Exposure Draft
Guidance Note on the Companies
(Auditor's Report) Order, 2020
(Last date for comments: March 18, 2020)
Issued by
Auditing and Assurance Standards Board
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
New Delhi
Exposure Draft
Guidance Note on the
Companies (Auditor's Report) Order, 2020
Your comments on this Exposure Draft should reach us by March 18, 2020.
Comments are most helpful if they indicate the specific paragraph(s) to
which they relate, contain a clear rationale and, where applicable, provide a
suggestion for alternative wording. The comments should be e-mailed at:
aasb@icai.in
Contents
Page No.
Introduction ............................................................................................................. 1
General Provisions Regarding Auditor's Report ................................................. 1
Applicability of the Order ....................................................................................... 2
Auditor's Report to Contain Matters Specified in Paragraphs 3 and 4
of the Order ............................................................................................................. 8
Period of Compliance ............................................................................................. 8
General Approach ................................................................................................... 9
Matters to be Included in the Auditor's Report ........................................... 12-145
Clause 3(i) ..................................................................................................... 12
Clause 3(ii) .................................................................................................... 28
Clause 3(iii) ................................................................................................... 35
Clause 3(iv) ................................................................................................... 45
Clause 3(v) .................................................................................................... 49
Clause 3(vi) ................................................................................................... 53
Clause 3(vii) .................................................................................................. 55
Clause 3(viii) ................................................................................................. 64
Clause 3(ix) ................................................................................................... 66
Clause 3(x) .................................................................................................... 82
Clause 3(xi) ................................................................................................... 91
Clause 3(xii) .................................................................................................. 99
Clause 3(xiii) ............................................................................................... 101
Clause 3(xiv) ............................................................................................... 106
Clause 3(xv) ................................................................................................ 112
Clause 3(xvi) ............................................................................................... 117
Clause 3(xvii) .............................................................................................. 126
Clause 3(xviii) ............................................................................................. 127
Clause 3(xix) ............................................................................................... 130
Clause 3(xx) ................................................................................................ 134
Clause 3(xxi) ............................................................................................... 141
Comments on Form of Report ........................................................................... 143
Board of Director's Report ................................................................................. 145
APPENDICES................................................................................................ 146-242
Appendix I: Text of the Companies (Auditor's Report) Order, 2020 ...................... 146
Appendix II: Clause-by-clause comparison of the reporting requirements of the
Order and the erstwhile CARO 2016 .................................................................... 153
Appendix III: Definitions ........................................................................................................160
Appendix IV: List of Financial Institutions Covered Under the Companies
(Acceptance of Deposit) Rules, 2014 .................................................................... 193
Appendix V: An Illustrative Checklist on Companies (Auditor's Report)
Order, 2020 .............................................................................................................................198
Appendix VI: List of important Sections /Rules/ Regulations / Statutes ................ 242
Introduction
1. The Central Government, in exercise of the powers conferred, under sub-
section (11) of section 143 of the Companies Act, 2013 (hereinafter referred to as
"the Act"), issued the Companies (Auditor's Report) Order, 2020, (CARO, 2020/
"the Order") vide Order No. S.O. 849(E) dated 25th February 2020. CARO, 2020
contains certain matters on which the auditors of companies (except auditors of
those categories of companies which are specifically exempted under the Order)
have to make a statement in their audit report. The text of the CARO, 2020 is
given in Appendix I to this Guidance Note.
2. This Order is in supersession of the earlier Order issued in 2016, viz., the
Companies (Auditor's Report) Order, 2016 (CARO 2016). Appendix II to this
Guidance Note contains a clause-by-clause comparison of the reporting
requirements of the Order and the erstwhile CARO 2016.
3. The purpose of this Guidance Note is to enable the members to comply with
the reporting requirements of the Order. It should, however, be noted that the
clarifications and explanations contained in this Guidance Note are not intended
to be exhaustive and the auditors should exercise their professional judgment and
experience on various matters on which they are required to report under the
Order.
Appendix III to this Guidance Note contains the Definitions of various terms used
in this Guidance Note. Appendix VI to this Guidance Note contains List of
Important Sections/ Rules/ Regulations/ Statutes referred to in this Guidance Note.
General Provisions Regarding Auditor's Report
4. The requirements of the Order are supplemental to the existing provisions of
section 143 of the Act regarding the auditor's report. In this regard the following
points may be noted:
(i) the provisions of sub-sections (1), (2), & (3) of section 143 are applicable to
all companies (other than clause (i) of sub-section (3)) while the Order
exempts certain categories of companies from its application; and
(ii) the provisions of sub-section (1) require the auditor to make certain specific
inquiries during the course of his audit. The auditor is, however, not required
to report on any of the matters specified in the sub-section unless he has any
special comments to make on the said matters. In other words, if he is
satisfied with the results of his inquiries, he has no further duty to report that
he is so satisfied. The Order, on the other hand, requires a statement on
each of the matters specified therein, as applicable to the company.
5. Another question that arises is about the status of the Order vis a vis the
directions given by the Comptroller and Auditor General of India under section
143(5) of the Act. In this regard, it may be noted that the Order is supplemental to
the directions given by the Comptroller and Auditor General of India under section
143(5) in respect of government companies. These directions continue to be in
force. Therefore, in respect of government companies, the matters specified in the
1
Order will form part of the auditor's report submitted to the members and the
replies to the aforesaid questionnaire issued by the Comptroller and Auditor
General of India will be governed by the requirements of section 143(5) of the Act.
6. The Order is not intended to limit the duties and responsibilities of auditors
but only requires a statement to be included in the audit report in respect of the
matters specified therein.
Applicability of the Order
Companies Covered by the Order
7. The Order applies to all companies except certain categories of companies
specifically exempted from the application of the Order.
8. The Order also applies to foreign companies as defined in clause (42) of
section 2 of the Act. According to the aforesaid section, a "foreign company"
means:
"Any company or body corporate incorporated outside India which -
(a) has a place of business in India whether by itself or through an agent,
physically or through electronic mode; and
(b) conducts any business activity in India in any other manner."
9. In the case of a foreign company, wherever under any of the provisions of
the Act, an audit under Chapter X of the Act is required to be carried out, the Order
would be applicable.
10. The Order is also applicable to the audits of branch(es) of a company since
sub-section 8 of section 143 of the Act read with Rule 12 of the Companies (Audit
and Auditors) Rules, 2014 clearly specifies that a branch auditor has the same
duties in respect of audit as the company's auditor. It is, therefore, necessary that
the report submitted by the branch auditor contains a statement on all the matters
specified in the Order, as applicable to the company, except where the company is
exempt from the applicability of the Order, to enable the company's auditor to
consider the same while complying with the provisions of the Order.
The Order is also applicable to the audits of project office / liaison office
established by a company outside India, to whom the Order applies. In case the
company has appointed separate auditors for the project office / liaison office, the
auditor of the company should seek a report from the said auditors which contains
a statement on all the matters specified in the Order, as applicable to the
company, except where the company is exempt from the applicability of the Order.
Companies Not Covered by the Order
11. The Order provides that it shall not apply to:
(i) a banking company as defined in clause (c) of section 5 of the Banking
Regulation Act, 1949;
2
(ii) an insurance company as defined under the Insurance Act, 1938;
(iii) a company licensed to operate under section 8 of the Act;
(iv) a One person Company as defined under clause (62) of section 2 of the Act
and a small company as defined under clause (85) of the section 2 of the
Act; and
(v) a private limited company, not being a subsidiary or holding company of a
public company, having a paid-up capital and reserves and surplus not more
than one crore rupees as on the balance sheet date and which does not
have total borrowings exceeding one crore rupees from any bank or financial
institution at any point of time during the financial year and which does not
have a total revenue as disclosed in Schedule III to the Act, (including
revenue from discontinuing operations) exceeding ten crores rupees during
the financial year as per the financial statements.
12. The Order specifically exempts banking companies, insurance companies
and companies which have been licensed to operate under section 8 of the Act.
The Order also exempts One Person Company and a Small Company from its
application. The applicability of the Order would be based on the status of the
company as at the balance sheet date. It may also be noted that in case a
company is covered under the definition of small company, it will remain exempted
from the applicability of the Order even if it falls under any of the criteria specified
for private company.
13. The specific exemption under the Order is given to companies licensed
under section 8 of the Act. However, it would appear that in view of the provisions
of section 465 of the Act, the exemption would also extend to companies licensed
to operate under section 25 of the Companies Act 1956.
14. A private limited company, in order to be exempt from the applicability of the
Order, must satisfy all the conditions mentioned above collectively. In other words,
even if one of the conditions is not satisfied, a private limited company's auditor
has to report on the matters specified in the Order.
15. In case a Company converts into a LLP or a partnership or any other
constitution (not governed by Companies Act) or converts to any constitution
which is exempted from application of CARO, in that situation CARO would not be
applicable.
16. This Order will not be applicable to Investment trusts and Real estate
investment trusts since they are Trusts which are governed by Securities and
Exchange Board of India Infrastructure Investment Trusts Regulations 2014 and
Securities and Exchange Board of India (Real Estate Investment Trusts)
Regulations, 2014 respectively. However, the Order will be applicable to the
Companies in which these trusts have investment if those Companies satisfy the
applicability criteria. Accordingly, the Order is not applicable to the consolidated
trust financial statements even though there are Companies forming part of the
3
consolidated trust financial statement which individually may have CARO
applicable to them.
Private Limited Company
17. The term "private limited company", as used in the Order, should be
construed to mean a company registered as a "private company" {as defined in
sub-section (68) of section 2 of the Act}.
Paid-up Capital and Reserves and Surplus
18. Sub-section (64) of section 2 of the Act defines the term "paid-up capital" as
such aggregate amount of money credited as paid-up as is equivalent to the
amount received as paid up in respect of shares issued and also includes any
amount credited as paid up in respect of shares of the company, but does not
include any other amount received in respect of such shares, by whatever name
called.
The Guidance Note on Terms Used in Financial Statements, issued by the
Institute of Chartered Accountants of India, defines the term "paid-up share
capital" as, "that part of the subscribed share capital for which consideration in
cash or otherwise has been received. This includes bonus shares allotted by the
corporate enterprise". Paid-up share capital would include both equity share
capital as well as the preference share capital. While calculating the paid-up
capital, amount of calls unpaid should be deducted from and the amount originally
paid-up on forfeited shares should be added to the figure of paid-up capital. In
order to maintain consistency with the Schedule III (Division II) classification, share
application money received should be considered as part of the paid-up capital.
Convertible instruments whether optionally or fully convertible should be
considered in paid up share capital only once the actual shares are issued by the
Company.
The Guidance Note on Terms Used in Financial Statements defines the term
"reserve" as, "The portion of earnings, receipts or other surplus of an enterprise
(whether capital or revenue) appropriated by management for a general or specific
purpose other than provision for depreciation or diminution in the value of assets
or for a known liability.
19. As per schedule III (Division I) of Companies Act 2013 "Reserves & Surplus"
consists of:-
· Capital Reserves;
· Capital Redemption Reserve;
· Securities Premium;
· Debenture Redemption Reserve;
· Revaluation Reserve;
· Share Options Outstanding Account;
· Other Reserves(specify the nature and purpose of each reserve and the
4
amount in respect thereof);
· Surplus i.e., balance in Statement of Profit and Loss
(Debit balance of Statement of Profit and Loss shall be shown as a negative figure
under the head "Surplus".)
Reserves are primarily of two typescapital reserves and revenue reserves.
According to the Guidance Note on Terms Used in Financial Statements, the term
"capital reserve" means "a reserve of a corporate enterprise which is not available
for distribution as dividend". The said Guidance Note defines the term "revenue
reserve" as "any reserve other than capital reserve". For determining the
applicability of the Order to a private limited company, both capital as well as
revenue reserves should be taken into consideration while computing the limit of
one crore rupees prescribed for paid-up capital and reserves & surplus.
Revaluation reserve, if any, should also be taken into consideration while
determining the figure of reserves for the limited purpose of determining the
applicability of the Order. In case of debit balance of profit and loss, the same shall
be netted for computing reserves & surplus.
20. In case of Schedule III (Division II) of Companies Act, 2013 (Financial
statements for a Company whose financial statements are drawn up in compliance
of the Companies (Indian Accounting Standards) Rules, 2015, the term Reserve &
Surplus as meant by CARO, 2020 will consist of:-
· Capital Reserves;
· Securities Premium;
· Other Reserves(specify the nature and purpose of each reserve and the
amount in respect thereof);
· Retained earnings i.e., balance in Statement of Profit and Loss
Further, it is important to note that as per division II of schedule III of Companies
Act 2013, equity component of compound financial instrument, revaluation surplus,
debt/equity instrument through Other comprehensive income (OCI), effective
portion of cash flow hedges, exchange difference on translating the financial
statement and other items of OCI are not considered to be part of Reserve &
Surplus.
Borrowings
21. Borrowings from banks or financial institutions can be long term or short
term and are normally in the form of term loans, demand loans, export credits,
cash credits, overdraft facilities, bills purchased or discounted. Outstanding
balances of such borrowings should be considered as borrowing outstanding
for the purpose of computing the limit of rupees one crore. Non-fund based
credit facilities, to the extent such facilities have devolved and have been
converted into fund-based credit facilities, should also be considered as
outstanding borrowings. The figures of outstanding borrowing would also
include the amount of bank guarantees issued by the company where such
guarantee(s) has (have) been invoked and encashed or where, say, a letter of
5
credit has been devolved on the company. In case of term loans, interest
accrued and due is considered as a borrowing whereas interest accrued but not
due is not considered as a borrowing. Further, in case the company enjoys a
facility, say, a cash credit facility, whose balance is fluctuating in nature, the
Order would apply to the company in case on any day during the financial year
concerned, the amount outstanding in the cash credit facility exceeds Rs. one
crore as per books of the company along with other borrowings. The condition
laid down in the Order is that the private company does not have total
borrowing exceeding rupees one crore from any bank or financial institution at
any point of time during the financial year. There is no stipulation in the Order
that the borrowing should be a long-term borrowing or a short-term borrowing
or that it should be a secured borrowing or an unsecured borrowing. Further,
the condition would also apply notwithstanding the fact that the company has
been granted an overdraft facility against, say, fixed deposits, of the company
with the concerned bank. Current maturity of long term borrowings will also
form part of borrowings. Moreover, outstanding dues in respect of credit cards
would also be considered while calculating the limit of Rs. one crore; in respect
of borrowings outstanding from a bank or financial institution. It is clarified that
since the words used by the Order are `any bank or financial institution', the
limit of "exceeding one crore rupees" would apply in aggregate to all borrowings
and not with reference to each bank or financial institution. The aggregate
borrowings disclosed in the financial statements would need to be considered
based on applicable Generally Accepted Accounting Practices in India (IND
AS/Indian GAAP).
Financial Institution
22. Sub section (39) of section 2 of the Act defines the term "financial institution"
to include a scheduled bank, and any other financial institution defined or notified
under the Reserve Bank of India Act, 1934". The term financial institution has been
defined under clause (c) of Section 45I of the RBI Act 1934 as under:-
"45I (c) ``financial institution'' means any non-banking institution which
carries on as its business or part of its business any of the following
activities, namely:
(i) the financing, whether by way of making loans or advances or otherwise, of
any activity other than its own;
(ii) the acquisition of shares, stock, bonds, debentures or securities issued by a
Government or local authority or other marketable securities of a like nature;
(iii) letting or delivering of any goods to a hirer under a hire-purchase agreement
as defined in clause (c) of section 2 of the Hire-Purchase Act, 1972;
(iv) the carrying on of any class of insurance business;
(v) managing, conducting or supervising, as foreman, agent or in any other
capacity, of chits or kuries as defined in any law which is for the time being in
6
force in any State, or any business, which is similar thereto;
(vi) collecting, for any purpose or under any scheme or arrangement by whatever
name called, monies in lumpsum or otherwise, by way of subscriptions or by
sale of units, or other instruments or in any other manner and awarding
prizes or gifts, whether in cash or kind, or disbursing monies in any other
way, to persons from whom monies are collected or to any other person, but
does not include any institution, which carries on as its principal business;
(a) agricultural operations; or
(aa) industrial activity; or
(b) the purchase or sale of any goods (other than securities) or the
providing of any services; or
(c) the purchase, construction or sale of immovable property, so however,
that no portion of the income of the institution is derived from the
financing of purchases, constructions or sales of immovable property by
other persons;
Explanation. For the purposes of this clause, ``industrial activity'' means any
activity specified in sub-clauses (i) to (xviii) of clause (c) of section 2 of the
Industrial Development Bank of India Act, 1964;
Further ``non-banking institution'' has been defined under clause (e) of Section
45I of RBI Act 1934 as under:-
45I (e) ``non-banking institution'' means a company, corporation or cooperative
society.
Further, the term "financial institution" is also referred to in the context of the
definition of a non-banking financial company as defined by the RBI Act, 1934.
The term ``non-banking financial company'' has been defined under clause (f) of
Section 45I of RBI Act 1934 as under:-
"45I (f) ``non-banking financial company'' means
(i) a financial institution which is a company;
(ii) a non-banking institution which is a company and which has as its principal
business the receiving of deposits, under any scheme or arrangement or in
any other manner, or lending in any manner;
(iii) such other non-banking institution or class of such institutions, as the Bank
may, with the previous approval of the Central Government and by
notification in the Official Gazette, specify;"
Accordingly the term "financial institution" shall also cover a non-banking financial
company (NBFC). A list of financial institutions covered under the Companies
(Acceptance of Deposits) Rules, 2014 is given in Appendix IV to this Guidance
Note. Further, private banks or foreign banks are banking institutions under the
7
Banking Regulation Act, 1949. Therefore, loans taken from a private bank or a
foreign bank would also be taken into consideration while examining the
applicability of the Order.
Revenue
23. The term, "revenue", has been defined by the Order as total revenue
disclosed in Schedule III of the Act for Division I Companies and Total Income for
Division II Companies. Accordingly, the total revenue/total income would include
other income as per Schedule III. Revenue will also include revenue from
discontinuing operations as specified in the Order.
Auditor's Report to Contain Matters Specified in Paragraphs 3
and 4 of the Order
24. Every report made by the auditor under section 143 of the Act on the
accounts of every company audited by him, to which this Order applies, for the
financial year commencing on or after 1st April 2019 shall, in addition, contain the
matters specified in paragraphs 3 and 4 of the Order as may be applicable.
Accordingly, the reporting under this Order shall be applicable for the financial
year 2019-20 and onwards. In case the auditor has to report on the financial
statements for the financial year commencing prior to 1st April 2019, then the
relevant earlier Order shall be applicable.
Here it is pertinent to mention that the Order specifies the applicability of the
matters by the words "as may be applicable", hence reporting on the matters
specified in paragraph 3 and 4 of the Order are to be made only on those matters
which are applicable to the Company.
Applicability to the Consolidated Financial Statements
25. The Order specifically provides that it shall not apply to the auditor's report
on consolidated financial statements except for clause (xxi) of paragraph 3.
26. This means that the auditor will need to give a CARO report on the
Consolidated financial statements which will have reporting on only one clause of
CARO i.e. clause (xxi). Reporting on other clauses are not required.
Period of Compliance
27. A question might arise as to the period in relation to which the auditor should
comment or report upon the matters specified in the Order. For example, several
of the questions relate to the maintenance of proper records. What should be the
position of the auditor when records were improperly maintained for some part of
the financial year but have been properly maintained at the balance sheet date?
One view of the matter would be that no adverse report is necessary since the
deficiencies existing during the year have been rectified before the auditor makes
his report. However, this view does not recognise the fact that maintenance of
records is not an end by itself but is a necessary condition for the auditor to satisfy
8
himself regarding the authenticity of the transactions on which he is reporting. The
better view, therefore, is to consider that the auditor is reporting on the state of
affairs as they existed during the accounting year and compliance with the
requirements of the Order should be judged with reference to the whole
accounting year and not merely with reference to the position existing at the
balance sheet date or the date at which he makes his report.
Compliance to any of clause post balance sheet date should not be taken into
consideration for reporting as at Balance Sheet date unless the compliance of the
clause itself requires consideration of post balance sheet events. For example
clause (xix) may require events after the balance sheet date to be considered in
order to report on the compliance of the clause.
General Approach
28. The Order does not replace an audit by an investigation in respect of the
matters specified therein. Many of these matters, in any case, are covered by an
auditor in the normal course of his audit and the emphasis of the Order is not,
therefore, on requiring the auditor to carry out an investigation but on requiring him
to give specific information on certain aspects of his work.
29. The reporting under the Order, issued under section 143(11) of the Act, is
supplemental to the audit of financial statements of the company. The procedures
required to be performed by the auditor would generally be within the framework of
the principles enunciated in Standards on Auditing (SAs) prescribed under Section
143(10) of the Act. However, reporting on CARO may require specific audit
procedures to be performed to comment on various clauses which could be in
addition to audit procedures required to express an opinion on the financial
statements or an opinion on internal control on financial reporting. For example,
procedures performed to report on short term funds used for long term purposes
may not have a bearing on opinion on the financial statements or on the opinion
on internal control on financial reporting but are required for the purpose of CARO
reporting.
