1. www.Safeecollege.com 1 Section 227(1A) Section 227(3) Section 227(4A)

2. www.Safeecollege.com 2 Under Section 227(1A) auditor has to make enquiry & comment on following matters. 1. Whether loan & advances made by company on the basis of security is properly secured & whether on which such loan & advance being made, are not prejudicial to the interest of company. Loan 10000 Rs Loan 10000 Rs Example:- XYZ Creditor A LIC Policy Approved LIC Policy Approved Face Value 50000 Rs. Surrender Value 7500 Rs. [Section 227(1A), In the present case company has given loan to Ms. A amounting 10000 Rs. A against which, Mr. A has assigned “LIC A amounting 10000 Rs. A against which, Mr. A has assigned “LIC

3. www.Safeecollege.com 3 policy” in favour of company. The surrender value of LIC policy is 7500 Rs. Therefore out of 10000 Rs., 7500 Rs. Is secured & remaining balance 2500 Rs. Is unsecured. Hence auditor should offer his comment in this regard. Conclusion:- little scope of qualification.] 2. Whether transaction of the company, represented merely by book entries are prejudicial to the interest of the company. book entries are prejudicial to the interest of the company. Example:- Mr. X MD 90% 40% 90% 40% A Co. B Co. A Co. B Co. 31 st December 31 st March 31 st December 31 st March Cotton Basis Cotton Basis Anti dated contract, buying 1000 cotton bales from B @ 25 Rs/cotton bales.

4. www.Safeecollege.com 4 A company will sell 1000 cotton bales to B @ 50 Rs/cotton bales. A B A B 25000/- profit 25000/- loss 25000/- profit 25000/- loss Conclusion:- Fake and manipulative entry, the auditor is required to qualify his report. qualify his report. 3. Where company is not an investment company or banking company, so much of assets consist of shares and debentures company, so much of assets consist of shares and debentures have been sold at a price less than price at which they were have been sold at a price less than price at which they were purchased. purchased. Conclusion:- The auditor has to ensure that sales proceed has duly accounted for in books of accounts. accounted for in books of accounts. 4. Whether loans & advances have been shown as deposits. Loan Interest Loan Interest Deposits Business purpose Deposits Business purpose intention to earn intention to earn Advance No intention to Advance No intention to recover only setoff recover only setoff

5. www.Safeecollege.com 5 Conclusion:- If loan and advances have been shown as deposits, it will distort true and fair view and auditor is required to will distort true and fair view and auditor is required to qualify his report. qualify his report. 5. Whether personal expenses have been (shown) charged to revenue. revenue. Question:- Director’s personal expenses have been charged to revenue. Comment? revenue. Comment? Answer:- As per section 227(1A) clause(e) where personal expenses of directors have been charged to revenue, expenses of directors have been charged to revenue, auditor must report the matter. auditor must report the matter. Where personal expenses of director are Where personal expenses of director are i. Covered by companies contractual obligation. i. Covered by companies contractual obligation. ii. As per accepted business practices auditor has no ii. As per accepted business practices auditor has no further duty to report. further duty to report. Where personal expenses of directors are not covered by Where personal expenses of directors are not covered by companies contractual obligations or as per accepted companies contractual obligations or as per accepted business practices, auditor should report on the matters business practices, auditor should report on the matters i. If amount involved is material, auditor may qualify his i. If amount involved is material, auditor may qualify his report. report.

6. www.Safeecollege.com 6 6. Where company have issued share for cash, whether cash has been actually received and where no cash is received, whether position stated in the books of accounts and balance sheet is correct, regular & not misleading. Example:- Spargo Case If shares have been issued against genuine debt. It is If shares have been issued against genuine debt. It is perfect compliance of section 75. perfect compliance of section 75.

