (4A)
section (1A) and sub-section(4A) in section 227 inserted by the Companies Amendment Act,1965 w.e.f 15-10-1965 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. ADUKIA 7
History of 227(4A)
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 MAOCARO 1975 Central Government issued the Manufacturing and Other Companies (Auditors 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 12th Jedune 2003 & Amended on 25th November 2004 paragraph 4 has RAJKUMAR 21 sub and 37 S. paragraphs ADUKIA
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. ADUKIA
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. ADUKIA 10
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. ADUKIA 11
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. ADUKIA 12
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. ADUKIA
13
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 Fixed Assets Register showing classification Management representation on physical verification Evidence of verification and differences Shareholders resolution for disposal [section 293(1)(a)]
Documentation
References
Companies Act(section 293), AS 10, 24,and 26 and AAS 16
RAJKUMAR S. ADUKIA 14
Paragraph 4(ii)- Inventory
Questions
Physical verification at reasonable intervals Verification procedure is adequate to companys 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. ADUKIA 15
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. ADUKIA 16
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. ADUKIA 17
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. ADUKIA 18
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. ADUKIA 19
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. ADUKIA 20
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. ADUKIA
21
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), RAJKUMAR S.Income ADUKIA tax (section 44AB)
22
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. ADUKIA 23
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. ADUKIA 24
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 companys name( D-mat shares & securities)
Reference
Companies Act, 1956 (section 125, 372A and Schedule VI)
RAJKUMAR S. ADUKIA 25
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. ADUKIA
26
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. ADUKIA 27
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 companys own name subject to exemption under Section 49 of the Companies Act
Documentation
List of records maintained Statement of holding stating registration in companys name( D-mat shares & securities)
Reference
Companies Act (section 49),AS 13
RAJKUMAR S. ADUKIA 28
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. ADUKIA 29
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. ADUKIA 30
Paragraph (xvii) Short term Funds
Questions Verify whether the funds raised on shortterm 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. ADUKIA 31
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. ADUKIA 32
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. ADUKIA 33
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. ADUKIA
34
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. ADUKIA
35
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 auditors responsibilities not clear
RAJKUMAR S. ADUKIA 36
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. ADUKIA 37
Committees
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Accounting Standards Board Audit Committee Auditing and Assurance Board Board of Studies Committee for members in the Industry Committee for review of Education and Training Committee on Commerce Education and career Counseling. Committee on Ethical Standards Committee on Financial Markets and Investors Protection Committee on Information Technology Research Committee Committee on Corporate Governance
RAJKUMAR S. ADUKIA
38
Committees (Contd)
13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. Committee on Insurance Committee on Internal Audit Committee on Trade laws and WTO Continuing Professional Education Committee Corporate and Allied Laws Committee Editorial Board Expert Advisory Committee Financial Reporting Review Board Fiscal Laws Committee ICAI-ICWAI-ICSI Coordination Committee International Affairs Committee Peer review Board Public Relations Committee Professional Development Committee Committee on Accounting Standards for Local Bodies
RAJKUMAR S. ADUKIA
39
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. ADUKIA 40
Peer Review
Audit Manual Company Audit Manual Tax Audit Manual Guidance Note on Peer Review Office Records and Procedures Reporting
RAJKUMAR S. ADUKIA
41
Research Committee
1) 2) 3) 4) 5) 6) Accounting and Auditing Accounting and Auditing Accounting and Auditing Accounting and Auditing Accounting and Auditing Accounting and Auditing industry 7) Accounting and Auditing 8) Accounting and Auditing 9) Accounting and Auditing of Telecom industry of Media industry of Power industry of Oil industry of Pharma industry of Automobile of Sugar industry of Paper industry of NBFC
42
RAJKUMAR S. ADUKIA
Research Committee
10) Accounting and Auditing 11) Accounting and Auditing 12) Accounting and Auditing 13) Accounting and Auditing 14) Accounting and Auditing 15) Accounting and Auditing 16) Accounting and Auditing 17) Accounting and Auditing 18) Accounting and Auditing Hardware Industry of Cement industry of BPO Industry of Software Industry of Hotel Industry of Jewellery Industry of Textile Industry of BPO Industry of Tea Industry of Computer
RAJKUMAR S. ADUKIA
43
Questions
RAJKUMAR S. ADUKIA
44
THANK YOU
RAJKUMAR S. ADUKIA
45