30. It is possible that for the purposes of the Order, the auditor needs greater
information from the management. The auditor and the management should
ensure that there is sufficient advance planning regarding the manner in which the
examination necessary for reporting on matters specified in the Order would be
carried out by the auditor and the form in which the company should maintain its
records so that they provide the necessary information and evidence to the
auditor. An example of this would be the documents and records to be maintained
by the company to provide the requisite evidence to the auditor regarding
verification of property, plant and equipment or inventories. It is, therefore,
suggested that the auditor should intimate to the management, in writing, his
requirements before the commencement of each audit. The auditor should also
consider intimating additional requirements, if any, during the course of the audit.
The auditor should also consider obtaining management representations, on
matters on which the Order requires the auditor to make a statement on certain
aspects.
9
31. For a number of reasons, the necessity for preserving working papers by the
auditors assumes greater importance in the context of the requirements of the
Order. Firstly, there should be evidence that the opinion expressed by the auditor
is based on an examination made by him. Secondly, there should be evidence to
show that in arriving at his opinion, the auditor has given due cognisance to the
information and explanations given by the company. Thirdly, there should be
evidence to show that the information and explanations obtained were full and
complete, that is, the auditor has sought and obtained all the information and
explanations which to the best of his knowledge and belief were necessary to be
considered before arriving at his opinion. Finally, there should be evidence to
show that the auditor did not merely rely upon the information or explanations
given by the company but that he subjected such information and explanations to
reasonable tests to verify their accuracy and completeness.
32. As the auditor needs to comply with the requirements of Standard on
Auditing (SA) 230, "Audit Documentation", the auditor may take the following steps
to ensure that he has adequate working papers to support the conclusions drawn
in his report:
(a) submit to the company, a questionnaire on all important matters covered by
the Order.
(b) make specific inquiries in writing on all important matters not covered by the
questionnaire.
(c) insist that replies of the company are furnished in writing and are signed by a
responsible officer of the company.
(d) where the explanations are not already separately recorded, maintain a
record of the discussions with the management.
(e) prepare his own "check-list" in respect of the requirements of the Order and
record the names of the members of his staff who made the examination and
the name of the company's staff who provided the information. An illustrative
check-list in respect of the requirements of the Order is given in Appendix V
to this Guidance Note.
33. Where a requirement of the Order is not complied with but the auditor
decides not to make an adverse comment, in view of the materiality of the item, he
should record rationale for the same in his working papers.
34. The mere fact that the Order is confined to certain specific matters should not
be interpreted to imply that the auditor's duties in respect of other matters normally
covered in the course of an audit of the financial statements are, in any way,
limited by the Order. At the same time, it should be recognised that the reporting
obligations under the Order are confined to the specific items stated in the Order.
35. Many of the matters covered by the Order require exercise of judgement by
the auditor rather than the application of a purely objective test. For example,
10
clause 3(iii)(b) requires the auditor to comment on whether the loans and
guarantees are prejudicial to the interest of the Company. Determining what is
prejudicial is dependent on the facts and circumstances specific to each case and
the auditor may need to exercise judgement in order to arrive at his conclusion.
36. It may be noted that while reporting on matters specified in the Order, the
auditor should consider the materiality, in accordance with the principles
enunciated in Standard on Auditing (SA) 320, Materiality in Planning and
Performing an Audit. The auditor obtains reasonable assurance by obtaining audit
evidence to reduce audit risk to an acceptable low level. Materiality and audit risk
are considered throughout the audit, in particular, when determining the nature,
timing and extent of further audit procedures to be performed. For example, the
auditor, in case of loans granted by the company, as referred to in Clause 3(iii) of
the Order, while reporting, on the repayment schedule of various loans granted,
the auditor examines the loan documentation of all large loans and conducts a test
check examination of the rest, having regard to the materiality.
An auditor may also need to exercise judgement on application of materiality
principle while reporting under clause 3 (xxi) of CARO in respect of qualifications
or adverse remarks or unfavorable comments in reports of Companies included in
the consolidated financial statements. In respect of exercise of judgement on
application of materiality on clause 3 (xxi) of CARO, the auditor should also
consider the requirements of the Guidance Note on Audit of Consolidated
Financial Statements.
37. It is necessary to remember that the exercise of judgement is bound to be
subjective. This is, in fact, recognised by the provisions of the Act which require
the expression of an opinion by the auditor. When a professional expresses an
opinion, he does not guarantee that his opinion is infallible nor does he hold out
that his opinion will invariably agree with the opinion of another professional on the
same facts. The test of an auditor's liability in a matter which involves the exercise
of judgement is not whether his opinion coincides with that of another person or
authority, but whether he has expressed his opinion in good faith and after the
exercise of reasonable care and skill. No liability can attach to an auditor in a
matter involving the expression of an opinion based on the exercise of judgement,
merely because there is a difference of opinion between him and some other
person or authority or merely because some other person or authority comes to
the conclusion that in expressing the opinion the auditor committed an error of
judgement. The auditor may be liable, however, if it is found that he has expressed
his opinion without exercising reasonable care and skill, or without applying his
mind to the facts, or if he has expressed his opinion recklessly, in complete
disregard of the facts.
11
Matters to be included in the Auditor's Report
The matters to be included in auditor's report are specified in paragraph 3 of the
Order. It has twenty one clauses in all. The Clause-wise comments are given below:
38. Whether the company is maintaining proper records showing full
particulars, including quantitative details and situation of Property, Plant
and Equipment; [Paragraph 3(i)(a)(A)]
Relevant Provisions
(a) The accounting aspects of Property Plant and Equipment are dealt with
in AS 10(Revised) and IND AS 16. AS 10(Revised), "Property, Plant and
Equipment" defines Property, Plant and Equipment" as follows;
Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes; and
(b) are expected to be used during more than a period of twelve months.
(b) The Order does not define as to what constitutes `proper records'. In general,
however, the records relating to PPE should contain, inter alia, the following
details:
(i) sufficient description of the PPE to make identification possible;
(ii) classification, that is, the head under which it is shown in the accounts,
e.g., plant and machinery, office equipment, etc;
(iii) situation;
(iv) quantity, i.e., number of units;
(v) original cost;
(vi) year of purchase;
(vii) useful life;
(viii) residual Value;
(ix) component-wise breakup; (Wherever applicable)
x) adjustment for revaluation or for any increase or decrease in cost;
(xi) date of revaluation, if any;
(xii) rate(s)/basis of depreciation or amortisation, as the case may be;
(xiii) depreciation/amortisation for the current year;
(xiv) accumulated depreciation/amortisation;
12
(xv) particulars regarding impairment;
(xvi) particulars regarding sale, discarding, demolition, destruction, etc.
(c) The records should contain the above-mentioned particulars in respect of all
items of PPE, self-financed or acquired through finance lease. These
records should also contain particulars in respect of those items of PPE that
have been fully depreciated or have been retired from active use and held for
disposal. The records should also contain necessary particulars in respect of
items of PPE that have been fully impaired during the period covered by the
audit report.
Thus, what constitutes proper records is a matter of professional judgment
made by the auditor after considering the facts and circumstances of each
case.
(d) It is necessary that the aggregate original cost, depreciation to date, and
impairment loss, if any, as per these records under individual heads should
reconcile with the figures shown in the books of account.
(e) It is not possible to specify any single form in which the records should be
maintained. This would depend upon the mode of account keeping (manual
or computerized), the number of operating locations, the systems of control,
etc. It may be noted that with the widespread use of the information
technology, many companies maintain electronic records. In fact, section
2(12) of the Act, defines the terms "book and paper" and "book or paper" as
including books of account, deeds, vouchers, writings, documents, minutes
and registers maintained on paper or in electronic form".
Audit Procedures and Reporting
(f) The auditor may, therefore, accept PPE register in electronic form if the
following two conditions are satisfied:
(i) The controls and security measures in the company are such that
once finalised, the PPE register cannot be altered without proper
authorization and audit trail.1
(ii) The PPE register is in such a form that it can be retrieved in a legible
form. In other words, the emphasis is on whether it can be read on the
screen or a hard copy can be taken. If this is so, one can contend that
it is capable of being retrieved in a legible form.
In case the above two conditions or either of the two conditions are not
satisfied, the auditor should obtain a duly authenticated print-out of the PPE
register. In case the auditor decides to rely on electronically maintained PPE
register, he should maintain adequate documentation evidencing the
1
In this context, attention of the members is also drawn to Standard on Auditing (SA) 315, Identifying and
Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment" as also
the "Guidance Note on Audit of Internal Financial Controls Over Financial Reporting", issued by ICAI.
13
evaluation of controls that seek to ensure the completeness, accuracy and
security of the register.
(g) The purpose of showing the situation of the PPE is to make verification
possible. There may, however, be certain classes of PPE whose situation
keeps changing, for example, construction equipment which has to be moved
to sites. In such circumstances, it should be sufficient if record of
movement/custody of the equipment is maintained.
(h) Where assets like furniture, etc., are located in the residential premises of
members of the staff, the PPE register should indicate the name &
designation of the person who has custody of the asset for the time being.
(i) While, generally, the quantity, value and situation have to be recorded item-
wise, assets of small individual value, e.g., chairs, tables, etc., may be
conveniently grouped for purposes of entry in the register. Similarly, for
assets having same useful life, it may not be necessary to indicate the
accumulated depreciation for each item; instead, depreciation for the group
as a whole may be shown.
(j) Quantitative details in respect of PPE may be maintained on the following
lines:
(i) Land may be identified by survey numbers and by deeds of
conveyance.
(ii) Leaseholds can be identified by individual leases.
(iii) Buildings may, initially, be classified into factory buildings, office
buildings, township buildings, service buildings (like water works),
etc. These may then be further sub-divided. Factory buildings may
be further classified into individual buildings which house a
manufacturing unit or a plant or sub-plant. Service buildings may be
similarly classified according to nature of service and location.
Township buildings can be further classified into individual units or
into groups of units taking into consideration the type of construction,
the location and the year of construction. For example, if a
company's township has four categories of quarters, e.g., A, B, C
and D, the PPE register may not record each individual quarter but
may have a single entry for all `A' type quarters constructed in a
particular year and located in a particular area and show only the
number of quarters covered by the entry.
(iv) Railway sidings can be identified by length and location.
(v) Plant and Machinery may be sub-divided into fixed and movable. For
movable machinery, a separate record may be kept for each individual
item. Movable machinery would include, for this purpose, items of plant
which are for the moment fixed to the shop-floor but which can be
moved, e.g., machine tools. In respect of fixed plant and machinery, a
14
sub-division can be made according to the process, a plant for each
separate process being considered as a separate identifiable unit. A
further sub-division may be useful when within a process, there are
plants which are capable of working independently of each other. The
degree to which a sub-division of fixed plant and machinery should be
made depends upon the circumstances of each case bearing in mind
the objectives of sub-division, namely, the determination of individual
cost and the facility for physical verification and componentisation2.
(vi) Furniture and fittings and assets like office appliances, air-conditioners,
water coolers, etc., consist of individual items which can be easily
identified. Some difficulty may, however, be faced with regard to the
large number of items and their relative mobility. In such cases, a
distinction by value may be necessary, individual identification being
made for high-value items and by groups for other items.
(vii) Development of property is an asset head which can be easily sub-
divided according to the buildings or plant for which the development
work is undertaken.
(viii) Vehicles can be identified by reference to the registration books.
(k) In cases where the details regarding allocation of cost over identified units of
assets are not available, it would have to be made by an analysis of the
purchases and the disposals of the preceding years. Among the difficulties
which may be faced could be: (i) records for some of the years may not be
available; (ii) the description in the records may not be complete; (iii) details
of disposals may not have been properly recorded; (iv) subsequent additions
to an existing asset may have been shown as a separate asset; (v) a single
figure of cost may be assigned to a number of assets which have to be
separately identified; (vi) assets purchased for one department may have
been moved to other departments, and so on. The management, in
consultation with the auditor, should make the best effort possible under the
circumstances to identify the cost of each asset. In doing so, reasonable
assumptions or approximations may be made, where necessary. For
example, when details of disposals are not available, it may be assumed that
the asset sold is the asset which was acquired earliest in point of time.
Similarly, when the individual cost of a large number of small items is not
available, one can estimate the cost of each item and pro-rate the total cost
in the proportion of the estimated cost of the item to the aggregate estimated
cost.
(l) It may be useful if initial identification of assets is done by persons who are
familiar with them, e.g., the maintenance staff. At the point of identification, a
code number may be affixed on the asset which would give sufficient details
for future identification.
2
Attention of the readers is invited to the requirements of Schedule II to the Companies Act 2013 in respect of
componentisation.
15
(m) The initial identification of assets will often reveal a number of discrepancies
between the assets as verified and the details compiled from the records.
This may be on account of the features already considered in (k) above. This
may also be due to the fact that assets might have been scrapped in earlier
years but proper documentation may not have been made or that assets may
have been broken up into smaller units or amalgamated into larger units or
otherwise modified without changing the asset records. The degree of further
inquiry necessary to reconcile these discrepancies would depend upon the
nature of the asset, its cost, the age of the asset, the extent of accounting or
other records available and other relevant factors. However, the concept of
materiality should be borne in mind in making these further inquiries, greater
attention being devoted to assets which are of large value or of relatively
recent purchase. Any adjustments that finally have to be made should be
properly documented. The auditor should request the appropriate level of
management to carry out necessary adjustments.
39. Whether the company is maintaining proper records showing full
particulars of Intangible assets. [Paragraph 3(i)(a)(B)]
Audit Procedures and Reporting
The auditor, while reporting under this clause, should consider the principles,
accounting aspects and disclosure requirements of Intangible Assets as laid down
in AS 26 and IND AS 38. Intangible Assets, inter alia can be of the following
types :
(a) Customer-based intangible assets;
(b) Marketing-based intangible assets;
(c) Contract-based intangible assets;
(d) Technology-based intangible assets; or
(e) Artistic-based intangible assets
In course of statutory audit, the auditor may have to consider the following types of
illustrative intangible assets:
· Customer Lists / Customer loyalty
· Trademark , Formula
· Broadcasting License
· Music copyright / literary works/musical works,
· Patent on digital device
· Air route authority / permit
· Recipe, Trade secrets, processes, designs,
16
· Publishing title
· Algorithms
· Patents
· Motion Picture films
· Fishing license
· Franchisee
· Formulations
· Non-competition agreements,
· Internet domain names, distribution network,
· Royalty agreements, employment contracts
· Operating rights / marketing rights / servicing rights
· Website development
Special Considerations
The auditor may have to consider the applicable documentation requirements of
intangible assets as laid down in, inter alia, Copyright Act, 1957, Patents Act,
1970, Trade Marks Act, 1999 , Designs Act, 2000, IT Act 2000 and so on.
Illustrative List of information, Documents / records showing particulars of
intangible assets
Documents, registers, records may be in the form of hard copies / printed
materials or available in digital medium. The same may be in the form of:
a) Narratives
b) Standard Operating Procedure ( SOP) eg, with respect to capitalization
process of R&D expenses in specific industries such as pharmaceuticals,
automobiles , Information Technology etc
c) Specific Transaction Reports or Ledgers in ERP platforms
d) Any other structured form of MIS
The auditor, while reporting under this clause, should consider
1. Self-generated Intangible Assets and their classification
2. Acquired Intangible Assets and their classification
Approach for reporting under this Clause
1. Reasonable and sufficient description of the asset to facilitate identification
should be available for inspection. For example, patents, trade marks and
designs may be identifiable by purchase agreements / letters granting patent
and by registration references. Similarly, computer software , which is
17
considered as intangible asset may be identified by its title version and serial
number, e.g., `Microsoft Office 2010' and licence number
2. Location, i.e., the name of division, branch or department where the asset is
located. (eg - computer software in operation at different locations)
3. Agreement books / Registers: Detailed commercial agreements with respect
to intangible assets, eg license agreements
4. Quantity of the intangible assets per category / classification, i.e., number of
units. This would be relevant for items like standard computer software
where more than one unit may have been acquired
5. Original cost details (for self generated assets, cost of development)
6. Date on which the asset becomes available for use by the entity with
documentary evidence
7. Subsequent expenditure on the asset that is included in its carrying amount,
along with the date of incurrence of the expenditure.
8. Register of amortisation containing, inter alia, Amortisation period (or rate
of amortisation), Amount of amortisation for the period, Amount of
accumulated amortisation as at the beginning and end of the period.
9 Impairment Register / Record: Particulars of impairment loss (if any) and any
reversal of such impairment loss date, amount for the period and
accumulated amount as at beginning and end of period. Impairment
indicators may also be documented
13. Retirement & Disposal Book: Particulars of retirement, sale, transfer,
disposal of intangible assets, if any
14. Record of registration name of registration authority and date of
registration, Period of validity of registration and date of expiry of registration.
15. License Register: Particulars of any licence or other similar right in the asset
granted to third parties, e.g., use rights in a trade mark. Such particulars
would include:
name and address of the counterparty,
nature and period of rights granted,
other key terms and conditions,
consideration received/receivable,
details of registration with authority concerned, etc.
Safeguarding Intangible Assets
Information Security Policy
Legal Protection and Contracts
18
16. BCP / DRP Register: Business Continuity Plan/ Disaster Recovery Plan of
the intangible asset
17. Records / Registers of Litigations involving intangible assets: which
may assist in tracing an intangible asset belonging to the entity which is
subject of any unauthorised access, use or disposal by another party
40. Whether these Property, Plant and Equipment have been physically
verified by the management at reasonable intervals; whether any material
discrepancies were noticed on such verification and if so, whether the same
have been properly dealt with in the books of account; [Paragraph 3(i)(b)]
Relevant Provisions
(a) The clause requires the auditor to comment whether the Property, Plant and
Equipment of the company have been physically verified by the management
at reasonable intervals. The clause further requires the auditor to comment
whether any material discrepancies were noticed on such verification and if
so, whether those discrepancies have been properly dealt with in the books
of account.
(b) Physical verification of the assets is the responsibility of the management
and, therefore, has to be carried out by the management itself and not by the
auditor. It is, however, necessary that the auditor satisfies himself that such
verification was done and that there is adequate evidence on the basis of
which he can arrive at such a conclusion. The auditor may prefer to observe
the verification, particularly when verification of all assets can be made by the
management on a single day or within a relatively short period of time. If,
however, verification is a continuous process or if the auditor is not present
when verification is made, then he should examine the instructions issued to
the staff (which should, therefore, be in writing) by the management and
should examine the working papers of the staff to substantiate the fact that
verification was done and to determine the name and competence of the
person who did the verification. In making this examination, it is necessary to
ensure that the person making the verification had the necessary technical
knowledge where such knowledge is required. It is not necessary that only
the company's staff should make verification. It is also possible for
verification to be made by outside expert agencies engaged by the
management for the purpose.
Audit Procedures and Reporting
(c) The auditor should examine whether the method of verification was
reasonable in the circumstances relating to each asset. For example, in the
case of certain process industries, verification by direct physical check may not
be possible in the case of assets which are in continuous use or which are
concealed within larger units. It would not be realistic to expect the
19
management to suspend manufacturing operations merely to conduct a
physical verification of the Property, Plant and Equipment, unless there are
compelling reasons which would justify such an extreme procedure. In such
cases, indirect evidence of the existence of the assets may suffice. For
example, the very fact that an oil refinery is producing at normal levels of
efficiency may be sufficient to indicate the existence of the various process
units even where each such unit cannot be verified by physical or visual
inspection. It may not be necessary to verify assets like building by
measurement except where there is evidence of alteration/demolition. At the
same time, in view of the possibility of encroachment, adverse possession,
etc., it may be necessary for a survey to be made periodically of open land.
(d) It is advisable that the assets are marked with "distinctive numbers"
especially where assets are movable in nature and where verification of all
assets is not being conducted at the same time.
(e) The Order requires the auditor to report whether the management" has verified
the Property, Plant and Equipment at reasonable intervals. What constitutes
"reasonable intervals" depends upon the circumstances of each case. The
factors to be taken into consideration in this regard include the number of
assets, the nature of assets, the relative value of assets, difficulty in
verification, situation and geographical spread of the location of the assets,
etc. The management may decide about the periodicity of physical verification
of Property, Plant and Equipment considering the above factors. While an
annual verification may be reasonable, it may be impracticable to carry out the
same in some cases. Even in such cases, the verification programme should
be such that all assets are verified at least once in every three years. Where
verification of all assets is not made during the year, it will be necessary for the
auditor to report that fact, but if he is satisfied regarding the frequency of
verification he should also make a suitable comment to that effect.
(f) The auditor is required to state whether any material discrepancies were
noticed on verification and, if so, whether the same have been properly dealt
with in the books of account. The latter part of the statement is required to be
made only if the discrepancies are material. The auditor has, therefore, to
use his judgement to determine whether a discrepancy is material or not. In
making this judgement, the auditor should consider not merely the cost of the
asset and its relationship to the total cost of all assets but also the nature of
the asset, its situation and other relevant factors. If a material discrepancy
has been properly dealt with in the books of account (which may or may not
imply a separate disclosure in the accounts depending on the circumstances
of the case), it is not necessary for the auditor to give details of the
discrepancy or of its treatment in the accounts but he is required to make a
statement that a material discrepancy was noticed on the verification of
Property, Plant and Equipment and that the same has been properly dealt
with in the books of account.
20
For the purpose of reporting under this clause, the auditor may have to use his
professional judgment to determine whether a discrepancy is material or not.
Factors which may be considered for this purpose may be as follows :
the cost of the asset / asset class and its relationship to the total cost of all
assets by percentage value or numerical count.
the nature of the significance of the asset, its value, in the overall production
/ processing / manufacturing process ( for example mission-critical assets) ,
operational criticality of the asset, its current situation / location.
materiality threshold may be different for different industries and may also
depend on the size, nature and complexity of the business of the entity.
material discrepancies are such that, if it is omitted to be reported or
considered, may fail to give a true and fair view of the PPE in the entity.