7. www.Safeecollege.com 7 Reporting Responsibility Section 227(3) Under section 227(3), auditor has to report on following matters. A. Whether he has obtained all information and explanation which to the best of his knowledge & belief, were necessary for the purpose of the audit. B. i. Where report on branch accounts auditor under section 228 by a person other than company auditor has been forwarded by a person other than company auditor has been forwarded to him and how he has dealt with the same in preparing his to him and how he has dealt with the same in preparing his report. (when company auditor & branch auditor are not report. (when company auditor & branch auditor are not same than applicable) same than applicable) ii. Where balance sheet & profit and loss account of the ii. Where balance sheet & profit and loss account of the company as dealt with by the report are in agreement with company as dealt with by the report are in agreement with books of accounts. books of accounts. iii. Whether any director is disqualified to be appointed as iii. Whether any director is disqualified to be appointed as director in any other company under section 274(1)(g). director in any other company under section 274(1)(g).

8. www.Safeecollege.com 8 Elaboration of section 274(1)(g) Section 274(1)(g)  A director of public company shall be disqualifies to be appointed as director in any other public company. If the public company in which he is director.  He has not filed annual accounts or annual return for 3 consecutive financial year.  Has failed to repaid its deposit or interest on due date or failed to pay dividend or failed to redeem its debentures on due date & failure continues for 1 year or more. Example:- Due date of redemption of debentures 5/1/2010 Debentures not redeemed till 4/1/2011 Debentures not redeemed till 4/1/2011 Resignation by director 1/1/2011 Resignation by director 1/1/2011 Accepted on 2/1/2011 Accepted on 2/1/2011 Note:- Director has escaped from his liability by Note:- Director has escaped from his liability by resignation. resignation. Whether cess payable under section 441A of Whether cess payable under section 441A of company act has been so paid, if not details of company act has been so paid, if not details of amount of cess not paid shall be given. amount of cess not paid shall be given.

9. www.Safeecollege.com 9 Whether proper book of accounts as required by the Whether proper book of accounts as required by the law has been maintained by the company so far as law has been maintained by the company so far as it appears from the examination of accounts and it appears from the examination of accounts and proper return adequate for the purpose of audit has proper return adequate for the purpose of audit has been received by the branches not visited by him. been received by the branches not visited by him. Meaning of proper books of accounts A company shall be deemed as not maintaining book of accounts if:-  If books are not kept on double entry system.  If books are not kept on accrual basis.  If transactions so recorded are not showing true and fair view.  Where companies balance sheet ad profit and loss account comply with accounting standard as referred under section 211(3C).  Whether accounts give the information as required by act in the manner so provided.  Whether accounts give true and fair view, in case of balance sheet, of the state of company affairs, or in case of profit and loss account for the period., of the state of company affairs, or in case of profit and loss account for the period.

10. www.Safeecollege.com 10 Reporting Responsibility Section 227(4A) CARO 2004 Applicability:- CARO 2004 applies to all companies including foreign companies as defined under section 591 of companies companies as defined under section 591 of companies act. act. Exception:- CARO does not apply on following:- 1. Banking companies as defined under section 5(C) of banking regulation act 1949. 2. Insurance companies as defined under section 2(21) of companies act 1956. 3. Companies licensed to operate under section 25 of companies act. 4. Private companies subject to following conditions:- a) Aggregate of paid up capital and reserve should not exceed rupees 50 lacks. exceed rupees 50 lacks.

11. www.Safeecollege.com 11 b) Loan outstanding from any bank and FI should not exceed Rs. 25 lacks. exceed Rs. 25 lacks. c) Turnover should not exceed Rs. 5 crore. Paid up Capital:- Paid up Capital:-  It include both preference and equity share capital.  Unpaid capital/calls shall be deducted from paid up share capital.  Amount originally collected on forfeited shares shall be included in paid up share capital.  Share application money is not considered part of paid up share capital Reserves:- Reserves:-  It includes both capital and revenue reserves  Debit balance in profit and loss account shall be adjusted against revenue reserve  Credit balance shall be included in the reserve  Revaluation reserve shall be included in reserve  Unwritten off miscellaneous expenses, shall not be deducted from reserve

