1. 1 Overview of Companies (Auditor’s Report) Order 2003

2. 2 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

3. 3 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

4. 4 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

5. 5 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, SA501

6. 6 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)

7. 7 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

8. 8 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, SA540

9. 9 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)

10. 10 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 –SA 600

11. 11 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)

12. 12 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)

13. 13 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)]

14. 14 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)

15. 15 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)

16. 16 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

17. 17 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

18. 18 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

19. 19 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)

20. 20 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)]

21. 21 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

22. 22 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

23. 23 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

24. 24 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

25. 25 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 Representation by management regarding the fraud risk factors their assessment and course of actions Reference –SA240

26. 26 Questions

27. 27 THANK YOU