41. Whether the title deeds of all the immovable properties (other than
properties where the company is the lessee and the lease agreements are
duly executed in favour of the lessee) disclosed in the financial statements
are held in the name of the company, if not, provide the details thereof in the
format below:-
Description Gross Held in Whether Period held Reason for
of property carrying name promoter, indicate not being
value of director or their range, held in
relative or where name of
employee appropriate company*
- -- - - - *also
indicate if in
dispute
[Paragraph 3(i)(c)]
Relevant Provisions
(a) The clause requires the auditor to comment whether the title deeds of
immovable properties are held in the name of the company, if not, to provide
the details thereof in the required format. The Act does not define the term
"Immovable Property". However, as per General Clauses Act, 1897,
"Immovable Property" shall include land, benefits to arise out of land, and
things attached to the earth, or permanently fastened to anything attached to
the earth. The auditor has to consider that under IND AS 116, disclosure
requirements in an Operating Lease is substantially the same as that of
Finance Lease.
21
Audit Procedures and Reporting
(b) Based on review of the Fixed Assets Register, the auditor is required to
identify immovable properties and verify the title deeds of such immovable
properties. TDRs(Transfer Development Rights), Plant and Machinery
embedded in land etc., are not considered as an immovable property.
(c) In general, title deeds means a legal deed or document constituting evidence
of a right, especially to the legal ownership of the immovable property.
(d) Following documents mainly constitute title deeds of the immovable
property:-
(i) Registered sale deed / transfer deed / conveyance deed, etc. of land,
land & building together, etc. purchased, allotted, transferred by any
person including any government, government authority / body/ agency
/ corporation, etc. to the company.
(ii) In case of leasehold land and land & buildings together, covered under
the head fixed assets, the lease agreement duly registered with the
appropriate authority. ( Under IND AS 116, disclosure requirements in
an Operating Lease is substantially the same as that of Finance Lease)
(e) The auditor should carry out detailed examination in the cases where
immovable property is transferred as a result of conversion of partnership
firm or LLP into company or amalgamation of companies, as in such cases
title deeds may be in the name of the erstwhile entity.
(f) Where the title deeds of the immovable property have been mortgaged with
the Banks/ Financial Institutions, etc., for securing the borrowings and loan
raised by the company, a confirmation about the same should be sought
from the respective institution to this effect. The auditor may also consider
verifying this information from the online records, if available, of the relevant
State.
(g) There may be instances where the title deeds were lost accidentally or
otherwise. In such cases, the certified copies of the documents, as available
with the company, and details about the FIR filed, about loss of such
documents needs to be obtained and documented. The auditor should also
seek written representation from the management in this regard.
(h) The management is responsible for legal determination of the validity of title
deeds, the auditor may refer SA 250 "Consideration of Laws and Regulations
in an audit of Financial Statements" to the extent considered relevant and
obtain sufficient and appropriate audit evidence. Further any discrepancy,
including any pending/disputed court cases relating to ownership, needs
detailed discussion with the management and should be properly
documented. In this context, the auditor may also consider communicating
with the legal counsel, whether in-house or external, in accordance with the
principles enunciated in SA 501, Audit Evidence Specific Considerations
22
for Selected Items. The auditor may also consider disclosing the dispute
while reporting under this clause.
The auditor should verify the title deeds available and reconcile the same
with the fixed assets register. The scrutiny of the title deeds of the immovable
property may reveal a number of discrepancies between the details in the
fixed assets register and the details available in the title deeds. This may be
due to various reasons which needs to be examined.
(i) In case the immovable properties are not held in the name of the company,
the auditor must ascertain the following information for the purpose of
reporting under this clause
a) description of the property, including location, identification number
from land records , municipal records etc.
b) Gross carrying amount as per Balance sheet of the company
c) Name of the individual (s) who are holding the title in the property
d) Auditor to report specifically if the immovable property is held in the
name of the promoter, director or their relative or employee
e) Auditor to indicate the period of such holding
f) Auditor to state the reason for the immovable property not being held in
the name of the company ( for example, the registration process of
transfer of name may be continuing as on the date of the audit)
The auditor may obtain the support of any legal expert in case there is any dispute
or litigation as to the title in the immovable property or where the auditor seeks
clarity in matters related to this clause.
42. Whether the company has revalued its Property, Plant and Equipment
(including Right of Use assets) or intangible assets or both during the year
and, if so, whether the revaluation is based on the valuation by a Registered
Valuer; specify the amount of change, if change is 10% or more in the
aggregate of the net carrying value of each class of Property, Plant and
Equipment or intangible assets; [Paragraph 3(i)(d)]
Relevant Provisions
(a) Revaluation of fixed assets is the process by which the carrying value of
fixed assets is adjusted upwards or downwards in response to major
changes in its fair market value. The process of revaluation may be carried
out at sufficient regularity such that the carrying amount does not differ
materially from the fair value . Hence Revaluations need not to be performed
every year or in every reporting period
23
(b) AS 10 (Revised )and IND AS 16 require fixed assets to be initially recorded
at cost but they allow two models for subsequent accounting for fixed assets,
namely the cost model and the revaluation model. The difference between
the cost model and the revaluation model is that the revaluation model allows
both downward and upward adjustment in value of an asset while cost model
allows only downward adjustment due to impairment loss. Hence for the
purpose of reporting under this Clause, there may be cases of:
· Upward revaluation
· Downward revaluation
(c) As per the requirements of this Clause, the auditor has to report on whether
the company during the year has revalued its PPE or intangible assets or
both and whether the revaluation is based on the valuation by a Registered
Valuer. The auditor, while reporting under this clause, has to consider the
pronouncements of Section 247 of the
(d) The auditor has to consider in line with the principles laid down in AS 10
Revised and IND AS 16, that if a single item of Property Plant & Equipment
(PPE) is revalued, then the entire class of PPE to which that item belongs
should be revalued.
(e) Companies Act 2013 and Companies (Registered Valuers and Valuation)
Rules 2017 which, inter alia, set out the nature and duties of Registered
Valuer under the Companies Act 2013. The auditor has to keep in
perspective that Section 2 (1)(c ) of the above mentioned Valuation Rules
states that: `Asset class' can indicate a distinct group of assets, such as
displaying similar characteristics, that can be classified and requires separate
set of valuers for valuation and may be of the following types :
Date of revaluation carried out by the company.
Name of the Registered Valuer or firm name who carried out the
Valuation exercise, place and date of Valuation Report.
Membership / Licence Number of the Registered Valuer (RV are to be
registered with Insolvency & Bankruptcy Board of India).
Review of Valuation Report issued under Rule 8 of the Valuation Rules
2017, by such Registered Valuer.
Methods and significant assumptions applied in estimating fair values.
Extent to which fair values were determined directly or estimated.
Revaluation surplus, including movement and any restrictions of
distribution of balance to shareholders.
land and building
Plant & machinery
Securities or Financial Assets ( including Intangible assets)
24
(f) The auditor, while reporting under this clause should review the following
Disclosure requirements for revalued assets and additional review areas
under this clause:
As part of audit documentation under SA 230, the auditor may consider the
following additional information with respect to the revaluation:
The auditor may also retain a Copy of the Valuation Report carried out by
such Registered Valuer.
(g) The auditor also needs to specify the amount of change, if change is 10% or
more in the aggregate of the net carrying value of each class of Property,
Plant and Equipment or intangible assets. This change may be a result of
upward or downward revaluation. The requirement of reporting the financial
impact of the revaluation subject to a threshold of 10% limit has to be
complied with by the auditor for the purpose of this clause.
(h) The auditor has to consider that reporting under this clause does not
tantamount to using the work of an expert as laid out in SA 620. Hence the
detailed guidelines prescribed in SA 620 may not be applicable for reporting
under this clause.
(i) It is also imperative to note that for reporting under this clause, the auditor is
not expected to review or comment on the following aspects of the Valuation
Report as issued by the Registered Valuer:
(a) purpose of valuation and appointing authority;
(b) identity of any other experts involved in the valuation;
(c) disclosure of valuer interest or conflict, if any;
(d) inspections and/or investigations undertaken;
(e) nature and sources of the information used or relied upon;
(f) procedures adopted and valuation standards followed;
(g) restrictions on use of the report, if any;
(h) major factors that were taken into account during the valuation;
(i) conclusion; and
( j) caveats, limitations and disclaimers to the extent they explain or
elucidate the limitations faced by valuer.
43. Whether any proceedings have been initiated or are pending against the
company for holding any benami property under the Benami Transactions
(Prohibition) Act, 1988 (45 of 1988) and rules made thereunder, if so, whether
the company has appropriately disclosed the details in its financial
statements; [Paragraph 3(i)(e)]
Relevant Provisions
(a) The duty of the auditor, under this clause is to report:
25
(i) Whether any proceedings have been initiated or are pending against
the company for holding any benami property under the Benami
Transactions (Prohibition) Act, 1988 and rules made thereunder?
(ii) If so, whether the Company has appropriately disclosed the details in its
financial statements?
(b) For the meaning of the relevant terms, reference has to be made to Benami
Property Transactions Act, 1988 and the rules made thereunder (hereinafter
referred to as the Benami Law). Relevant definitions as provided under the
Benami Law are reproduced in Annexure A below.
(c) The Initiating Officer (IO), as the name indicates is an authority that initiates
the proceedings under the Act. As per section 2(19) of the Act, the IO is the
Assistant/ Deputy Commissioner of Income Tax. Chapter IV of the Act deals
with the provisions relating to attachment, adjudication, and confiscation.
(d) The IO collects the material during the investigation of suspicious benami
transaction, and based on such material in his possession if he has reason to
believe that any person is benamidar in respect of the property, then he has
to record the reasons in writing and then issue a Show Cause Notice to such
benamidar asking why the property should not be treated as benami
property. The IO issues the Show Cause Notice (SCN) under section 24(1) of
the Act. A copy of the Show Cause Notice shall be sent to the beneficial
owner also if his identity is known.
(e) The clause shall cover properties which are included under the head
"Property, Plant and Equipment" and "Intangible Assets", since reporting
under the Clause 3(i) pertains to such assets only.
Audit Procedures and Reporting
(f) Under this sub-clause, the auditor is required to examine whether
proceedings have been initiated under Section 24(1) of the Benami Law by
the Initiating Officer and/ or any proceedings being pending against the
Company before the Initiating Officer/ Adjudicating Authority/ Appellate
Tribunal/ High Court/ Supreme Court during any of the preceding financial
years.
(g) In case any proceedings are initiated or pending, the auditor is required to
examine whether appropriate disclosures are made in the financial
statements. Appropriate disclosures shall include nature of property, carrying
value of the property in the books of accounts, status of proceedings before
the relevant authority and the liability that may arise in case the proceedings
are decided against the Company. Depending on the merits of the case, the
auditor is also required to evaluate whether the liability is required to be
disclosed as "Contingent liabilities" or whether provisions are required to be
made.
26
(h) Where the proceedings are initiated post Balance Sheet date but before the
signing of the Auditors Report, reporting under this clause shall became
applicable in case the same relates to a property owned by the Company as
on the Balance Sheet date.
(i) For the purpose of ascertaining whether any proceedings are initiated or are
pending, the auditor should make necessary inquiries from the management
including obtaining a management representation letter. The auditor should
particularly review the legal expenses account to ascertain whether any
expenses have been incurred by the Company in respect of a proceeding
under Benami Law.
(j) It may be noted that reporting under this clause is limited to the adequacy of
disclosure in the financial statements and to cases where proceedings are
initiated with Company being treated as a benamidar. The reporting is not
applicable where the notice is received by the Company as a beneficial
owner.
Annexure A
(8) "benami property" means any property which is the subject matter of
a benami transaction and also includes the proceeds from such property;
(9) benami transaction" means,--
(A) a transaction or an arrangement--
(a) where a property is transferred to, or is held by, a person, and the
consideration for such property has been provided, or paid by, another
person; and
(b) the property is held for the immediate or future benefit, direct or indirect,
of the person who has provided the consideration,
except when the property is held by--
(i) a Karta, or a member of a Hindu undivided family, as the case
may be, and the property is held for his benefit or benefit of other
members in the family and the consideration for such property has
been provided or paid out of the known sources of the Hindu
undivided family;
(ii) a person standing in a fiduciary capacity for the benefit of another
person towards whom he stands in such capacity and includes a
trustee, executor, partner, director of a company, a depository or a
participant as an agent of a depository under the Depositories Act,
1996 (22 of 1996) and any other person as may be notified by the
Central Government for this purpose;
(iii) any person being an individual in the name of his spouse or in the
name of any child of such individual and the consideration for
27
such property has been provided or paid out of the known sources
of the individual;
(iv) any person in the name of his brother or sister or lineal ascendant
or descendant, where the names of brother or sister or lineal
ascendant or descendent and the individual appear as joint-
owners in any document, and the consideration for such property
has been provided or paid out of the known sources of the
individual; or
(B) a transaction or an arrangement in respect of a property carried out or
made in a fictitious name;
(C) a transaction or an arrangement in respect of a property where the
owner of the property is not aware of, or, denies knowledge of, such
ownership; or
(D) a transaction or an arrangement in respect of a property where the
person providing the consideration is not traceable or is fictitious.
(10) "benamidar" means a person or a fictitious person, as the case may be, in
whose name the benami property is transferred or held and includes a
person who lends his name;
(19) "Initiating Officer" means an Assistant Commissioner or a Deputy
Commissioner as defined in clauses (9A) and (19A) respectively of section 2
of the Income-tax Act, 1961;
(26) "property" means assets of any kind, whether movable or immovable,
tangible or intangible, corporeal or incorporeal and includes any right or
interest or legal documents or instruments evidencing title to or interest in the
property and where the property is capable of conversion into some other
form, then the property in the converted form and also includes the proceeds
from the property;
44. Whether physical verification of inventory has been conducted at
reasonable intervals by the management and whether, in the opinion of the
auditor, the coverage and procedure of such verification by the management
is appropriate; whether any discrepancies of 10% or more in the aggregate
for each class of inventory were noticed and if so, whether they have been
properly dealt with in the books of account; [Paragraph 3(ii)(a)]
Relevant Provisions
(a) The clause requires the auditor to comment whether the management has
conducted physical verification of inventory at reasonable intervals, and
whether the coverage and procedure of such verification by the management
is appropriate. The clause also requires the auditor to comment on whether
any discrepancies of 10% or more in the aggregate for each class of
inventory were noticed and if so, whether they have been properly dealt with
28
in the books of accounts.
(b) According to Accounting Standard (AS) 2, "Valuation of Inventories":
"Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production
process or in the rendering of services."
(c) As per Indian Accounting Standard (Ind AS) 2, "Inventories",
"Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production
process or in the rendering of services."
(d) Inventories encompass goods purchased and held for resale, for example,
merchandise purchased by a retailer and held for resale, computer software
held for resale, or land and other property held for resale. Inventories also
encompass finished goods produced, or work in progress being produced, by
the enterprise and include materials, maintenance supplies, consumables
and loose tools awaiting use in the production process. Inventories do not
include spare parts, servicing equipment and standby equipment which meet
the definition of property, plant and equipment as per AS 10, Property, Plant
and Equipment. Such items are accounted for in accordance with Accounting
Standard (AS) 10, Property, Plant and Equipment.
Costs incurred to fulfill a contract with a customer that does not give rise to
inventories (or assets within the scope of another Standard) are accounted
for in accordance with Ind AS 115, Revenue from Contracts with Customers.
Audit Procedures and Reporting
(e) The auditor should obtain reasonable assurance about existence and
condition of inventories. Observation of physical verification/ examination of
records of verification inventory is the primary source of evidence for the
purpose of reporting under this clause. Physical verification of inventory is
the responsibility of the management of the company which should verify all
material items at least once in a year and more often in appropriate cases. It
is, however, necessary that the auditor satisfies himself that the physical
verification of inventories has been conducted at reasonable intervals by the
management and that there is adequate evidence on the basis of which the
auditor can arrive at such a conclusion. For example, the auditor may
examine the documents relating to physical verification conducted by the
management during the year as also at the end of the financial year covered
by the auditor's report.
29
(f) There are two principal methods of physical verification of inventories:
periodic and continuous. Under the periodic physical verification method,
physical verification of inventories is carried out at a single point of time,
usually at the year-end or at a selected date just prior to or shortly after the
year-end. Under the continuous physical verification method, physical
verification is carried out throughout the year, with different items of inventory
being physically verified at different points of time. However, the verification
programme is normally so designed that each material item is physically
verified at least once in a year and more often in appropriate cases. The
continuous physical verification method is effective when a perpetual
inventory system of record-keeping is also in existence. Some entities use
continuous physical verification methods for certain stocks and carry out a
full count of other stocks at a selected date.
(g) What constitutes "reasonable intervals" depends on circumstances of each
case. The periodicity of the physical verification of inventories depends upon
the nature of inventories, their location and the feasibility of conducting a
physical verification. The management of a company normally determines
the periodicity of the physical verification of inventories considering these
factors. Normally, wherever practicable, all the material items of inventories
should be verified by the management of the company at least once in a
year. It may be useful for the company to determine the frequency of
verification by `A-B-C' classification of inventories, `A' category items being
verified more frequently than `B' category and the latter more frequently than
`C' category items.
(h) The Order also requires the auditor to comment on whether in his opinion,
the coverage and procedure of such verification by the management is
appropriate. What constitutes "appropriate" is a matter of professional
judgment. The coverage and procedure of such verification will normally not
be appropriate if it is not reasonable and adequate in relation to the size of
the company and nature of its business. Observation of such physical
verification/ examination of records of verification inventory is the primary
source of evidence for the purpose of reporting under this clause. While the
physical verification of inventories is primarily the duty of the management,
the auditor is expected to examine the methods, procedures and the
coverage of such verification. The auditor may, if considered appropriate by
him, be also present at the time of stock-taking. Where the auditor is present
at the time of stock-taking, he should observe the procedure and coverage of
physical verification adopted by the stock-taking personnel to ensure that the
instructions issued in this behalf are being actually followed. The auditor
should also perform test-counts to satisfy himself about the effectiveness of
the count procedures.
(i) The auditor may compare the final inventories with stock records and other
corroborative evidence, e.g., inventory statements submitted to banks, etc.,
for verification purposes. The auditor should establish the reasonableness
and adequacy of procedures adopted for physical verification of inventories
30
and its coverage having regard to the nature of inventories, their locations,
quantities, value and feasibility of conducting the physical verification. This
would require the auditor to make use of his professional judgment.
(j) The auditor should ascertain whether the management has instituted
adequate cut-off procedures. For example, he may examine a sample of
documents evidencing the movement of inventories into and out of stores,
including documents pertaining to periods shortly before and shortly after the
cut-off date, and check whether the inventories represented by those
documents were included or excluded, as appropriate, during the stock-
taking.
(k) The auditor may determine the appropriateness and the adequacy of the
procedures and coverage of physical verification of inventories by examining
the related records and documents. These records and documents would
also include the policy of the company regarding physical verification. The
following are the documents which can be examined by the auditor in this
regard:
a) written instructions given by the management to the concerned staff
engaged in the verification process;
b) physical verification inventory sheets duly authenticated by the field
staff and responsible officials of the company;
c) summary sheets/consolidation sheets duly authenticated by the
responsible officials;
d) internal memos etc., with respect to the issues arising out of physical
verification of inventory;
e) extent of coverage of inventory having regard to their value;
f) any other relevant documents evidencing physical verification of
inventory.
While commenting on this clause, the auditor should point out the specific
areas where he believes the procedure of inventory verification is not
reasonable or adequate.
(l) The auditor should also pay attention to ascertaining whether the
management has established adequate procedures for physical verification
of inventories, so that in the normal circumstances, the programme of
physical verification will cover all material items of inventory at least once
during the year. The auditor should also determine whether the procedures
for identifying damaged and obsolete items of inventory are well designed
and operate properly. For items of stock which are held by third parties, the
auditor should obtain confirmations for stock held by them. In case the
procedures and coverage of physical verification of inventories, in the opinion
of the auditor, is not appropriate, the auditor has to report the same.
(m) The Order further requires the auditor to examine whether any discrepancies
31
of 10% or more in the aggregate for each class of inventory have been
noticed on verification of inventories when compared with book records. As
per Paragraph 27 of Accounting Standard (2) "Valuation of Inventories",
common classifications of inventories are raw materials and components,
work in progress, finished goods, stores and spares, and loose tools. As per
paragraph 37 of Indian Accounting Standard (Ind AS) 2, "Inventories",
Common classifications of inventories are merchandise, production supplies,
materials, work in progress and finished goods. Only in cases where any a
discrepancy of 10% or more arises in value, for any class of inventory, does
the auditor have to report the fact as to whether they have been appropriately
dealt with in the books of accounts. In case where the same has not been
appropriately dealt with in the books of accounts, the extent of the
discrepancies and its impact on the financial statements need to be reported.
Such an examination is possible when quantitative records are maintained
for inventories but in many cases circumstances may warrant that records of
individual issues (particularly for stores items) are not separately maintained
and the closing inventory is established only on the basis of a year-end
physical verification. Where such day-to-day records are not maintained, the
auditor will not be able to arrive at book value of inventories except on the
basis of an annual reconciliation of opening inventory, purchases and
consumption. This reconciliation is possible when consumption in units can
be co-related to the production, or can be established with reasonable
accuracy. Where such reconciliation is not possible, the auditor would be
unable to determine the discrepancies. In such cases where the discrepancy
cannot be established, the auditor will have to report that he is unable to
determine the discrepancy, if any, on physical verification for the item or
class of items to be specified.