12. www.Safeecollege.com 12 Example:- Private company XYZ Example:- Private company XYZ Equity share reserve - 40 lack Equity share reserve - 40 lack Revaluation reserve - 5 lack Revaluation reserve - 5 lack Capital reserve - 6 lack Capital reserve - 6 lack Debit balance in profit and loss account - 2 lack Debit balance in profit and loss account - 2 lack Answer:- CARO will apply on the company Answer:- CARO will apply on the company Loan Outstanding:- Loan Outstanding:-  Loan includes Term loanTerm loan Demand loanDemand loan CC limitCC limit Overdraft facilityOverdraft facility Work capital loanWork capital loan Export creditExport credit Bills purchaseBills purchase Discounted billsDiscounted bills Etc….Etc….  Loan includes short term as well as long term loans  Loan includes secured as well as unsecured loans

13. www.Safeecollege.com 13  Non fund based limits to the extent converted into fund based limit shall be included in the loan  Interest accrued and due shall be included in the loan  Interest accrued but not due shall not be included in the loan Turnover:- Turnover:-  Turnover means amount for which sale was affected by the company. Sale effected – is the sale of goods as well as service rendered.  Sales tax and custom duty received shall not be considered part of turnover if sales tax and custom duty credited separately in sales tax account and custom duty account.  Trade discount allowed shall be deducted from turnover.  Cash discount shall not be deducted.  Commission paid to third party shall not be deducted.  Rental income and dividend received shall not constitute turnover. However if principal business is of letting out of property for where company is an investment company than rental income or dividend income constitute turnover.

14. www.Safeecollege.com 14  Sale Sale Return Remark C.Y. SR is made out of Deducted from C.Y. SR is made out of Deducted from Current year sale Turnover Current year sale Turnover & received Within & received Within F.Y. F.Y. C.Y. SR related to C.Y. Not deducted C.Y. SR related to C.Y. Not deducted Sale not received Sale not received after end of C.Y. after end of C.Y. C.Y. SR related to sales Deducted C.Y. SR related to sales Deducted Of P.Y. and Of P.Y. and received in C.Y. received in C.Y. In short all sales whether in the C.Y. or previous year In short all sales whether in the C.Y. or previous year received in the C.Y. shall be deducted. received in the C.Y. shall be deducted.

15. www.Safeecollege.com 15 Fixed assets  Whether or not proper record have been maintained by the company:- Showing full particular Showing full particular Quantitative detail Quantitative detail Situation Situation  Physical verification by management at regular interval & resoluement of discrepancy if any.  Whether going assumption is violated where substantial part of F.A. has been sold. Inventory Inventory  Whether proper records have been maintained.  Physically verification by the management at regular interval.  Whether procedure adopted by management is reasonable having regard to size of the company & nature of business.

16. www.Safeecollege.com 16 Loan to/from Directors & Interested Parties Loan to/from Directors & Interested Parties  Has the company granted/taken loan secured/unsecured to/from companies/parties covered in the registered maintained under section 301, if so give No. of Parties No. of Parties Amount Involved Amount Involved  Whether rate of interest & terms and conditions of such loan are prejudicial to the interest of company.  Whether company is regular in receive/payment of principal in interest  If overdue amount exceed Rs. 1 lacks, whether reasonable interest have been taken by the company for recovery of same Internal Control Internal Control  Having regard to size of the company & nature of the business whether company is having appropriate internal control system in respect of following:- Sale of goods Sale of goods Purchase of Inventory Purchase of Inventory Fixed Assets Fixed Assets

17. www.Safeecollege.com 17 Transactions Covers under section 301 Transactions Covers under section 301  Whether particular of controls or arrangements as referred under section 301 have been so entered in the register maintained under section 301.  Whether each of such transaction have been at a price which are reasonable having regard to prevailing market price. [This information is regarded to be given only if information [This information is regarded to be given only if information with any party in one financial year exceeds in value of Rs. 5 with any party in one financial year exceeds in value of Rs. 5 lacks] lacks] Loss Making Company Loss Making Company In case of a company which has been registered for a period not less than 5 years, following shall be reported:-  Whether accumulated losses at the end of relevant financial year exceeds 50% of net worth of the company.  Whether company has incurred cash loss in immediately preceding financial year.