45. Whether during any point of time of the year, the company has been
sanctioned working capital limits in excess of five crore rupees, in
aggregate, from bank or financial institutions on the basis of security of
current assets; whether the quarterly returns or statements filed by the
company with such banks or financials are in agreement with the books of
account of the company, if not, give details;[Paragraph 3(ii)(b)]
Relevant Provisions
(a) The clause requires the auditor to comment on whether during any point of
time of the year, the Company has been sanctioned working capital limits in
excess of Rs. 5 crores, in aggregate, from banks or financial institutions on
the basis of security of current assets and whether the quarterly returns or
statements filed by the Company with such banks or financial institutions are
in agreement with the books of account of the Company. The clause does
not require reporting where such limits are unsecured or sanctioned on the
basis of assets other than current assets.
(b) The Guidance Note on Terms used in Financial Statements issued by the
32
Institute of Chartered Accountants of India defines "working capital" to mean
the funds available for conducting day-to-day operations of an enterprise,
also represented by the excess of current assets over current liabilities
including short-term loans.
The working capital of an organization generally indicates the liquidity levels
of companies for managing day-to-day expenses and covers inventory, cash,
accounts payable, accounts receivable and short-term debt that is due. It is
derived from several organizational operations such as debt and inventory
management, supplier payments and collection of revenues.
Working capital could be in the form of credit facilities which are fund based,
wherein immediate flow of funds is available to the borrowers, which includes
cash credit or bank overdraft, trade credit, working capital loans,
purchase/discount of bills, factoring, etc. It could also be non-fund based
where there is no immediate outflow of funds from the lender which includes
letter of credit, bank guarantees, etc.
(c) Schedule III to the Companies Act, 2013 defines a current asset as under
"An asset shall be classified as current when it satisfies any of the following
criteria:--
a) it is expected to be realised in, or is intended for sale or consumption in,
the company's normal operating cycle;
b) it is held primarily for the purpose of being traded;
c) it is expected to be realised within twelve months after the reporting
date; or
d) it is cash or cash equivalent unless it is restricted from being exchanged
or used to settle a liability for at least twelve months after the reporting
date. "
The aforementioned Guidance Note also defines "current assets" to mean
cash and other assets that are expected to be converted into cash or
consumed in the production of goods or rendering of services in the normal
course of business. It includes, inter alia, cash and cash equivalents,
accounts/trade receivables, stock-in-trade, marketable securities, prepaid
liabilities, and other liquid assets.
Audit Procedures and Reporting
(d) It may be noted that for the purpose of checking the limit of Rs. 5 crores, the
auditor is required to see the working capital sanction limit and not its
utilization. The auditor should determine the sanction limit with reference to
the sanction letter issued by banks or financial institutions and relevant
agreements executed with them. The utilisation may be less than the
sanctioned limit of Rs 5 crores but such cases will be covered for the
purpose of reporting. Alternatively the sanctioned limit may be less than Rs 5
crores but due to excess withdrawals/levy of interest/temporary
33
overdrawings, the balance may exceed Rs 5 crores. Such cases are beyond
the scope of reporting under this clause. The term "sanction" here should
include fresh sanction during the year as well as limits renewed or due for
renewal during the year. Moreover, both fund based and non-fund based
credit facilities availed by the organization should be considered for the
purpose of checking the limit. It is also pertinent to note that the aforesaid
threshold of Rs. five crores should be examined for any day during the year
for which the reporting is to be made, and not as at the end of the financial
year. This would mean that even if the limit exceeds Rs. five crores for a day,
the auditor is liable to report the same. The limit would cover the working
capital limits by all the banks and financial institutions in aggregate. However,
this would exclude any working capital limits which are sanctioned without
the security of the organization's current assets.
(e) The auditor should examine the important terms in the sanction letters and
other correspondences with the lender and the documents, if any, evidencing
charge in respect of such facilities availed and the Register of Charges. The
Order further mandates the auditor to examine whether the book balances
agree with the quarterly returns or statements submitted to the lenders (bank
or financial institutions). The responsibility of the submission of such
returns/statements to banks/financial institutions is that of the
management. It is, however, necessary that the auditor satisfies himself that
such quarterly returns/statements agree with the books of accounts and that
there is adequate evidence on the basis of which the auditor can arrive at
such a conclusion. The auditor should obtain a list of the statements or
returns which are submitted to the banks/financial institutions and
compare the same with the books of accounts as to its accuracy or
otherwise. The auditor is not required to audit such quarterly
returns/statements, but only compare the same with the books of accounts
and report disagreement, if any. The auditor is also not required to audit the
books of accounts on the basis of which such statements/quarterly returns
have been prepared and submitted to the banks/financial institutions.
Moreover, although organisations may be submitting monthly returns to the
lenders, reporting under this clause is confined to the quarterly returns only.
Therefore in such scenarios the auditor is required to only verify returns as at
the end of each quarter and not for other months of the same quarter. For
instance, if the entity submits returns/statements on a monthly basis say for
the months of April, May and June, the auditor in this case would be required
to verify the return solely for the month of June, being the relevant return as
at the end of a quarter.
Such statements would include stock statements, book debt statements,
credit monitoring arrangement reports, statements on ageing analysis of the
debtors/other receivables, and other financial information to be submitted
in stipulated format on a quarterly basis to lenders, etc. Any other
information which is submitted to the lenders should also be examined
by the auditor in this regard. He should also examine the reconciliation
34
statements, if any, prepared by the entity.
If any discrepancy arises when such statements are compared with the
books of accounts, the auditor is liable to report the same. Instances of
such differences may be relating to difference in value of stock, amount
of debtors/creditors, age analysis of such debtors, etc., between the
books of accounts and the returns/statements submitted to banks. The
auditor has to use his professional judgment to determine the materiality
and the relevance of the discrepancy to the users of financial statements
while reporting under this clause.
46. Whether during the year the company has made investments in ,
provided any guarantee or security or granted any loans or advances in the
nature of loans , secured or unsecured to companies, firms, Limited Liability
Partnerships or other any other parties, If so,
a) whether during the year the company has provided loans or provided
advances in the nature of loans, or stood guarantee, or provided
security to any other entity [not applicable to companies whose
principal business is to give loans], if so, indicate -
(A) the aggregate amount during the year, and balance outstanding at
the balance sheet date with respect to such loans or advances and
guarantees or security to subsidiaries, joint ventures and
associates;
(B) the aggregate amount during the year, and balance outstanding at
the balance sheet date with respect to such loans or advances and
guarantees or security to parties other than subsidiaries, joint
ventures and associates;
b) Whether the investments made, guarantees provided, security given
and the terms and conditions of the grant of all loans and advances in
the nature of loans and guarantees provided are not prejudicial to the
company's interest;
c) in respect of loans and advances in the nature of loans, whether the
schedule of repayment of principal and payment of interest has been
stipulated and whether the repayments or receipts are regular;
d) If the amount is overdue, state the total amount overdue for more than
ninety days, and whether reasonable steps have been taken by the
company for recovery of the principal and interest.
e) whether any loan or advance in the nature of loan granted which has
fallen due during the year, has been renewed or extended or fresh
loans granted to settle the overdues of existing loans given to the same
parties, if so, specify the aggregate amount of such dues renewed or
extended or settled by fresh loans and the percentage of the aggregate
to the total loans or advances in the nature of loans granted during the
35
year [not applicable to companies whose principal business is to give
loans];
f) whether the company has granted any loans or advances in the nature
of loans either repayable on demand or without specifying any terms or
period of repayment, if so, specify the aggregate amount, percentage
thereof to the total loans granted, aggregate amount of loans granted to
Promoters, related parties as defined in clause (76) of section 2 of the
Companies Act, 2013; [Paragraph 3(iii)]
Relevant Provisions
(a) There are six clauses under paragraph 3(iii) of the Order. It is clarified that
the auditor's comments on all the six clauses are to be made with reference
to all the loans/advances in nature of loan granted, guarantee or security
provided to companies, firms, limited liability partnerships or any other
parties. Sub-clause (a) and (e) are not applicable to companies whose
principal business is to give loans (for example financial institutions, NBFCs
etc.)
(b) Clause (iii)(a) is applicable to all companies except for companies whose
principal business is to give loans. The clause requires determination of
gross amount (i.e. without adjusting any subsequent settlements) of all loans,
advances in nature of loans, guarantees, security provided during the year
(emphasis added) to subsidiaries, joint ventures, associates and to any other
parties. The expression subsidiaries, joint ventures, associates would be
interpreted in accordance with provisions of the Companies Act, 2013.
(c) Whether an advance is in the nature of a loan would depend upon the
circumstances of each case. For example, a normal advance against an
order, in accordance with the normal trade practice would not be an advance
in nature of a loan. But if an advance is given for an amount which is far in
excess of the value of an order or for a period which is far in excess of the
period for which such advances are usually extended as per the normal trade
practice, then such an advance may be in nature of a loan to the extent of
such excess. When a trade practice does not exist, a useful guide would be
to consider the period of time required by the supplier for the execution of the
order, that is, the time between the purchase of the raw material and the
delivery of the finished product. An advance which exceeds the operating
cycle would normally be an advance in nature of loan unless there is
evidence to the contrary. Similarly, a stipulation regarding interest may
normally be an indication that the advance is in nature of a loan but this by
itself is not conclusive and there may also be advances which are not in the
nature of loan and which carry interest.
36
Audit Procedures and Reporting
(d) The duty of the auditor, under this clause, is to determine whether the
company during the year has made investments in, provided any guarantee
or security or granted any loans/advances in nature of loans, secured or
unsecured to companies, firms, limited liability partnerships or any other
parties. If the company has done so, the auditor should report on the matters
specified in sub-clauses (a) to (f) of the clause 3(iii). The auditor is required
to disclose the requisite information in his report in respect of all the parties.
Further, there is no stipulation regarding the loan being given in cash or in
kind. In the absence of such stipulation, the auditor is required to disclose the
requisite information as specified in sub-clauses (a) to (f) of the clause 3(iii),
in his report in respect of all kind of loans whether long term or short term,
whether given in cash or in kind to any party(s).
(e) As a starting point, the auditor should obtain an understanding around
controls and procedures established by the company with regard to making
of investments, provision of guarantees, security, grant of loans and
advances in nature of loan and check the operating effectiveness of the
same. For example, important consideration while evaluating the controls
around loans and investments could be purpose for which loans was given,
permissibility as per the applicable law, terms for which loans made, person
authorized etc.
(f) In relation to this clause it is suggested that the auditor should ensure
compliance with all the requirements of sections 179, 180, 185, 186, 187 and
rules there under. Further, depending upon the nature of the operations of
the company, the auditor would be required to consider the sectoral laws for
instance provisions of the Insurance Act, 1938 where the company is an
insurance company.
(g) ICAI has issued Guidance Note on Audit of Investments, Audit of Loans and
advances and on audit of liabilities and same should be considered for
defining the audit procedures.
(h) The auditor should obtain details of all investments made, guarantee or
security provided or loans/advances in nature of loans granted during the
years from the management. The details should include, name of the parties,
relationship of the company with the parties (i.e. whether subsidiary, joint
venture or associate, promoter, any other related party etc.), gross amount of
investments made, guarantees/security provided, loans/advances in nature
of loans granted during the year, date of settlement of guarantee/loans /
advances in nature of loan as per the terms of contracts etc. Further, in
respect of guarantees, security, loans and advances in nature of loans the
details of amounts outstanding as at March 31 should also be obtained from
the management.
37
(i) It may be noted that several types of guarantees are in vogue. The type of
guarantee within the scope of the clause is the one which the company has
provided to a bank or financial institution in respect of loans taken by a third
party. Consequently, auditor's response in this clause would be limited to
financial guarantees only.
(j) Guarantee given by a company is a contingent liability. In respect of
contingent liabilities, the auditor is normally concerned with seeking
reasonable assurance that all contingent liabilities are identified and properly
valued and disclosed as an off-balance sheet item. The auditor should obtain
a written representation from the management that: (i) there are no
guarantees issued up to the year-end which are yet to be recorded; and (ii)
all obligations in respect of guarantees have been duly recorded in the
register of guarantees and disclosed.
(k) The auditor should also examine the register of guarantees, if any,
maintained by the company. The auditor should also obtain a list of the
guarantees issued by the company during the year from the management of
the company which should be checked with the register of guarantees. The
auditor should perform appropriate procedures and examine records like the
minutes book of the board meetings, and general meetings to determine that
all the guarantees given by the company have been included in the list. The
auditor should also ascertain whether the guarantees have been issued by or
under sanction of the competent authority. In case of listed companies,
pursuant to requirement of regulation 34(3) and 53(f) of SEBI LODR
Regulations holding company is required to disclose Loans and advances in
the nature of loan to subsidiaries, associate and to the firms/companies in
which directors are interested by name and amount in Schedule V. As part of
examination, auditor should check such disclosures.
(l) It may so happen that a party might have taken a loan/advances in nature of
loan from a company and repaid it during the same financial year. Therefore,
while examining the loans, the auditor should also take into consideration the
loan/advances in nature of loan transactions that have been squared-up
during the year and report such transactions under this clause. For example,
the company has, during the financial year, granted a loan of Rs. 1,00,000/-
to a firm and the firm repays the loan during the financial year concerned.
The auditor is also required to consider such transactions while commenting
upon this clause.
The auditor may report under this clause in the following format:
Guarantees Security Loans Advances
in nature
of loans
Aggregate amount during the
year
38
- Subsidiaries
- Joint Ventures
- Associates
- Others
Balance outstanding as at
balance sheet date
- Subsidiaries
- Joint Ventures
- Associates
- Others
47. Whether the investments made, guarantees provided, security given and
the terms and conditions of the grant of all loans and advances in nature of
loans and guarantees provided are not prejudicial to the company's interest;
[Paragraph 3(iii)(b)]
Relevant Provision
(a) Clause (iii)(b) covers determination of terms and conditions at the time of the
grant of the loan and advances in nature of loan. Additionally, it requires
assessment of terms and conditions in which the company has made an
investment, provided a guarantee or given a security.
Audit Procedures and Reporting
(b) Under this clause the auditor's duty is to determine whether, in his opinion,
the terms and conditions of the investments, guarantee, security,
loans/advances in nature of loans granted during the year are prejudicial to
the interest of the company.
(c) In case of loans/advances in nature of loans, the "terms and conditions"
would primarily include rate of interest, security, terms and period of
repayment and restrictive covenants nature of entity i.e. whether given to a
start-up or an entity having established track record etc. In determining
whether the terms of the loans are prejudicial to the company's interest, the
auditor would have to give due consideration to the other factors connected
with the loan, including its ability to lend, terms of its borrowings, borrower's
financial standing, credit rating, if available, the nature of the security, rate of
interest, and so on. In respect of advances in nature of loans, the auditor
might find it difficult to ascertain the "terms and conditions" since such loans
are camouflaged as advances. Accordingly, as part of audit procedures, the
39
auditor should obtain the listing of all advances and compare them with the
underlying contractual agreements (for example purchase order) to ascertain
the excess of an amount granted/excess of credit period extended. Further,
in respect of advances which are long outstanding due auditor should
evaluate the trade terms and enquire the rationale for non-provisioning
against the same. Where auditor does not have reason to believe contrary
such advances should be reported under this clause.
(d) Similarly in respect of investments made, to assess whether same are
prejudicial to the company's interest, auditor would have to give due
consideration to the factors connected with such an investment, including
company's ability to make such investment, covenant's attached and so on.
(e) With regard to guarantees/security the auditor should review the issuance of
guarantee(s) to establish the reasonableness thereof in the light of previous
experience and knowledge of the current year's activities. In determining
whether the guarantee is prejudicial to the interest of the company, the
auditor would have to give due consideration to a number of factors
connected with the guarantee, including the financial standing of the party on
whose behalf the company has given the guarantee, party's ability to borrow,
the nature of the security offered by the party, the availability of alternative
sources of finance and the urgency of the borrowing, if available, for which
the company has given guarantee and so on. The auditor should obtain this
information from the management.
(f) Checking compliance with applicable law would also assist the auditor to
identify whether terms are prejudicial to the interest of the company. For
example, section 186 of the Companies Act 2013 states that no investment
shall be made, or security can be given by the company unless the resolution
sanctioning it is passed at a meeting of the Board with the consent of all
directors present in the meeting. Similarly, in respect of loans, compliance
conditions as per this section include obtaining prior approval of financial
institutions, ensuring rate of interest is not lower than the prevailing yield of
one year, 3 year, five year or ten year government security close to the tenor
of the loan etc.
(g) Further, the auditor may also come across a situation where the company
has a policy of providing loans at concessional rates of interest to its
employees and such a loan has been given to a relative of the director who is
also an employee of the company. In such a case also, the auditor would be
required to examine and comment whether loan is prejudicial to the interests
of the company. It may, however, be noted that normally such terms as per
the policy followed by the company cannot be said to be prejudicial to the
interest of the company if other employees of the company also receive the
loan on the same terms.
(h) It should be noted that reporting requirement under this clause is applicable
to all companies including those which are engaged in the financing business
and thus sector specific legal requirements would need to be considered by
40
the auditor. For examples in case of banks, NBFC's guidelines issued by
Reserve Bank of India would need to be assessed.
(i) It may be mentioned that clause (a) of sub-section (1) of section 143 of the
Act also requires the auditor to inquire whether loans and advances made by
the company on the basis of security have been properly secured and
whether the terms on which they have been made are prejudicial to the
interests of the company or its members.
While addressing the requirement of this clause, the auditor may reach a
conclusion to express an unfavorable comment. Following is an example of
an unfavourable comment by the auditor under this clause:
"According to the information and explanations given to us and based on the
audit procedures conducted by us, we are of the opinion that the guarantee
provided and the terms and conditions of loans granted by the company to its
associate, (guarantee provided during the year aggregating to Rs. ___total
loan amount granted Rs ---- and balance outstanding as at balance sheet
date Rs -- ) are prejudicial to the company's interest on account of the fact
that the guarantee provided without obtaining requisite approvals as required
under section 186 of the Companies Act 2013 and the loans have been
granted at an interest rate of X% per annum which is significantly lower than
the cost of funds to the company and also lower than the prevailing yield of
government security close to the tenor of the loan".
48. In respect of loans and advances in the nature of loans, whether the
schedule of repayment of principal and payment of interest has been
stipulated and whether the repayments or receipts are regular; [Paragraph
3(iii)(c)]
Relevant Provision
(a) This part of the clause requires the auditor to report upon the stipulation of
schedule of repayment of principal and payment of interest and on regularity
of repayments of principal amount of loans/advances in nature of loan and
receipts of interest thereon. As mentioned in paragraph 46, advances in
nature of loans may not necessarily carry an interest. Clauses (iii)(c), (iii)(d)
and (iii)(e) cover the loans and advances in nature of loans granted during
the year and also all loans having opening balances.
Audit Procedures and Reporting
(b) The auditor has to examine from the loan agreements / mutually agreed
letter of arrangement, as the case may be, whether the schedule of
repayment of principal and payment of interest has been stipulated at the
time of sanction.
41
(c) The auditor has to examine whether the repayment of principal and receipt of
interest are regular. The word `regular' should be taken to mean that the
principal and interest should normally be received whenever they fall due,
respectively.
(d) In case where the auditee company is a non-banking finance company, the
auditor, for reporting under this clause, would also need to refer various
directions for non-banking finance companies issued by Reserve Bank of
India.
(e) If there is no such agreement / arrangement or the agreement / arrangement
does not contain the schedule of repayment of principal and payment of
interest, the auditor shall report that there is no stipulation of schedule of
repayment of principal and payment of interest and may report that he is
unable to make specific comment on the regularity of repayment of principal
& payment of interest, in such cases. Advances in nature of loan usually
does not contain the schedule of repayment and payment of interest and
thus would get reported under this clause.
(f) In case where the schedule of repayment of principal & payment of interest is
stipulated but repayment of principal or payment of interest is not regular
then the auditor may report the fact and may give no. of cases and remarks,
if any.
(g) Suggestive format for reporting under this Clause:
Name of the Amount Due date Extent of Remarks, if
entity delay any
49. If the amount is overdue, state the total amount overdue for more than
ninety days, and whether reasonable steps have been taken by the company
for recovery of the principal and interest. [Paragraph 3(iii)(d)]
Relevant Provisions
(a) This clause requires the auditor to state the total amount overdue for more
than ninety days and whether reasonable steps have been taken by the
company for recovery of the principal and interest. An amount is considered
to be overdue when the payment has not been received on the due date as
per the lending arrangement. In such cases, the auditor has to examine the
steps, if any, taken for recovery of this amount. It may, however, be noted
that the scope of the auditor's inquiry under this clause is expanded to all
loans/advances in nature of loans given by the company to any party.
Audit Procedures and Reporting
(b) Under this clause, the auditor is required to disclose total amount overdue for
more than 90 days. The auditor should examine the agreement or other
42
documents containing the schedule of repayment of the loans/advances in
nature of loans granted to all parties. The auditor should then verify whether
the repayments as per the books of account are in accordance with the
schedule of repayment of the loans/advances in nature of loan as per
agreement or arrangement. This examination would enable the auditor to
determine the total amount overdue (principal and interest) for more than 90
days from such parties as at balance sheet date. The auditor should disclose
the aggregate of the total amount of overdue for more than 90 days in
respect of loans/advances in nature of loan granted to all parties.
(c) While examining whether reasonable steps have been taken by the company
for recovery of principal and interest, the auditor would have to consider the
facts and circumstances of each case, including the amounts involved. It is
not necessary that steps to be taken must necessarily be legal steps.
Depending upon the circumstances, the degree of delay in recovery and
other similar factors, issue of reminders or sending of an advocate's or
solicitor's notice, may amount to "reasonable steps" even though no legal
action is taken. The auditor is not, therefore, required to comment on the
mere absence of legal steps if he is otherwise satisfied that reasonable steps
have been taken by the company. The auditor should obtain sufficient
appropriate audit evidence to support the fact that reasonable steps have
been taken for recovery of the principal and interest of loans granted by the
company. The auditor should ask the management to give in writing, the
steps which have been taken. The auditor should arrive at his opinion only
after consideration of the management's representations and other relevant
evidence.
50. Whether any loan or advance in the nature of loan granted which has
fallen due during the year, has been renewed or extended or fresh loans
granted to settle the overdues of existing loans given to the same parties, if
so, specify the aggregate amount of such dues renewed or extended or
settled by fresh loans and the percentage of the aggregate to the total loans
or advances in the nature of loans granted during the year [not applicable to
companies whose principal business is to give loans] [Paragraph 3(iii)(e)];
Relevant Provisions
(a) This clause is a new reporting requirement. This Clause requires reporting in
respect of loan or advance in the nature of loan granted which has fallen due
during the year and has been renewed or extended or fresh loans granted to
settle the overdues of existing loans given to the same parties. The clause is
inserted to identify instances of `ever-greening' of loans/advances in nature
of loans. [Note: The term `evergreening' is not defined in statute. However, in
general parlance it implies an attempt to mask loan default by giving new
43
loans to help delinquent borrowers repay principal or pay interest on old
loans.]
Audit Procedures and Reporting
(b) Auditor has to obtain the list of parties to whom loan or advance in the nature
of loan granted has fallen due during the year and has been renewed or
extended or fresh loans granted to settle the overdues of existing loans.
(c) The auditor has to examine the loan agreements / mutually agreed letter of
arrangement with such parties, as the case may be, to ascertain the terms of
renewal/extension of loan/advances in nature of loan.
(d) Although literal interpretation would be to report only those instances where
loans/advances in nature of loans were renewed or extended or fresh loans
granted to settle the overdues of existing loans given to the same parties.
However, where auditor comes across instances where fresh loan was given
close to the settlement schedule for instance 7 days prior to date of
settlement of loan, such instances should also be reported factually.
(e) In respect of loans falling due as on the balance sheet date and which were
renewed/extended/settled post balance sheet and before the date of audit
report, same should also be considered for reporting under this clause.
Further, same matter would also get reported next year.
Suggestive format for reporting under this Clause
Name of the parties
Aggregate amount dues renewed or extended or settled by fresh loans
Percentage of the aggregate to the total loans or advances in the nature of
loans granted during the year
51. Whether the company has granted any loans or advances in the nature of
loans either repayable on demand or without specifying any terms or period
of repayment, if so, specify the aggregate amount, percentage thereof to the
total loans granted, aggregate amount of loans granted to Promoters, related
parties as defined in clause (76) of section 2 of the Companies Act, 2013
[Paragraph (iii)(f)];
Relevant Provisions
(a) This clause is a new reporting requirement. The clause requires reporting of
the gross amount in respect of loans or advances in the nature of loans
either repayable on demand or without specifying any terms or period of
repayment. If response is `yes' auditors are required to report the aggregate
amount of loans granted to Promoters under section 2(69), related parties as
defined in clause (76) of section 2 of the Companies Act, 2013.
44
Audit Procedures and Reporting
(b) Auditor has to obtain the list of promoters and related parties as per section
2(69) and section 2(76) respectively.
(c) Auditor should consider the requirements of Standard on Auditing (SA) 550
Related Parties
(d) The auditor has to examine from the loan agreements / mutually agreed
letter of arrangement with such parties, as the case may be to ascertain
whether the agreement / arrangement does not contain the schedule of
repayment of principal and payment of interest or as per the
agreement/arrangement loans are repayable on demand.
(e) In case auditor identifies loans/advances in nature of loans are granted to
promoters or related parties which are repayable on demand or without
specifying any terms or period of repayment, the auditor should state the fact
and report the gross amount of such loans/advances in nature of loan
granted during the year.
Suggested format for reporting under this clause is given below:
All Parties Promoters Related Parties
Aggregate of loans/advances in
nature of loan
- Repayable on demand
- Agreement does not specify
any terms or period of
repayment
Percentage of loans/advances in
nature of loan to the total loans
52. In respect of loans, investments, guarantees, and security whether
provisions of section 185 and 186 of the Companies Act, 2013 have been
complied with. If not, provide the details thereof. [Paragraph 3(iv)]
A. Compliance of Section 185 of the Companies Act 2013: Loan to directors,
etc.
Relevant Provisions
(a) Under this clause the auditor is required to report on the compliance of
Section 185 of the Act. Reference may be made to Section 185 of
Companies Act, 2013.
45
Audit Procedures and Reporting
(b) For this purpose, the auditor should carry out the following procedures:
(i) Obtain from the management the details of the directors or any other
person in whom the director is interested. He may also check the
details of the persons covered under this clause from Form MBP-1 and
from the Register maintained u/s 189 of the Act.
(ii) Obtain and check the details of the transactions carried out with such
persons, including of any guarantee given and security provided.
(iii) Further examine the details to find out whether any of the transaction is
attracting the provisions of section 185 of the Act.
(iv) In case of transactions that are covered under the exceptions as
provided under section 185, the auditor should obtain the necessary
evidence in support of such exception.
(c) Section 185 prohibits advance of any loan to directors, etc., directly or
indirectly. What is an indirect loan is not defined in section 185 or elsewhere
in the Act. Indirect is interpreted in case of Dr. Fredie Ardeshir Mehta v.
Union of India [1991] 70 Comp. Cas. 210 (Bom.) to mean a loan to a director
through the agency of one or more intermediaries. For example, if company
A borrows from company B and lends the same to company C and loan from
B to C is covered by section 185. In this case section 185 shall also be
applicable in case of lending from company A to C because it would be
construed as an indirect loan from B to C.
(d) The auditor should report the nature of non-compliance, the maximum
amount outstanding during the year and the amount outstanding as at the
balance sheet date in respect of
(i) the Directors; and
(ii) persons in whom directors are interested (specify the relationship with
the Director concerned).
B. Compliance of Section 186 of the Companies Act 2013: Loan and
investment by company
Relevant Provisions
(a) Under this clause the auditor is also required to report on the compliance of
Section 186 of the Act, which governs giving of loans, and guarantee or
providing security in connection with a loan, by a company to any person or
other body corporate and acquiring securities of any other body corporate by
a company. The section also prohibits a company from making investments
through more than two layers of investment companies. Reference may be
made to Section 186 and relevant extract of Rules 11, 12 & 13 of Companies
(Meeting of Board and its Powers) Rules, 2014.
46
Audit Procedures and Reporting
(b) The duty of the auditor under this clause is to determine whether the loans
and investments made by the company comply with the requirements of the
provisions of Section 186 of the Act.
For this purpose, the auditor should:
(i) Obtain the details of, loans given to any person or other body corporate,
guarantee given or security provided in connection with a loan to any
other body corporate or person and securities acquired of any other
body corporate by way of subscription, purchase or otherwise, made
during the year as well as the outstanding balances as at the beginning
of the year.
(ii) Check whether, at any point of time during the year in case of aforesaid
transactions, the company has exceeded the limit of sixty per cent of its
paid-up share capital, free reserves and securities premium account or
one hundred per cent of its free reserves (as defined in section 2(43) of
the Act and securities premium account, whichever is more.
If it exceeds the limits specified above, whether prior approval by
means of a special resolution passed at a general meeting has been
obtained.
(iii) Check whether the company has made investments through more than
two layers of investment companies.
(iv) Check whether the company has disclosed the full particulars of the
loan given, investment made or guarantee given or security provided in
the financial statement including the purpose for which the same is
proposed to be utilized by the recipient.
(v) Check whether the company has passed the board resolution as
prescribed and obtained the prior approval, wherever required, from the
public financial institution concerned where any term loan is subsisting.
(vi) Check whether the loan has been given to company registered under
section 12 of the Securities and Exchange Board of India Act, 1992, if
so, whether the inter-corporate loan or deposits taken by such company
are within the limits prescribed, if so, obtain the certificate of statutory
auditors of that company from the management to ensure the
compliance.
(vii) Check whether rate of interest is not lower than the prevailing yield of
one year, three year, five year or ten year government security closest
to the tenor of the loan granted.
(viii) Check if the company is in default in the repayment of any deposits
accepted or in payment of interest thereon, then the company is not
47
allowed to give any loan or guarantee or any security or an acquisition
till such default is subsisting.
(ix) Check whether the company has maintained a register (as per Form
MBP-2) in the manner as prescribed and also check the compliances of
other provisions and relevant rules.
(x) It may be noted that the aforesaid section is not applicable in respect of
any loan made, any guarantee given or any security provided any
investment made by banking company or an insurance company or a
housing finance company in the ordinary course of its business, or a
company established with the object of and engaged in the business of
financing industrial enterprises, or of companies or of providing
infrastructural facilities. However the restriction with regard to the
investment through more than two layers of investment companies
would be applicable for such companies also. The auditor may ensure
compliance accordingly.
(a) It may also be noted that the provisions of section 186 of the Act
shall not apply to a government company engaged in defence
production and a government company, other than a listed
company, in case such company obtains approval of the ministry
or department of the central government which is administratively
in charge of the company, or, as the case may be, the State
Government before making any loan or giving any guarantee or
providing any security or making any investment under the
section. [vide Notification F. No. 1/2/2014-CL.V dated 5th June
2015]
Non-compliance may be reported incorporating following details:-
Non-compliance of Section 186 Remarks,
if any
Sheet Date
Balance as
at Balance
Company/
Name of
Involved
Amount
S.No.
Party
1. Investment through
more than two layers
of investment
companies
2. Loan given or
guarantee given or
security provided or
acquisition of securities
exceeding the limits
48
without prior approval
by means of a special
resolution
3. Loan given at rate of
interest lower than
prescribed
4. Any other default
53. In respect of deposits accepted by the Company or amounts which are
deemed to be deposits, whether the directives issued by the Reserve Bank
of India and the provisions of sections 73 to 76 or any other relevant
provisions of the Companies Act and the rules made thereunder, where
applicable, have been complied with, if not, the nature of such
contraventions be stated; If an order has been passed by Company Law
Board or National Company Law Tribunal or Reserve Bank of India or any
court or any other tribunal, whether the same has been complied with or
not? [Paragraph 3(v)]
Relevant Provisions
(a) This clause, in addition to requiring the auditors to report on compliance with
the requirements of sections 73 to 76 of the Act, and the directives of the
Reserve Bank of India for acceptance of public deposits, also requires the
auditor to report on compliance with the order, if any, passed by the
Company Law Board or National Company Law Tribunal or Reserve Bank of
India or any Court or any other Tribunal.
(b) Section 2(31) of the Act has defined `deposit' to include any receipt of money
by way of deposit or loan or in any other form by a company, but does not
include such categories of amount as may be prescribed in consultation with
the Reserve Bank of India.
(c) This clause includes reporting on `amounts which are deemed to be deposits'
in addition to deposits accepted by the company. Rule 2(1)(c) of The
Companies (Acceptance of Deposit) Rules, 2014 (as amended) defines
deposit to include any receipt of money by way of deposit or loan or in any
other form, by a company, but does not include the amounts specified
therein. Explanation to sub-clause (xii) of Rule 2(1)(c) explains that the
amount shall be deemed to be deposits on the expiry of fifteen days from the
date they become due for refund. Sub-clause (xii) prescribed the instances,
where an amount received in the course of, or for the purposes of, the
business of the company would be deemed to deposit-
a) as an advance for the supply of goods or provision of services
accounted for in any manner whatsoever provided that such advance is
appropriated against supply of goods or provision of services within a
49
period of three hundred and sixty five days from the date of acceptance
of such advance:
Provided that in case of any advance which is subject matter of any
legal proceedings before any court of law, the said time limit of three
hundred and sixty five days shall not apply:
b) as advance, accounted for in any manner whatsoever, received in
connection with consideration for an immovable property under an
agreement or arrangement, provided that such advance is adjusted
against such property in accordance with the terms of agreement or
arrangement;
c) as security deposit for the performance of the contract for supply of
goods or provision of services;
d) as advance received under long term projects for supply of capital
goods except those covered under item (b) above:
Provided that if the amount received under items (a), (b) and (d) above
becomes refundable (with or without interest) due to the reasons that
the company accepting the money does not have necessary permission
or approval, wherever required, to deal in the goods or properties or
services for which the money is taken, then the amount received
shall be deemed to be a deposit under these rules (emphasis
applied):
(d) Section 73 of the Act, prohibits a company (other than a banking company,
non-banking financial company (NBFC) and such other company as may be
specified by the central government in consultation with the Reserve Bank of
India), to invite, accept or renew deposits from the public except in the
manner provided in this section and the Companies (Acceptance of
Deposits) Rules, 2014.
(e) Section 76 of the Act, permits the public companies having specified net
worth or turnover, to accept deposits from persons other than its members
subject to compliance with section 73 and the Companies (Acceptance of
Deposits) Rules, 2014.
(f) The Central Government in consultation with the Reserve Bank of India has
notified the Companies (Acceptance of Deposits) Rules, 2014. These Rules
are not applicable to a banking company, a NBFC, a housing finance
company and a company specified by the central government under the
proviso to sub-section (1) of section 73 of the Act.
(g) The Companies (Acceptance of Deposits) Rules, 2014 cover the following
main items:
(i) the nature of deposits which may be accepted;
(ii) the terms and conditions of acceptance of deposits by companies from
its members and persons other than its members;
(iii) the limits up to which deposits can be accepted;
50
(iv) the form and particulars of advertisement for deposits;
(v) the form of application for deposits;
(vi) furnishing of deposit receipts to depositors;
(vii) Maintenance of liquid assets, creation of security and appointment of
trustee for depositors;
(viii) maintenance of register(s) of depositors;
(ix) Manner and extent of deposit insurance;
(x) general provisions regarding the repayment of deposits and payment of
interest;
(xi) the returns to be filed with the Registrar of Companies.
(h) MCA vide notification dated January 22, 2019 issued the Companies
(Acceptance of Deposits) Amendment Rules, 2019 (`Deposit Rules, 2019'),
amending the Companies (Acceptance of Deposits) Rules, 2014 (`Deposit
Rules, 2014'). The Deposit Rules, 2019 has amended the Form DPT 3 which
is required to be filed on annual basis up to June 30 of every year. The
amended Form will be required to be filed by every company (other than a
government company) for a) a return of deposit; b) Particulars of transaction
not considered as deposit or c) both. Further, MCA vide its letter no. File No:
P-01/08/2013- CL-V Vol. VI dated June 24, 2019 has clarified on the matter
that the Auditor's Certificate is mandatory only in case of return of deposits.
Also, in order to provide guidance to the members, the Auditing and
Assurance Standards Board of ICAI has issued Illustrative Auditor's
Certificate on Return of Deposits as at [state the year end] pursuant to Rule
16 of the Companies (Acceptance of Deposits) Rules, 2014, as amended
which is available on ICAI Website.
Audit Procedures and Reporting
(i) The auditor should plan to test for compliance with the provisions of sections
73 to 76 of the Act and the Rules made thereunder i.e. the Companies
(Acceptance of Deposits) Rules, 2014. For such purpose, the auditor should
also obtain an understanding of the requirements of sections 73 to 76 and
rules thereunder.
(j) The auditor should examine compliance by the company with regard to all
the matters specified in the sections and the Rules and not merely to the
limits of the deposits. Where the number of deposits is very large, it is
obviously not feasible for the auditor to satisfy himself that every single
deposit complies with the rules. He should, therefore, examine the system by
which deposits are accepted and records are maintained and make a
reasonable test check to ensure the correctness of the system. The auditor
may also make a "check list" to ensure that all the requirements of the Rules
regarding the records to be maintained, returns to be filed, etc., are complied
with.
(k) In order to examine instances where an amount could be deemed to be
51
deposits, the auditor should obtain the list of amounts received in the course
of, or for the purposes of, the business of the company (for instances
advances, security deposits) and assess them against the requirements of
sub-clause (xii) of Rule 2(1)(c) of the Companies (Acceptance of Deposits)
Rules 2014 to determine whether such amounts have assumed the nature of
deposits. Where available the auditor should also examine the DPT-3 form
filed by the company.
(l) The auditor should examine the efficacy of the internal controls instituted by
the company so that the deposits accepted by the company remain within
the limits. It may be difficult for the auditor to ascertain that deposits
accepted by the company are within the limits on each day of the accounting
year. He would, therefore, be justified in making a reasonable test check to
ensure that the company has not accepted deposits during the year in
excess of the limits. For financing companies, the auditor should make a
similar examination having regard to the Reserve Bank directives in force
from time to time.
(m) Apart from the audit procedures mentioned above, the auditor should also
enquire from the management about the possible instances of non-
compliance with sections 73 to 76 or any other relevant provisions of the Act
and the relevant rules. The auditor should also enquire from the
management about any order passed by the Company Law Board or
National Company Law Tribunal or Reserve Bank of India or any Court or
any other Tribunal for contravention of these sections or any other relevant
provision(s) of the Act and the relevant rules. The auditor should obtain a
management representation to the effect whether:
(i) the company has complied with the directives issued by the Reserve
Bank of India and the provision of section 73 to 76 (as the case may
be) of the Act and the relevant rules; and
(ii) an order has been passed by any of the relevant authorities mentioned
in the clause, and if so, the company has complied with the
requirements of the Order.
(n) In case where the auditor is of the view that any kind of contravention of
sections 73 to 76 or any other relevant provisions of the Act or relevant rules
or directives from Reserve Bank of India, if any, has taken place, the auditor
should state in his report that the provisions of that section(s) and/or relevant
rules, as the case may be, have not been complied with. The auditor should
also report the nature of contraventions.
(o) In respect of non-banking financial companies and housing finance
companies (to which the provisions of section 73 to 76 of the Companies Act,
2013 and the rules issued thereunder are not applicable), i.e where such
companies are registered with the Reserve Bank of India (RBI) or National
Housing Bank (NHB), as deposit taking companies and have accepted or
have been holding public deposits during the year - such companies shall be
governed by the acceptance of public deposit norms, issued by the
52
respective regulatory bodies. The auditor should specify that sections 73 to
76 of the Companies Act, 2013 and rules issued thereunder are not
applicable to such company.
(p) The auditor, under this clause, is required to verify whether the company has
complied with the order passed by Company Law Board or National
Company Law Tribunal or Reserve Bank of India or any Court or any other
Tribunal. Where any of such authorities has passed an order, the auditor
should examine the steps taken by the company to comply with the said
order. If the company has not complied with the order, the same is to be
reported stating therein the nature of contravention and the fact that the
company has not complied with the order issued by the Company Law Board
or National Company Law Tribunal or Reserve Bank of India or any Court or
any other Tribunal.
54. Whether maintenance of cost records has been specified by the Central
Government under sub-section (1) of Section 148 of the Companies Act,
2013 and whether such accounts and records have been so made and
maintained. [Paragraph 3(vi)]
Relevant Provisions
(a) Section 148(1) of the Act, specifies that the Central Government may, by
order, in respect of such class of companies engaged in production of such
goods or providing such services as may be prescribed, direct that
particulars relating to the utilization of material or labour or to other items of
cost as may be prescribed shall also be included in the books of account
kept by that class of companies. Pursuant to this requirement and in exercise
of the powers conferred by sub-section (1) of section 469 of the Act, the
Central Government has made rules in respect of a number of classes of
companies. These books of account and records form part of the books of
account of the company within the meaning of Section 2(13) of the Act.
In exercise of the power conferred by sub-section (1) and (2) of section 469
and section 148 of the Act, the Central Government has issued the
Companies (Cost Records and Audit) Rules, 2014 which has specified the
list of class of companies in which maintenance of cost record is prescribed
under section 148 of the Act. Reference may be made to the Companies
(Cost Records and Audit) Rules, 2014.
(b) The Companies (Cost Records and Audit) Rules, 2014 has defined "cost
records" as books of account relating to utilization of materials, labour and
other items of cost as applicable to the production of goods or provision of
services as provided in section 148 of the Act, and these rules. These rules
also prescribed the items of cost to be included in the Books of Account.
(c) Sub-section (2) of Section 148 of the Act, also provides that where, in the
opinion of the Central Government, it is necessary to do so it may by order,
direct that the audit of cost records of class of companies, which are covered
53
under sub-section (1) and which have a net worth of such amount as may be
prescribed or a turnover of such amount as may be prescribed, shall be
conducted in the manner specified in the order.
(d) Rule 4 of the aforesaid Rules lays down the conditions subject to which the
companies covered by these Rules need to get their cost records audited.