18. www.Safeecollege.com 18 Repayment of Dues Repayment of Dues  Has the company paid principal & interest due to FI, banks & debenture holders without any default.  In case of default, period & amount of default shall be indicated in the report. Loan Against Security Loan Against Security  Where company has advanced/granted loan against the security by way of pledge of shares, securities & debentures etc, whether proper records & documents have been maintained by the company.  If Not, than deficiency shall be reported. Chit Fund/ Mutual Benefit Societies / Nidhi Chit Fund/ Mutual Benefit Societies / Nidhi  Whether or not provisions of special statitute applicable on chit fund have been duly complied with.  Whether net owned fund to deposit liability ratio is more than 1:20 as on balance sheet date.  Whether prudential norms for income recognition & asset classification have been duly complied with.  Whether their exists appropriate credit appraisal system in the company.  Whether repayment schedule of the borrower is based on repayment capacity of the borrower

19. www.Safeecollege.com 19 Company dealing in shares Company dealing in shares Where company is dealing or trading in shares, debentures etc Where company is dealing or trading in shares, debentures etc whether whether  Proper records have been maintained  Timely entries have been passed  Share bonds, debentures have been held by company in its own name except to the extent of exemption granted under section 49 of companies act. Guarantee Given Guarantee Given Where company has given guarantee for the loan taken by Where company has given guarantee for the loan taken by others from bank of FI, whether terms & conditions of such others from bank of FI, whether terms & conditions of such guarantee are prejudicial to the interest of company. guarantee are prejudicial to the interest of company. End use of Borrowings End use of Borrowings Whether term loan have been applied for the purpose such Whether term loan have been applied for the purpose such term loan have been obtained term loan have been obtained

20. www.Safeecollege.com 20 Application of Fund Application of Fund Whether short term funds have been applied for long term Whether short term funds have been applied for long term investments & vise versa. investments & vise versa. If so give nature & amount involved. If so give nature & amount involved. Preference Share Allotment Preference Share Allotment  Whether company has maid preferential allotment of shares to the parties covered in the registered maintained under section 301.  If so, whether issue price is prejudicial to the interest of company. Securities or Debentures Securities or Debentures  Whether or not adequate secularity has been created in respect of debenture issue. End use of Proceed End use of Proceed  Whether end use of money Raised by public issue has been properly disclosed by the management.  Whether such end use has been verified & disclosed.

21. www.Safeecollege.com 21 Fraud Fraud  Whether any fraud on or by the company has been noticed during the year.  If so nature & amount involved should be stated in the report. Deposit accepted from public Deposit accepted from public  Whether directives issued by RBI have been duly complied with.  Whether provision of section 58A & 58AA and rules framed there under have been duly complied with.  Whether order of CLB/NCLAT/Tribunal have been duly complied with.  Nature of contravention. Internal Audit Internal Audit Having regard to size & nature of business, whether following Having regard to size & nature of business, whether following companies have internal audit system. companies have internal audit system.  Listed companies.  Companies having aggregate of paid up capital & reserves exceeding 50 Lacks at the commencement of F.Y.  Companies having average annual turnover exceeding Rs. 5 Crore in 3 immediately F.Y.

22. www.Safeecollege.com 22 Statutory Dues Statutory Dues  Is company regular in depositing undisputed statutory dues like:-  Pro Fund  ESI  VAT  Excise duty  Income tax  Wealth tax  Service tax  Custom duty  Etc…  If not regular than extent of arrears of outstanding statutory dues as at the last date of financial year for a period more than 6 months. Cost Records Cost Records Where CG has prescribed maintenance of cost records under Where CG has prescribed maintenance of cost records under section 207(1)(d), whether company is preparing and section 207(1)(d), whether company is preparing and maintaining such records. maintaining such records. From the date they become payable shall be indicated. From the date they become payable shall be indicated. If non payment is on account of dispute than forum and If non payment is on account of dispute than forum and amount involved shall be indicated. amount involved shall be indicated.