Audit Procedures and Reporting
(e) The Order requires the auditor to report whether cost accounts and records
have been made and maintained. The word "made" applies in respect of cost
accounts (or cost statements) and the word "maintained" applies in respect of
cost records relating to materials, labour, overheads, etc. The auditor has to
report under the clause irrespective of whether a cost audit has been ordered
by the central government. The auditor should obtain a written representation
from the management stating (a) whether cost records are required to be
maintained for any product(s) or services of the company under section 148
of the Act, and the Companies (Cost Records and Audit) Rules, 2014; and
(b) whether cost accounts and records are being made and maintained
regularly. The auditor should ascertain whether maintenance of cost records
has been specified for the company by Central Government or not. If
maintenance of cost record has been specified, the auditor should obtain a
list of books/records made and maintained in this regard. The Order does not
require a detailed examination of the cost records. The auditor should,
therefore, conduct a general review of the cost records to ensure that the
records as prescribed are made and maintained. He should, of course, make
such reference to the records as is necessary for the purposes of his audit.
(f) Where cost audit is applicable to the Company, the auditor may obtain copy
of cost audit report of immediately preceding year and note any qualifications
or comments in the report of the cost auditor. In case, there are any such
observations, the auditor should enquire from the management, whether
such observations have been properly addressed in the current year. The
auditor should include this in the management representation letter.
(g) It is necessary that the extent of the examination made by the auditor is
clearly brought out in his report. The following wording is, therefore,
suggested:
"We have broadly reviewed the books of account maintained by the company
pursuant to the Rules made by the Central Government for the maintenance
of cost records under section 148 of the Act, and are of the opinion that
prima facie, the prescribed accounts and records have been made and
maintained."
(h) Where the auditor finds that the records have not been maintained or are not
prima facie complete, it will be necessary for the auditor to make a suitable
comment in his report.
(i) Where maintenance of cost records has not been specified for the company,
this clause will not be applicable and the auditor may report accordingly.
54
55. Whether the company is regular in depositing undisputed statutory dues
including Goods and Services tax, provident fund, employees' state
insurance, income-tax, sales-tax, service tax, duty of customs, duty of
excise, value added tax, cess and any other statutory dues to the
appropriate authorities and if not, the extent of the arrears of outstanding
statutory dues as on the last day of the financial year concerned for a period
of more than six months from the date they became payable, shall be
indicated; [Paragraph 3(vii)(a)]
Relevant Provisions
(a) This clause requires the auditor to report upon the regularity of the company
in depositing undisputed statutory dues including Goods and Services tax,
provident fund, employees' state insurance, income-tax, sales-tax, service
tax, duty of custom, duty of excise, value added tax, cess and any other
statutory dues to appropriate authorities. If the company is not regular in
depositing the above mentioned undisputed statutory dues, the auditor is
required to state the extent of arrears of statutory dues which have remained
outstanding as at the last day of the financial year concerned for a period of
more than six months from the date they became payable.
(b) It may be noted that the use of the words "any other statutory dues" indicates
that the clause covers all type of dues under various statues which may be
applicable to a company having regard to its nature of business. Apart from
the statutory dues listed, the auditor is required to report on the regularity of
the company in depositing "any other statutory dues" payable by the
company to appropriate authorities under the statutes applicable to the
company. As far as identification of "Any other statute and dues there under"
the auditor can draw further guidance from SA 250, "Consideration of laws
and regulations in an Audit of Financial Statements".
(c) The intention of the government, in this clause is to ascertain how regular the
company is in depositing statutory dues with the appropriate authorities.
Since the emphasis of the clause is on the regularity, the scope of auditor's
inquiry is restricted to only those statutory dues, which the company is
required to deposit regularly to an authority. The auditor is not required to
ascertain whether the company is regular in depositing amounts, which may
be levied by an appropriate authority from time to time upon occurrence or
non-occurrence of certain events and therefore are not required to be paid
regularly. Any sum, which is to be regularly paid to an appropriate authority
under a statute (whether Central, State or Local or Foreign) applicable to the
company, should be considered as a "statutory due" for the purpose of this
clause. In other words, obligation to pay a statutory due is created or arises
out of a statute, rather than being based on an independent contractual or
legal relationship. Thus, examples of "statutory dues" would include
municipal taxes, taxes deducted at source, fees payable to the licensing
55
authority in respect of business being carried on under license granted by an
authority, say a cinema hall. Accordingly, any sum payable to an electricity
company as electricity bill would not constitute a statutory due despite the
fact that such electricity company has been established under a statute. This
is so because the due has arisen on account of contract of supply of goods
or services between the parties. Similarly, where any sum is payable to
Public Sector Enterprises, namely, State PSUs or Central PSUs, as the case
may be, the same shall not be considered as `Statutory due' despite the fact
that such undertakings are incorporated, owned and operated by the
State/Central Government. However, care shall have to be taken that in case
any dues are recoverable as arrears of land revenue by the concerned
authority, the same shall be treated as a statutory due.
(d) With reference to regularity, it is also important to distinguish amongst the
various items stated in the clause. The auditor should very clearly
understand the nature of each statutory due payable by the company while
examining the aspect of regularity before commenting on the same. For
instance, the regularity is a normal feature in case of certain statutory dues
such as Goods and Services tax, provident fund, employees' state insurance,
sales tax, etc., because the companies are required to deposit the money
with appropriate authorities on a monthly or quarterly basis. But this is not
the case in respect of, say, duty of custom on import of goods or demands
arising on account of assessment orders etc., which a company is required to
pay as and when an event giving rise to the liability of the company occurs.
Such dues should be construed to have been paid regularly if the company
deposits them as and when they become due. However, the auditor would
be required to comment upon the regularity of the company in depositing the
installments, if any, granted by an authority in respect of a demand against
the company.
(e) An important issue to consider is the question of regularity of payment of
import duty where the goods had been imported, say, five years back and
were placed in the bonded warehouse and even till the end of the financial
year under audit, the goods have not been removed from such warehouse. It
may be noted that when the imported goods are lodged in a bonded
warehouse, the payment of import duty is to be made when the goods are
removed from the bonded warehouse. Till the time3 the importer opts to
remove the goods from the warehouse, the importer is required to incur the
rent and interest expenditure on the amount of customs duty payable. Since
the payment of the custom duty is not due in the current case, the question of
regularity does not arise in respect of custom duty. However, it may be noted
that the interest and rent that are required to be incurred under section 61 of
3
It may be noted that section 61 of the Customs Act, 1962 provides that any goods deposited in the
warehouse may be stored upto a period of one year in the bonded warehouse. The time limit is five years in
case of capital goods and for other good three years which are intended for use in any 100% EOU. The said
Act, however, also provides for extension of the warehousing period by the relevant authorities subject to
certain prescribed conditions.
56
the Customs Act, 1962 would come under category of other statutory dues
and the auditor would have to examine and comment upon the regularity of
the company in depositing such interest and rent.
(f) Non-payment of advance income tax would constitute default in payment of
statutory dues. It may, however, happen that the company might not have
any taxable income on the due dates on which advance tax is required to be
paid. If such a company has an income after the last date on which the
advance tax was required to be paid and consequently the company incurs
interest under the relevant provisions of the Income Tax Act, 1961, it should
not be construed that the company is not regular in depositing advance tax.
However, if the company does not comply with the requirements of advance
tax on account of erroneous application of tax laws, then the same shall be
considered as default in payment of statutory dues. For example, the
company, prima facie, does not satisfy the conditions of tax holiday
provisions, but availed the same while estimating the income for advance tax
purposes, such underestimation shall be construed that the company is not
regular in depositing statutory dues.
(g) It may be noted that the auditor has to report on the regularity of deposit of
statutory dues irrespective of the fact whether or not there are any arrears on
the balance sheet date. This is because there may be situations where a
company has deposited the relevant dues before the end of the year while it
has been in default in the matter for a significant part of the year. In cases
where there are no arrears on the balance sheet date but the company has
been irregular during the year in depositing the statutory dues, the auditor
should state this fact while reporting under this clause. There may be
situation where the company receives invoice from the vendor on a yearly
basis for services availed throughout the year and the expense has been
accrued in the books on a monthly basis. However, with regard to its
obligation on withholding taxes, the company is deducting tax at source only
at the year end, in which case the auditor should consider the same as
default in payment of statutory dues. Non deduction of Tax deducted at
source will be considered as default in payment of statutory dues. The
auditor should evaluate the same on case to case basis based on the
materiality of the amount involved. The auditor may rely upon the work of
internal auditor/ expert opinion with respect to any intricate issues to frame
an opinion whether the company has duly discharged its responsibilities. The
auditor should also review the past history of the statutory compliances by
the Company and accordingly, design the audit procedures to mitigate risks.
(h) It may also be noted that the auditor has to report on the regularity of deposit
of statutory dues after applying appropriate judgements wherever necessary.
There may be situations in case of Goods and Services tax where the vendor
has not shown the amount of Goods and services tax credit paid to him in his
statement and the company has appropriate justifications for taking those
credit in the books and adjusted the same in the books against goods and
services tax liability, the same can be considered as Statutory dues paid on
57
due date. However erroneous adjustments of one category of Good and
services tax credit with other category without appropriately applying the
prevailing laws in the state/country will be considered as default in payment
of statutory dues. The auditor may also review the Goods and services
returns/audit reports issued by other auditors and shall trace non-
compliances, if any, disclosed thereunder for the purposes of reporting under
this clause.
(i) For the purpose of this clause, the auditor should consider a matter as
"disputed" where there is a positive evidence or action on the part of the
company to show that it has not accepted the demand for payment of tax or
duty, e.g., where it has gone into appeal. For this purpose, where a petition
has been made by the company seeking rectification of mistake under
section 154 or revision of orders under section 264 of the Income Tax Act,
1961, the amount should be regarded as disputed. Where the demand
notice/intimation for the payment of a statutory due is for a certain amount
and the dispute relates only to a part and not the whole of such amount, only
such amount should be treated as disputed and the balance amount should
be regarded as undisputed. It is not necessary for the auditor to examine the
sustainability or otherwise of the claim of the company regarding disputed
amounts. It is sufficient for this purpose if the evidence available shows that
the amount is disputed by the company. It may also be noted that the Order
has clarified that mere representation to the concerned Department shall not
be treated as a dispute.
(j) There are times where the Income tax department issues intimations to the
assessee for payment of advance tax prior to the due date for payment of
advance tax based on their assessment of expected income tax dues.
However, the assessee may have computed and arrived a liability which may
be significantly different from the intimation received from the department. In
those cases the auditor should evaluate whether the assessee has properly
responded to intimation for the differences in liability and in case of non-
responses the differential tax dues may be treated as undisputed statutory
dues. The auditor should evaluate the same on case to case basis based on
the materiality of the amount involved.
(k) A question may arise that when do the statutory dues become payable.
There can be two views with regard to the question. On the one hand, it can
be argued that the statutory dues referred to in this clause become payable
on the last date by which payment can be made without attracting penalty
and/or interest under the relevant law. On the other hand, it can also be
argued that the amounts referred to in the clause become so payable as at
the date of the expiry of the stay granted by the authorities or, where
installments have been granted for the payment of statutory dues referred to
in the clause, the date on which the default occurs and the amount becomes
payable to the authorities. As the purpose of this clause is to indicate the
amounts which have become actually payable and are outstanding as at the
last day of the financial year concerned for a period of more than six months
58
from the date they became payable, the latter view seems to conform more
closely to the requirements of the Order.
(l) It may be noted that penalty and/or interest levied under the respective laws
would be covered within the term "amounts payable".
(m) The reporting should be restricted to the actual arrears and should not
include the amounts which have not fallen due for payment to appropriate
authority and have been recognised as outstanding dues at the balance
sheet date.
(n) It is possible that in a large company where there are a number of
departments with separate payrolls and where payments are spread over a
number of days, the collection of data regarding the provident
fund/employees' state insurance collections and the company's contribution
thereto may take some time. In order to ensure that deposit of the dues is
made in time, the company may make lump-sum deposits of estimated
amounts and adjust the excess or deficit against the following month's
deposit. If this method is consistently followed and the difference between
the total dues and the lump-sum deposit is not significant, it need not be
considered that dues have not been regularly deposited and no unfavorable
comment is necessary.4
Audit Procedures and Reporting
(o) The auditor should make plans to test whether the company is regular in
depositing undisputed statutory dues. The auditor, in order to be able to
comment on this clause, should have a general understanding of the various
statutes governing the company and the dues payable by the company under
those statutes. The auditor should also enquire of the management of the
company about the statutes under which the company is required to pay any
statutory dues. The auditor should also discuss with the management, the
policies or procedures adopted for identification and payment of statutory
dues. The auditor may also obtain from the management or himself prepare
a calendar of dates for submission of various statutory dues by the company
for his reference.
(p) The information necessary to comply with this requirement of the Order may
be obtained from the company in the form of a statement. The statement
should contain a list of various statutes under which the company is required
to make payments regularly to appropriate authorities, the kind of payments
under each statute, the due date for making the payment to the appropriate
authority, the date on which the payment is made by the company, the
arrears not due and the arrears overdue for more than six months. The
auditor should verify the statement provided by the management with the
underlying documents and records. The auditor's general understanding of
4
The concept of materiality which is fundamental to the entire auditing process should be borne in mind
while reporting on this clause as in case of other clauses of the Order.
59
the various statutes governing the company and the dues payable by the
company under those statutes would help the auditor in assessing the
completeness of the statement. The auditor should recognise that there
could be a situation that a statutory due might have become payable but has
not been captured by the accounting and internal control systems
established by the company and, therefore, the auditor should perform
procedures to mitigate risk arising from such a situation.
(q) The auditor should obtain a written representation with reference to the date
of the balance sheet from the management:
(i) specifying the cases and the amounts considered disputed;
(ii) containing a list of the cases and the amounts in respect of the statutory
dues which are undisputed and have remained outstanding for a period
of more than six months from the date they became payable; and
(iii) containing a statement as to the completeness of the information
provided by the management.
(r) While the auditor has to report upon the regularity of the deposit, he is not
required to specify in detail each instance where there has been a delay or
the extent of the delay.It should be sufficient if he indicates whether
generally the deposits have been regular or otherwise. The following are
examples of the wordings, which may be used in relevant situations:
(i) "undisputed statutory dues including Goods and Services tax, provident
fund, employees' state insurance, income-tax, sales-tax, service tax,
duty of custom, duty of excise, value added tax, cess have been
regularly deposited by the company with the appropriate authorities in
all cases during the year".
(ii) "undisputed statutory dues including Goods and Services tax, provident
fund, employees' state insurance, income-tax, sales-tax, service tax,
duty of custom, duty of excise, value added tax, cess have generally
been regularly deposited with the appropriate authorities though there
has been a slight delay in a few cases".
(iii) "undisputed statutory dues including Goods and Services tax, provident
fund, employees' state insurance, income-tax, sales-tax, service tax,
duty of custom, duty of excise, value added tax, cess have not
generally been regularly deposited with the appropriate authorities
though the delays in deposit have not been serious".
(iv) "undisputed statutory dues including Goods and Services tax, provident
fund, employees' state insurance, income-tax, sales-tax, service tax,
duty of custom, duty of excise, value added tax, cess have not been
regularly deposited with the appropriate authorities and there have
been serious delays in a large number of cases".
(v) "undisputed statutory dues including Provident fund, employees' state
insurance, income-tax, sales-tax, service tax, duty of custom, duty of
60
excise, value added tax, cess have been regularly deposited by the
company with the appropriate authorities in all cases during the year,
except GST. In respect of GST, during the year, the company is
irregular in depositing the sum due for 10 months and the amount
involved is Rs. XXX lakhs".
(s) If the auditor is of the opinion that the company is not regular in depositing
undisputed statutory dues including Goods and Services tax, provident fund,
employees' state insurance, income-tax, sales-tax, service tax, duty of
custom, duty of excise, value added tax, cess and any other statutory dues
with the appropriate authorities, the extent of the arrears of outstanding
statutory dues as at the last day of the financial year concerned for a period
of more than six months from the date they became payable, are required to
be mentioned by the auditor in his audit report. In indicating the arrears, the
period to which the arrears relate should also preferably be given and further,
wherever possible, the fact of subsequent clearance or otherwise may also
be indicated. The auditor may report in the following format:-
Statement of Arrears of Statutory Dues Outstanding for More than Six Months
Name Nature of Amount Period to Due Date of Remarks, if
of the the Dues (Rs.) which the Date Payment any
Statute amount
relates
56. Where statutory dues referred to in sub-clause (a) have not been
deposited on account of any dispute, then the amounts involved and the
forum where dispute is pending shall be mentioned. {A mere representation
to the concerned Department shall not be treated as a dispute.} [Paragraph
3(vii)(b)]
Relevant Provisions
(a) The reporting under this clause is wide enough to cover all the disputed
statutory dues including but not limited to Income tax, Goods and
Services Tax etc. This clause requires that in case of disputed statutory
dues, the amounts involved should be stated along with the forum where the
dispute is pending. Therefore, even minor amounts would be required to be
reported under this clause. The amount should be reported in a manner so
that the reader is able to understand the dispute and the amount involved
therein.
Audit Procedures and Reporting
(b) The audit procedures applied by the auditor for commenting on the previous
clause, including obtaining a statement from the management in regard to
61
the matters specified in the clause, would help the auditor in determining the
dues of Goods and Services tax/sales tax/income tax/duty of
customs/service tax/duty of excise/Provident fund/ employees' state
insurance and any other statutory dues to the appropriate authorities that
have not been deposited on account of any dispute, the amounts involved
and the forum where dispute is pending. The auditor should also obtain a
management representation about the disputed dues, the amounts involved
and the forum where the dispute is pending. The auditor should carry out
necessary audit procedures to verify the information provided by the
management.
(c) A show-cause or similar notice generally contains the requirements/queries of
the assessing officer. Normally, issuance of a show cause notice by the
concerned department should not be construed to be a demand payable by
the company. However, in some cases, a show cause notice and demand
may be combined in one document. Normally, in such cases, the demand
would not be construed to have arisen till the time the assessee has disposed
off the requirements of the show cause notice. Hence, it would be necessary
to evaluate each situation individually.
(d) Tax demands that have been set aside are clearly not `dues'. Similarly, if a
demand has been referred for reassessment and the effect of such referral is
the cancellation of the earlier demand, this too would not constitute an
amount due. The wording of the order would be of significance; if the
demand is not cancelled, it will remain disputed dues. As far as demands
that have been stayed are concerned, these should be regarded as disputed
dues. These should be disclosed along with a disclosure of the fact of stay.
The fact that a stay has been granted does not mean that the authority
granting the stay has held that the amount in question is not a valid demand
against the company. The stay normally is a concession that the amount may
not be deposited immediately or that it may be deposited in installments.
Sometimes a stay is granted if the assessee provides a bank guarantee. It
may also be noted that there may be a situation that the appellate authority
has decided a case in favour of the company but the Department may prefer
to make an appeal to a higher authority. In such a case, there is considered
to be no dispute until the time the Department makes an appeal to the
relevant appellate authority. Further, in case where the amount under the
dispute is pending for an appeal to be filed and the time limit for filing the
appeal has lapsed, the disputed amount would become a statutory due and
the reporting responsibilities of the auditor as are applicable to any other
undisputed statutory due under clause 3(vii)(a) of the Order would become
applicable. Further, in case where the amount under dispute has not been
paid before filing the appeal and no appeal is filed within the time allowed
and the time limit for filing the appeal has expired, the disputed amount
would become a statutory due. There may also be a situation where the
company would have opted for certain tax settlement schemes offered under
a Statute, namely, `Vivad se Vishwas' or `Sabka Vishwas (Legacy Dispute
Resolution) Scheme' etc. Those dues once declared under the scheme by
62
the company and approved by the appropriate authorities shall be
considered as undisputed statutory dues and accordingly be reported by the
auditor under respective clause. The auditor shall examine and ensure that
all the conditions stipulated under the scheme has been complied by the
company, before eliminating particular statutory due from reporting under this
clause.
(e) There could be an instance where an appeal preferred by the department
against the company could have been rendered infructuous for any reason.
However, the department has not withdrawn such appeals resulting in
continuity of status of the demand against the company. For example, the
CBDT vide circular no. 17/2019 dated 08.08.2019 stipulated limits of tax
effect based on which appeals could be filed by the department against an
assessee. Such circular is binding on the department and applies
retrospectively to all the appeals. In respect of such appeals, the tax
demands against the company stands neutralized and thus, the auditor may
consider and drop reporting under this clause as there are no `dispute'. This
view shall remain unaltered even in the eventuality of department not
withdrawing the cases on its own.
(f) There may be situations where the status of the litigations outstanding as at
the year-end may change on account of decision given under any other law
e.g. : Insolvency and Bankruptcy Code, 2016. The auditor may review and
consider those developments and ensure that appropriate treatment has
been given to the disputed dues.
(g) It is possible that in respect of same nature of statutory dues, there may be
more than one dispute pertaining to different periods for which, appeals
might have been filed separately. For example, different years' income tax
liabilities might have been disputed at different levels of appellate authorities.
Hence, in such cases, the information required by the clause should be given
separately in respect of each period. In the case of a large company having
a number of manufacturing and marketing divisions, it would be quite normal
that many cases relating to sales tax, income tax, excise, customs, value
added tax, etc., are disputed and are pending at various stages. It cannot be
the intention of the clause that each case is listed separately. It is, therefore,
proper to summarise the cases stage-wise under each broad head, e.g.,
sales tax, income-tax, duty of customs, duty of excise, and give the
particulars as indicated in paragraph (h) below.
(h) The information required by the clause may be reported in the following
format:
Statement of Disputed Dues
Name Nature of Amount Period to Forum Remarks, if
of the the Dues (Rs.) which the where any
Statute amount dispute is
relates pending
63
(i) Further, a plain reading of the clause suggests that the amounts to be
reported under clause 3(vii)(b) of the Order are those which have not been
deposited on account of any dispute, irrespective of the treatment of such
disputed amounts in accounts. It is quite possible that an amount is
disputed and has not been deposited but on consideration of the likely
outcome of the dispute, a provision has been made in the accounts. Such
an amount will need to be reported, notwithstanding that it has been
provided for in accounts. Similarly, even if it had not been provided for in
accounts, it would have to be reported as long as it is not deposited. It is
also possible that an amount is disputed, has been deposited and on
consideration of the likely outcome of the dispute, has been shown as a
recoverable. Though such an amount is not contemplated for reporting
under the clause, since it has been deposited, the fact of such deposit
having been made under protest should be brought out by the auditor in his
report under the clause.
Whether a disputed amount should be provided for in the accounts or not
will need to be judged in the context of Accounting Standard (AS) 4,
"Contingencies and Events Occurring After the Balance Sheet Date/IND AS
10- "Events after the reporting period" and/or Accounting Standard (AS) 29,
"Provisions, Contingent Liabilities and Contingent Assets"/IND AS 37-
Provisions, contingent Liabilities.
57. Whether any transactions not recorded in the books of account have
been surrendered or disclosed as income during the year in the tax
assessments under the Income Tax Act, 1961 (43 of 1961), if so, whether the
previously unrecorded income has been properly recorded in the books of
account during the year; [Paragraph 3(viii)]
Relevant provisions
(a) This Clause is a new reporting requirement. The Clause reads as below
"whether any transactions not recorded in the books of account have been
surrendered or disclosed as income during the year in the tax assessments
under the Income Tax Act, 1961 (43 of 1961), if so, whether the previously
unrecorded income has been properly recorded in the books of account
during the year".
Audit Procedures and Reporting
(b) For the purpose of reporting under this clause, the auditor is required to
examine:
a) Whether any transaction(s) have been surrendered or disclosed as
income during the year in the tax assessments under the Income Tax
Act, 1961; if so, whether these transactions were unrecorded in the
books of account before such surrender or disclosure;
64
b) If yes, whether these previously unrecorded incomes have been
properly recorded in the books of account during the year;
(c) In this context it is relevant to understand the meaning of "undisclosed
income". As per Section 158B of the Income Tax Act, 1961, "undisclosed
income" includes any money, bullion, jewellery or other valuable article or
thing or any income based on any entry in the books of account or other
documents or transactions, where such money, bullion, jewellery, valuable
article, thing, entry in the books of account or other document or transaction
represents wholly or partly income or property which has not been or would
not have been disclosed for the purposes of this Act, or any expense,
deduction or allowance claimed under this Act which is found to be false.
(d) The emphasis under clause (viii) is limited to examination of those
transactions, which were hitherto unrecorded in the books of accounts and
which were surrendered or disclosed as income in the tax assessments
under the Income Tax Act, 1961. The auditor is also required to review the
tax assessments made subsequent to the Balance Sheet date but prior to
signing of the auditor's report if the surrendered or disclosed income relates
to the year under audit or prior years.
The emphasis is on the words surrendered or disclosed which implies that
the Company must have voluntarily admitted to the addition of such income,
which can be demonstrated on the basis of the returns filed by the Company.
The auditor should also obtain a copy of the statements made in the course
of search and survey to verify the nature of income so surrendered or
disclosed. Where, however, such statement has been retracted on the
ground that such disclosure was obtained under force, coercion, etc., the
income cannot be treated as surrendered or disclosed by the Company.
Accordingly, where the addition is made by the Income Tax Authorities and
the Company has disputed such additions, reporting under this clause is not
applicable.
(e) For the purpose of examination, the auditor is required to review all the tax
assessments completed during the year under audit. The auditor should
obtain a representation letter from the management that all the assessments
completed during the year have been duly informed to the auditor. The
surrender or disclosure of unrecorded income might relate to any
assessment year under the Income Tax Act, 1961.
(f) Where, in the course of such review, the auditor identifies unrecorded
transactions which are surrendered or disclosed as income, the auditor
needs to examine the submissions and representations made by the
Company to the income tax authorities. Based on such examination, the
auditor should identify the nature of income surrendered or disclosed and
ascertain whether proper recording of such transactions have been duly
made in the books of accounts.
65
(g) Proper recording, by implication, includes proper disclosure thereof in the
financial statements of the Company. The disclosure in the financial
statements should be sufficient to enable users understand the impact of
such transactions.
Under the Accounting Standards, the auditor needs to evaluate whether the
surrendered or disclosed income is required to be classified as exceptional or
extraordinary items keeping in view the requirements of the Accounting
Standard 5 "Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies".
Under the Ind AS, the auditor needs to evaluate whether the requirements as
laid down in Ind AS 8 "Accounting Policies, Changes in Accounting
Estimates and Errors" have been complied with, particularly paragraphs 41-
49 in respect of correction of prior period errors. Reference may also be
made to paragraph 9.6 of the Guidance Note on Division II Ind AS
Schedule III to the Companies Act 2013 regarding disclosure of exceptional
items in the Statement of Profit and Loss.
The nature of disclosure shall depend on the nature of undisclosed income,
and the treatment thereof if the same was duly disclosed and reported in the
books of accounts in the year to which the undisclosed income relates to.
Further, considering the materiality of the income surrendered or disclosed,
the auditor should also evaluate whether the internal financial controls are
operating effectively, particularly with respect to recognition of revenue/
income.
58. Whether the company has defaulted in repayment of loans or other
borrowings or in the payment of interest thereon to any lender, if yes, the
period and the amount of default to be reported as per the format below:
Nature of Name of lender* Amount Whether No. of Remarks,
borrowing not paid principal days if any
including on due or interest delay or
debt date unpaid
securities
* lender wise
details to be
provided in case
of defaults to
banks, financial
institutions and
Government.
[Paragraph 3(ix(a))]
Relevant Provisions
(a) Under this clause, the auditor is required to report whether the company has
defaulted in repayment of loans or other borrowings or in the payment of
66
interest thereon to any lender. If the answer is in the affirmative, the auditor is
also required to report on such defaults in the format prescribed.
(b) A question that arises is whether the scope of the auditor's inquiry would
cover defaults made by the company during the year only or whether the
defaults committed in previous years and continuing until the year end would
also be covered. It is to be noted that column (3) of the format specified
requires the auditor to report the amounts not paid on due date. Further
column (5) of the format requires the auditor to report the number of days of
delay or unpaid. Accordingly, the auditor should report the amount of all
defaults committed during the year and the number of days of default.
Further, since the auditor is also required to report amounts remaining
unpaid, it is clarified that the auditor should also report the period and
amount of all defaults existing at the balance sheet date irrespective of when
those defaults have occurred.
(c) Though the word "default" has not been defined, in this regard, the word
"default" would mean non-payment of dues to lenders on the last dates
specified in loan documents or debentures trust deed, as the case may be.
For example, in the case of term loans, fixed dates are prescribed for
repayment in the agreement or terms and conditions of the loans. The dates
prescribed for repayments would operate as the last date of payments and
any delay after this fixed date would amount to default and reporting would
be required in case of default on account of repayment of loan or interest.
(d) The format prescribed by this clause also requires reporting on default in
repayment of loans or other borrowings taken from the financial institutions
and / or interest thereon. Section 2(39) of the Act defines "financial
institution" to include a scheduled bank, and any other financial institution
defined or notified under the Reserve Bank of India Act, 1934. Reference
may be made to Section 45-I(c) of RBI Act, 1934.
In view of the said definition, Financial Institution includes all Banks, Public
Financial Institutions, as well as NonBanking Institutions and also includes
Non-Banking Financial Companies.
(e) The format prescribed by this clause also requires reporting on default in
repayment of loans or other borrowings taken from the Government and / or
interest thereon. The term "Government" means the department of the
Central Government, a State Government and its department and a Union
Territory and its department, but shall not include any entity, whether created
by a statute or otherwise, the accounts of which are not required to be kept in
accordance with article 150 of the constitution or the rules made there under.
(As defined u/s 65B(26A) of the Finance Act 1994). Accordingly, the term
"Government" does not include Government Company/ Public Sector
Undertaking/ Boards/Authority/Corporation and Foreign Government.
Audit Procedures and Reporting
(f) The auditor should obtain the schedule of repayments to all lenders from the
67
management of the company. The schedule should indicate the amount and
the due dates of the payments (including interest) that the company is
required to make to such lenders.
(g) The auditor should examine the agreement or other documents (for example
debenture trust deed) containing the terms and conditions of the loans and
borrowings of the company taken from all lenders. This examination would
enable the auditor in verifying the amount and due dates of the payments
mentioned in schedule of repayments provided by the management of the
company. The auditor should then verify whether the repayments as per the
books of account are in accordance with the terms and conditions of the
relevant agreement.
(h) The auditor should verify the payment amounts and dates with the underlying
bank statements and/ or any advice received from the lenders. Such
verification may be done on test check basis considering the materiality and
in accordance with the standards on auditing.
(i) The auditor should obtain the confirmation of the concerned lender as to the
status of the loan account including the overdue position as at the balance
sheet date.
(j) It may happen that the company might have submitted application for
reschedulement / restructuring proposals to the lenders, which may be in
different stages of processing. Submission of application for reschedulement
/ restructuring does not mean that no default has occurred. Accordingly, in
such situations also the auditor should report the period of default and the
amount of default. However, if the application for reschedulement of loan has
been approved by the concerned bank or financial institution during the year
covered by the auditor's report, the auditor should state in his audit report the
fact of reschedulement of loan.
(k) The auditor may come across a situation where the company has adequate
balance in its current account on the due date of repayment of loan or
payment of interest, but such date is either a public holiday or a bank holiday.
In such cases, the payment is normally debited by banks/ financial
institutions/ lenders on the next working day. It is clarified that in such cases,
the auditor should not consider the same as default.
(l) The auditor may come across a situation where there may be disputes
between the company and the lender on certain issues relating to
repayments. In such situations, the auditor should consider the prevailing
terms and conditions only. However, he may give a brief nature of the
dispute while reporting under this clause.
(m) Under this clause the auditor is required to give lender wise details in case of
banks, financial institutions and Government only and not in respect of other
lenders. In respect of other lenders, the auditor should report under this sub-
68
clause in the format prescribed.
Nature of Name of Amount Whether No. of Remarks,
borrowing lender* not paid principal days if any
including debt on due or delay or
securities date interest unpaid
* lender wise
details to be
provided in
case of
defaults to
banks, financial
institutions and
Government.
Other lenders
Aggregate for
each type of
lender may be
given, for
example-
debenture
holders
59. Whether the company is a declared wilful defaulter by any bank or
financial institution or other lender? (paragraph 3(ix)(b))
Relevant Provisions
(a) Under this clause, the auditor is required to report whether the company has
been declared as a wilful defaulter by any bank or financial institution or any
other lender.
(b) Reserve Bank of India vide its master circular RBI/2014-
15/73DBR.No.CID.BC.57/20.16.003/2014-15 ("RBI Circular") as updated
from time to time has defined that a "wilful default" would be deemed to have
occurred if any of the following events is noted:-
a) The unit has defaulted in meeting its payment / repayment obligations
to the lender even when it has the capacity to honour the said
obligations.
b) The unit has defaulted in meeting its payment / repayment obligations
to the lender and has not utilised the finance from the lender for the
specific purposes for which finance was availed of but has diverted the
funds for other purposes.
69
(c) The unit has defaulted in meeting its payment / repayment obligations to the
lender and has siphoned off the funds so that the funds have not been
utilised for the specific purpose for which finance was availed of, nor are the
funds available with the unit in the form of other assets.
(d) The unit has defaulted in meeting its payment / repayment obligations to the
lender and has also disposed off or removed the movable fixed assets or
immovable property given by him or it for the purpose of securing a term loan
without the knowledge of the bank/lender.
The term `lender' appearing in the circular covers all banks/Financial
Institutions (FIs) to which any amount is due, provided it is arising on account
of any banking transaction, including off balance sheet transactions such as
derivatives, guarantee and letter of credit.
Audit Procedures and Reporting
(e) Reporting under this sub-clause would normally be required when there has
been a default by the company in repayments of loans and/or interest to
lenders. The auditor should on the basis of the procedures performed under
subclause (a) of clause (ix) of paragraph 3 identify whether the company has
defaulted in repayments of loans and/ or interest to lenders.
(f) Reserve Bank of India has prescribed a transparent mechanism for
identification of wilful defaulters. The circular defines the term `lender'
appearing in the circular to cover all banks/FIs to which any amount is due,
provided it is arising on account of any banking transaction, including off
balance sheet transactions such as derivatives, guarantee and Letter of
Credit. The RBI circular, therefore, is not applicable on government and other
lenders, for example, individuals or a company. Declaration of borrower as a
wilful defaulter by other lenders not covered by the RBI circular may not have
been done in a transparent manner in the absence of guidelines. However,
government or government authorities by virtue of their powers, may be in a
position to declare any borrower as a wilful defaulter. It is, therefore, clarified
that the auditor should restrict the reporting under this clause to declaration
of wilful defaulter by banks, financial institutions, and in respect of other
lenders should restrict the reporting for government/ government authorities.
(g) The clause does not mention whether the banks, financial institutions or
other lenders refer to those who have lent to the company. Considering the
objective of the clause, it may be construed to mean any bank or financial
institution even if such bank or financial institution has not lent to the
company. However, as stated above, in respect of other lenders, reporting
should be restricted to cases where either government or any government
authority has declared the company as wilful defaulter.
70
(h) The auditor when obtaining confirmations of outstanding loans and interest
from banks/ financial institutions may include a question whether the
company has been declared a wilful defaulter.
(i) The auditor should enquire from the management whether the company has
been declared a wilful defaulter or been issued a show-cause notice by any
lender bank, financial institution or government as per the procedure
described under the RBI Circular. The auditor should obtain a signed
declaration in this regard from the management,
(j) Banks and financial institutions are required to submit the list of suit-filed
accounts of wilful defaulters of Rs. 25 lakhs and above every month to the
four credit information companies including Credit Information Bureau (India)
Ltd (CIBIL). The auditor should, therefore, obtain latest CIBIL report of the
auditee company and verify whether the company has been categorised as
wilful defaulter.
(k) Credit Information Companies- CIBIL, CRIF, Equifax, and Experian are
required by the RBI Circular to disseminate the information on willful defaults.
The auditor should search for the information available on websites of these
Credit Information Companies. The auditor may also search on the websites
of Reserve Bank of India and of lender banks/ financial institutions and
information available in public domain.
(l) It is possible that the company may not have been declared as wilful
defaulter as at the date of the balance sheet but has been so declared before
the audit report has been issued. A question, therefore, arises whether the
reporting under this sub-clause is to be considered as at the balance sheet
date or on the date of signing of audit report. As per paragraph 6 of SA 560
"Subsequent Events", the auditor shall perform audit procedures designed to
obtain sufficient appropriate audit evidence that all events occurring between
the date of the financial statements and the date of the auditor's report that
require adjustment of, or disclosure in, the financial statements have been
identified. It is therefore, clarified that the auditor should also consider
whether the company has been declared as willful defaulter as on the date of
the audit report.
(m) If the company has not been declared a wilful defaulter but has received a
show-cause notice in accordance with the RBI Circular, the auditor may
consider disclosing this in his report under the Order.
The auditor should also obtain a representation letter from the management
that the company has neither been declared as a wilful defaulter nor has
received any show cause notice.
71
60. Whether term loans were applied for the purpose for which the loans
were obtained; if not, the amount of loan so diverted and the purpose for
which it is used may be reported. (paragraph 3(ix)(c))
Relevant Provisions
(a) Under this clause, the auditor is required to examine whether term loans
were applied for the purpose for which these loans were obtained. Further
where the term loans were not applied for the purpose for which these loans
were obtained, the auditor is also required to report the amount of loan so
diverted and the purpose for which it is used. First of all, the auditor should
ascertain whether the company has taken any "term loans". Term loans
normally have a fixed or pre-determined repayment schedule. In the common
parlance of the expression, loans with repayment period beyond 36 months
are usually known as term loans. Cash Credit, over draft and call money
accounts/ deposits are, therefore, not covered by the expression "Term
Loans".
(b) Reserve Bank of India vide its master circular RBI/2014-15/73
DBR.No.CID.BC.57/20.16.003/2014-15 dated July 1, 2014 on "Master
Circular on Wilful Defaulters" (as updated from time to time) has defined
diversion of fund as:
Diversion of funds, would be construed to include any one of the undernoted
occurrences:
a) utilisation of short-term working capital funds for long-term purposes not
in conformity with the terms of sanction;
b) deploying borrowed funds for purposes / activities or creation of assets
other than those for which the loan was sanctioned;
c) transferring borrowed funds to the subsidiaries / Group companies or
other corporates by whatever modalities;
d) routing of funds through any bank other than the lender bank or
members of consortium without prior permission of the lender;
e) investment in other companies by way of acquiring equities / debt
instruments without approval of lenders;
f) shortfall in deployment of funds vis-à-vis the amounts disbursed / drawn
and the difference not being accounted for.
Audit Procedures and Reporting
(c) The Order is silent as to whether this clause also covers term loans obtained
from entities/persons other than banks/financial institutions. A strict
interpretation of the clause would mean that the term loan obtained from
entities/persons other than banks/financial institutions would also have to be
examined by the auditor for the purpose of reporting under the clause.
72
(d) The auditor should examine the terms and conditions subject to which the
company has obtained the term loans. The auditor may also examine the
proposal for grant of loan made to the lender. Normally the end use of the
funds raised by term loans is mentioned in the sanction letter or documents
containing the terms and conditions of the loan. The auditor should ascertain
the purpose for which term loans were sanctioned. The auditor should also
compare the purpose for which term loans were sanctioned with the actual
utilisation of the loans. The auditor should obtain sufficient appropriate audit
evidence regarding the utilisation of the amounts raised. If the auditor finds
that the funds have not been utilised for the purpose for which they were
obtained, the auditor's report should state the fact.
(e) It is not necessary to establish a one-to-one relationship with the amount of
term loan and its utilisation. It is quite often that the amount of term loan
disbursed by the bank is deposited in the common account of the company
from which subsequently the utilisation is made. In such cases, it should not
be construed that the amount has not been utilised for the purpose it was
raised.
(f) The auditor will need to examine whether the company has utilised the term
loans for any of the purposes defined as diversion by the RBI circular as
mentioned above. Such process may include checking whether the company
has granted loans to other parties, including related parties, or made
investments in other companies.
(g) It may happen that the company might have acquired improved
version/model of assets as against the assets for which the loan had been
sanctioned. For example, if out of a loan sanctioned for purchase of
machinery to be used for manufacture of shoe upper is instead used to
purchase a machine, which apart from manufacturing shoe uppers has
certain additional manufacturing facilities. In such cases, it should not be
construed that the loan has not been applied for the purpose for which it was
raised.
(h) Normally, the term lenders directly make the payment to the
vendor/suppliers. In such cases, it becomes easier for the auditor to
comment on the application of term loans.
(i) During construction phase, companies, generally, temporarily invest the
surplus funds to reduce the cost of capital or for other business reasons.
However, subsequently the same are utilised for the stated objectives. In
such cases, the auditor should mention the fact that pending utilisation of the
term loan for the stated purpose, the funds were temporarily used for the
purpose other than for which the loan was sanctioned but were ultimately
utilised for the stated end-use.
(j) It may so happen that the term loans taken during the year might not have
been applied for the stated purpose during the year, for example, the loan
was disbursed at the fag end of the year. In such a case, the auditor should
73
mention in his audit report that the term loan obtained during the year has not
been utilised. This also implies that the auditor, while making inquiry in
respect of this clause, should also consider the term loans which although
were taken in the previous accounting period but have been actually utilised
during the current accounting period.
(k) It may happen that under Ind AS, certain term loans (for example, Mezzanine
loans) may either be classified as equity or may be compound instruments
and, therefore, are split into equity and debt components. However, such
instruments will be classified as debt under non Ind-AS. It is clarified that the
basic character of such loans is debt and accordingly auditor should consider
utilization of entire amount for the purpose of reporting under this clause
irrespective of the accounting treatment.
(l) Where the auditor concludes that the term loans were not applied for the
purpose for which the loans were obtained, the auditor should ascertain the
amount so diverted and the purpose for which such loan was used. The
auditor should mention in his report the amount of term loan as well as the
fact the term loan was not utilised for the purpose for which it was obtained
and report the amounts diverted and purpose for which such loan was used.
(m) A suggested reporting format under this cause is as follows:
In our opinion and according to the information and explanations given to us,
the Company has utilized the money obtained by way of term loans during
the year for the purposes for which they were obtained, except for:
Nature of Name of Amount Purpose Purpose Remarks
the fund the lender diverted for which for which
raised (Rs.) amount amount
was was
sanctioned utilised
61. Whether funds raised on short term basis have been utilised for long
term purposes? If yes, the nature and amount to be indicated. (paragraph
3(ix)(d))
Relevant Provisions
(a) The principles of financial management suggest that the long-term assets of
an enterprise should be financed from long term funds. The genesis of the
principle is that if funds raised from short term sources are used for long-term
investments, the enterprise can face liquidity problems as soon as the short-
term sources fall due for payment. However, an exception to the principle
would be the situation where an enterprise is able to generate sufficient
funds from long term sources either through its operations or other means to
74
meet the working capital requirements arising from the event of short-term
sources falling due for payment. The application of the principle is considered
to be of utmost importance for the financial health of an enterprise. The
clause requires the auditor to comment whether the funds raised on short-
term basis have been used for long-term purposes so that the readers can
assess whether the company has followed the above-mentioned principle of
financial management. Examples of use of funds raised on short term basis
and used for long-term purposes would include investing money from
overdraft facilities in long-term investments in shares of
subsidiaries/associates/joint ventures or investing money raised from public
deposits due for repayment in three years in a project whose pay-back period
is ten years
(b) The auditor uses the data contained in the balance sheet to ascertain
whether the funds raised on short-term basis have been used for long-term
investment. Short-term sources of funds include temporary credit facilities
like cash credits, overdraft. Reduction in current assets or increase in current
liabilities are also sources of short-term increase in funds. Long-term sources
of funds would include share capital, reserves and surplus, provision for
depreciation, long-term debt securities and long-term loans. Long term
applications of funds include investment in Property, Plant & Equipment,
intangible assets, long-term investments in shares, debentures and other
securities and other assets of similar nature, repayment of long-term loans
and advances or redemption of long-term debt or securities, etc. Application
of funds which is not long-term may be categorised as short-term application.
Increase in current assets or decrease in current liabilities also indicate short-
term application of funds.
(c) The auditor should determine the long-term sources and the long-term
application of funds by a company using the data contained in the financial
statements. If the quantum of long-term funds of a company is not
significantly different from the long-term application of funds, it is an
indication that the long-term assets of the company are financed from the
long-term sources. However, if the quantum of long-term funds is significantly
less than the long-term application of funds, it is an indication that short-term
funds have been used to finance the long-term assets of the company. The
difference between figures of long-term funds and long-term assets of the
company indicate the extent to which short term funds have been used to
finance long-term assets of the company.
Audit Procedures and Reporting
(d) Working capital is normally understood to be a short-term application of
funds which keeps on changing its form throughout the working capital cycle.
It may, however, be noted that core or permanent working capital of an
enterprise should be financed from long-term funds (preferably the owners'
capital). Core or permanent working capital is that component of the working
capital of the enterprise that always remains invested in business and is
75
never allowed to exit. Therefore, if the quantum of long-term funds is
significantly more than the long-term application of funds, the auditor should
determine whether long-term funds have been used to finance the core
working capital of the company. For this purpose, the auditor should compute
the figure of working capital and compare it with the difference between the
quantum of long-term funds and long-term application of funds. Still, if the
long-term funds are more than the working capital of the company the
auditor's report should state that the company has used long-term funds to
finance current assets.
(e) Certain companies deploy funds based on their respective maturity pattern
as a risk management technique. In case a company does so, it would be
easier for the auditor to comment upon the clause since a comparison of
sources of funds with their deployment based on their respective maturity
patterns would be a significantly more sophisticated way of analysing
whether short-term funds have been used to finance long-term assets of the
company. To take a highly simplified example, if an enterprise has a long-
term debt that is to mature within the next 12 months and an equivalent
amount in a long-term investment that would mature after 3 years, the
maturity pattern analysis would indicate the potential inability to meet the
liability on the debt on due date, but the traditional analysis would not do so.
(f) The clause also requires the auditor to state the nature of application of
funds if the company has financed long-term assets out of short-term funds.
The nature of application of funds can be determined only if the funds raised
can be directly identified with an asset. The determination of direct
relationship between particular funds and an asset from the balance sheet
may not be feasible. Further, such movement in funds should be supported
by relevant documentation. A more practical approach would be to determine
the overall picture of the sources and application of funds of the company
unless an evident trail is available that enables the auditor in establishing a
direct relationship between sources and application of funds.
(g) An example of reporting under the clause is as follows:
"According to the information and explanations given to us and on an overall
examination of the balance sheet of the company, we report that no funds
raised on short-term basis have been used for long-term purposes by the
company."
(h) An example of negative reporting under the clause is as follows:
"According to the information and explanations given to us and on an overall
examination of the balance sheet of the company, we report that the
company has used funds raised on short-term basis for long-term purposes.
The company has accepted public deposits amounting to Rs. 5 Crores which
would fall due for repayment two years from the date of their acceptance.
The company has invested the money for the increase of its production
capacity which would be completed in the next four years."
76
62. Whether the company has taken any funds from any entity or person on
account of or to meet the obligations of its subsidiaries, associates or joint
ventures, if so, details thereof with nature of such transactions and the
amount in each case [paragraph 3(ix)(e)]
Relevant Provisions
(a) For the purpose of this clause, definitions of subsidiary, associate or joint
venture will be as defined in the Companies Act 2013.
(b) Though the word entity has not been defined, in this regard, the entity will
include banks, financial institutions, company, LLP, trust, government, or
others irrespective of the legal form.
(c) Fund will include both long term and short-term funds.
Audit Procedures and Reporting
(d) Reporting under this sub-clause would normally be required when the
company has taken any funds from any entity or any person and has also
granted loans or advances in the nature of loans to its subsidiaries, associate
companies or joint ventures or has made further investments in such
subsidiaries, joint ventures, or associate companies.
The auditor needs to consider new loans or advances given during the year,
meeting the obligations of subsidiaries, joint ventures, or associate
companies during the year and new investments (equity or debt investment)
made during the year for the purpose of reporting under this clause.
Therefore, if there are no such transactions during the year, the auditor may
conclude that the company has not taken any funds from any entity or person
on account of or to meet the obligations of its subsidiaries, associates or joint
ventures,
Reporting under this clause will be required for all funds taken during the
year even if these have been repaid before the year end. Further, reporting
will be required where funds were taken in earlier years and were repaid
during the year or are outstanding as at the year end.
(e) The Companies Act 2013 or the Order does not define the word "obligation".
In normal parlance, obligation means a debt security (such as a mortgage or
corporate bond) or a commitment to pay a particular sum of money.
Therefore, obligation of subsidiary, joint venture or associate would mean
the amounts that such subsidiaries, joint venture of associate companies
were required to pay themselves either to their vendors, lenders,
employees, or statutory authorities. When a company pays these amounts
on behalf of subsidiaries, joint ventures or associate companies, the
amount so paid is generally treated as an asset either as loan, advance, or
other current/ non-current assets in the financial statements.
77
(f) The auditor should obtain list of all subsidiaries, associates and joint ventures
from the Company. The auditor should also obtain details of all loans,
advances including advances in the nature of loans granted to subsidiaries,
associates and joint ventures and investments made in such companies. The
auditor should also obtain schedule of related party transactions and verify
the loans and advances including advances in the nature of loans granted to
subsidiaries, associates and joint ventures or expenses incurred or paid on
behalf of subsidiaries, joint ventures and associate companies. The auditor
should obtain balance confirmations from subsidiaries, joint ventures, and
associate companies. The auditor is expected to perform procedures to
ensure compliance with AS 18 or Ind AS 24 (as the case may be) and SA
550.
(g) It is possible that the financial statements of subsidiaries, joint ventures, and
associates are audited by another firm. In such cases, the principal auditor
may consider seeking specific information from the auditors of the
component in accordance with the guidance given in SA 600 to enable him to
report under this clause.
(h) The auditor should obtain schedule of all borrowings. In case of term loans,
the auditor would have performed the procedures described for the purpose
of reporting under clause (ix)(c) and would have identified diversion of funds
for the purpose of granting loans or advances to subsidiaries, joint ventures
and associates or to meet the obligations of these entities. However, since
the requirement is to report on both long term and short term funds, the
auditor will also need to verify the utilisation of borrowed funds other than
term loans. For this purpose, the auditor will identify the purpose for which
loans other than term loans were taken and check the utilisation of such
funds. The audit procedures will be identical to those performed for checking
utilisation of term loans and described above in the guidance on clause
(ix)(c).
(i) The auditor should review the cash flow statement of the company. Normally,
if the company has sufficient positive cash flows from operations, positive
cash flows from investing activities and/ or cash inflows from issue of equity
instruments and has utilised these cash inflows to make investments in,
grant loans or advances or to meet the obligations of its subsidiaries, joint
ventures and associates, the auditor may be able to conclude that borrowed
funds have not been used to grant loans or advances or to meet the
obligations of its subsidiaries, joint ventures and associates.
(j) Based on the procedures performed in paragraphs (h) and (i) above, the
auditor shall determine the amount of funds that the company has borrowed
to grant loans or advances or to meet the obligations of its subsidiaries, joint
ventures and associates.
(k) The auditor may also consider obtaining suitable management
representation letter in this regard.
78
(l) An example of reporting under the clause is as follows:
"According to the information and explanations given to us and on an overall
examination of the balance sheet of the company/ examination of the cash
flow statement of the Company, we report that the company has not taken
any funds from any entity or person on account of or to meet the obligations
of its subsidiaries, associates or joint ventures as defined under Companies
Act, 2013".
(m) An example of reporting under the clause is as follows:
"According to the information and explanations given to us and on an overall
examination of the balance sheet of the company, we report that the
company has taken funds from following entities and persons on account of
or to meet the obligations of its subsidiaries, associates or joint ventures as
per details below:
Nature Name Amount Name of the Relation Purpose Remarks,
of fund of involved subsidiary, for if any
taken lender joint which
venture, fund
associate utilized.
63. Whether the company has raised loans during the year on the pledge of
securities held in its subsidiaries, joint ventures or associate companies, if
so, give details thereof and also report if the company has defaulted in
repayment of such loans raised [Paragraph 3(ix)(f)]
Relevant Provisions
a) Under this clause the auditor is required to report:
whether the company has raised loans during the year on the pledge of
securities held in its subsidiaries, joint ventures or associate
companies;
If yes, give details of such loans; and
Report if the company has defaulted in repayment of such loans raised.
It is clarified that for reporting under this clause, the auditor is not required to
give details of default in respect of loans as the delays are in any case
required to be reported under clause (ix)(a) for all lenders. Under this clause,
therefore, the auditor is merely required to state yes or no for defaults.
Further it is clarified that reporting under this clause would cover all loans
taken during the year even if these have been repaid during the year.
Further, reporting is required only in case of loans taken during the year,
79
therefore loans taken in earlier years and outstanding as at the balance
sheet date need not be reported.
b) As per Indian Contract Act, 1872, pledge is a contract where a person
deposits an article or good with a lender of money as security for the
repayment of a loan or performance of a promise.
c) The term `Securities' has been defined under Section 2(81) of the
Companies Act, 2013 to mean `securities' as defined in Section 2(h) of the
Securities Contracts (Regulation) Act, 1956 (SCRA).
Under section 2(h) of SCRA, the term `securities' include the following:
Shares, scrips, stocks, bonds, debentures, debenture stocks etc. in or
of any incorporated company or another body corporate;
Derivatives;
Units issued by any Collective Investment Scheme to the investors in
such scheme;
Security receipt as defined in Section 2(zg) of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002;
Units or any other such instruments issued to the investors under any
Mutual fund scheme;
Government Securities;
Such other instruments as may be declared by the Central Government
to be securities; and
Rights or interest in securities.
Audit Procedures and Reporting
d) The auditor should obtain schedule of all loans raised during the year. It is
clarified that the clause does not specify the lender, and therefore the
reporting under this clause will include loans taken during the year from any
lender.
e) The auditor should verify the loan agreements or other such documents such
as term sheets to check the nature of security against such loans.
f) The clause refers to pledge of securities. Considering the definition as per
Companies Act, 2013, such securities are not restricted to equity shares and
covers all types of securities as defined above.
g) "Securities held in its subsidiaries, joint ventures or associate companies"
means the investment of the reporting entity in such subsidiary, joint venture
or associate company. Accordingly when a company obtains loans by
pledging such investments, it will be required to create a charge under
section 77 of the Companies Act, 2013. The auditor should obtain and verify
the documents related to charges created including any modification thereof.
This together with procedures performed in paragraph (f) above will ensure
80
that auditor is able to identify whether loans have been obtained by way of
pledge of securities held in its subsidiaries, joint ventures or associate
companies.
h) The auditor may consider obtaining management representations in this
regard.
i) Clause (ix)(a) requires the auditor to report whether the company has
defaulted in repayment of loans or other borrowings or in the payment of
interest thereon to any lender, and if yes, the period and the amount of
default to be reported. Since the requirement of clause (ix)(a) is to report on
defaults in case of all lenders, the auditor would have already performed
necessary procedures even in respect of loans referred to in clause (ix)(f).
j) An example of reporting under the clause is as follows:
"According to the information and explanations given to us and procedures
performed by us, we report that the company has not raised loans during the
year on the pledge of securities held in its subsidiaries, joint ventures or
associate companies."
or
According to the information and explanations given to us and procedures
performed by us, we report that the company has raised loans during the
year on the pledge of securities held in its subsidiaries, joint ventures or
associate companies as per details below. Further the company has not
defaulted in repayment of such loans raised.
Nature Name Amount Name of the Relation Details Remarks
of loan of of loan subsidiary, of
taken lender joint security
venture, pledged
associate
k) An example of reporting under the clause is as follows:
"According to the information and explanations given to us and procedures
performed by us, we report that the company has raised loans during the
year on the pledge of securities held in its subsidiaries, joint ventures or
associate companies and has defaulted in repayment of such loans as per
details below.
Nature Name Amount Name of Relat Details Whether Remarks
of loan of of loan the -ion of there is
taken lender subsidiary, security default in
joint pledged repayment
venture, of loan?
associate (Yes/ No)
The auditor may consider giving reference to reporting under clause (ix)(a)
above in remarks column.
81
64. Whether moneys raised by way of initial public offer or further public
offer (including debt instruments) during the year were applied for the
purposes for which those are raised. If not, the details together with delays
or default and subsequent rectification, if any, as may be applicable, be
reported; [Paragraph 3(x)(a)]
Under this clause the auditor is required to report whether money raised by the
company through Initial Public Offer or Further Public Offer (including debt
instruments) during the year have been utilised for the purposes for which those
were raised. If not, the auditor is required to report the details together with delays
or default and subsequent rectification, if any, as may be applicable.
Relevant Provisions
(a) In case the company has made an Initial Public Offer or Further Public Offer
(including debt instruments) the auditor is required to report upon the
disclosure of end-use of the money by the management in the financial
statements. The auditor is also required to state whether he has verified the
disclosure made by the management in this regard. `Securities' has been
defined in Section 2(81) of the Act which refers to the definition of `securities'
in section 2(h) of the Securities Contracts (Regulation) Act, 1956. Initial
public offer or further public offer shall cover issue of equity shares,
convertible securities, non-convertible debt securities, non-convertible
redeemable preference shares, perpetual debt instruments, perpetual non-
cumulative preference shares, Indian depository receipts, and securitized
debt instruments.
(b) Part 1 of Chapter III of the Act consisting of Sections 23 to 41 deals with
Public Offer. Section 23(1)(a) of the said Act, provides that, "a public
company may issue securities to public through prospectus which is also
referred to as "public offer". Explanation to Section 23 states that for the
purpose of aforesaid Chapter III, the expression, "public offer" includes initial
public offer or further public offer of securities to public by a company, or an
offer for sale of securities to the public by an existing shareholder, through
issue of prospectus. In terms of Section 24 of the said Act, the Securities and
Exchange Board of India (SEBI) is empowered to regulate issue of securities
by making regulations on that behalf. Therefore, a company raising moneys
by way of Initial Public Offer or Further Public Offer shall have to follow the
requirements of the applicable provisions of the Act, as well as the relevant
SEBI Regulations.
(c) Currently, there is no legal requirement under the Act to disclose the end use
of money raised by Initial Public Offer or Further Public Offer (including debt
instruments) in the financial statements. The companies, however, make
such a disclosure in the Board's Report. Schedule III to the Act requires that
82
only unutilized amount of any Initial Public Offer or Further Public Offer
(including debt instruments) made by the company should be disclosed in the
financial statements of a company. In the absence of any legal requirement
of such disclosure, it appears that the clause envisages that the companies
should disclose the end use of money raised by the Initial Public Offer or
Further Public Offer (including debt instruments) in the financial statements
by way of notes and the auditor should verify the same.
Audit Procedures and Reporting
(d) Normally, the companies do mention the end-use of the money proposed to
be raised through the Initial Public Offer or Further Public Offer (including
debt instruments) in the offer document. An examination of the offer
document would provide the auditor an understanding of the proposed end-
use of money raised from public. The auditor should verify that the amount of
end-use of money disclosed in the financial statements by the management
is not materially different from the proposed and actual end use. The auditor
should obtain a representation from the management as to the completeness
of the disclosure with regard to the end-use of money raised as well as actual
end utilization of money raised by Initial Public Offer or Further Public Offer
(including debt instruments). If, for any reason, the auditor is not able to
verify the end-use of money raised from Initial Public Offer or Further Public
Offer (including debt instruments), he should state that he is not able to
comment upon the disclosure of end-use of money by the company since he
could not verify the same. He should also mention the reasons which
resulted in the auditor's inability to verify the disclosure.
(e) It may be noted that while reporting under this clause, the auditor should also
have regard to the SEBI (Listing Obligations & Disclosure Requirements)
Regulations, 2015 (hereinafter referred as "LODR"), which contain a number
of disclosure requirements in the balance sheet with respect to utilization of
proceeds of monies raised from public, whether by shares or debentures, as
also disclosure requirements in respect of unutilized monies from such
proceeds. From a perusal of the LODR, it would be apparent that the details
have to be given of both `utilised' and `unutilised' monies. Since the purpose
is to provide a picture to the reader of `utilisation of issue proceeds', it is only
logical that the sum total of utilised and unutilised portions equal the total
issue size. This implies that the figure of `utilised' money should be
cumulative.
(f) It may also be noted that according to the LODR, the issuer company is
required to make arrangements for the use of proceeds of the issue to be
monitored by financial institutions. The monitoring agency so appointed is
required to submit its report to the SEBI, on a half-yearly basis, till the
completion of the project. In case, the company has appointed a monitoring
83
agency for the purpose of the issue, reports of the monitoring agency would
also be helpful to the auditor while reporting under the clause.
(g) The expression "debt instrument" is neither defined in the Order not under
the Act. However, SEBI (Issue and Listing of Debt Securities), Regulations,
2008 which apply to public issue of debt securities and its listing, define the
term "debt securities". In terms of Regulation 2(1)(e) of the said regulations, it
means a non-convertible debt securities which create or acknowledge
indebtedness, and include debentures, bonds and such other securities of a
body corporate or a Trust registered with the Board as a Real Estate
Investment Trust or an Infrastructure Investment Trust, or any statutory body
constituted by virtue of a legislation, whether constituting a charge on the
assets of the body corporate or not, but excludes bonds issued by
Government or such other bodies as may be specified by the Board, security
receipts and securitized debt instruments. Further, in terms of the
Explanation to Section 23 of the Act, "Public Offer" would include ADRs and
GDRs.
(h) In view of the aforesaid, the reporting by an auditor as stated in paragraph
(a) above should only relate to moneys raised by the company by way of
initial public offer or further public offer of equity shares, convertible securities
(defined above) and debt securities (defined above). Since, offer for sale of
specified securities (i.e. equity shares and convertible securities) to the public
by any existing holder does not result in any moneys raised by the company,
the same is outside the purview of the reporting requirement under this
clause. It seems that strictly in terms of the definitions of public offer, initial
public offer and further public offer cited above, moneys raised from foreign
capital markets and by way of issuance of Global Depository Receipts and
American Depository Receipts may not fall within the scope of reporting
under this clause.
In certain situations, the Company may undertake an offer of initial public
offer or further public offer of equity shares, convertible securities (defined
above) and debt securities (defined above) together with an offer for sale of
specified securities (i.e. equity shares and convertible securities) to the public
by any existing holder which does not result in any moneys raised by the
company. In such cases, the reporting by an auditor as stated in paragraph
(a), would apply only to the extent of moneys raised by the Company. In
respect of the offer for sale of specified securities (i.e. equity shares and
convertible securities) to the public by any existing holder which does not
result in any moneys raised by the company, the auditor, may if applicable,
verify that the management has disclosed in the financial statements the
terms of the offer for sale including the fact that no moneys were raised by
the company.
(i) It is not necessary to establish a one-to-one relationship with the amount of
84
moneys raised by way of initial public offer or further public offer (including
debt instruments) and its utilisation. It is quite often found that the amount of
moneys raised as aforesaid is transferred to a common account of the
company from which subsequently the utilisation is made. In such cases, it
should not be construed that the amount has not been utilised for the
purpose it was raised.
(j) It may happen that the company might have acquired improved
version/model of assets as against the assets for which the moneys were
raised. For example, if moneys were raised for purchase of machinery to be
used for manufacture of shoe upper is instead used to purchase a machine,
which apart from manufacturing shoe uppers has certain additional
manufacturing facilities, in such cases, it should not be construed that the
moneys raised has not been applied for the purpose for which it was raised.
(k) It may so happen that the moneys raised during the year might not have
been applied for the stated purpose during the year, for example, the moneys
were raised at the fag end of the year. In such a case, the auditor should
mention in his audit report that the moneys raised during the year has not
been utilised. This also implies that the auditor, while making inquiry in
respect of this clause, should also consider the moneys raised which
although were raised in the previous accounting period but have been
actually utilised during the current accounting period and report whether such
moneys have been applied for the purposes for which they were raised.
(l) Companies, may, temporarily invest the surplus funds to reduce the cost of
capital or for other business reasons. However, subsequently the same are
utilised for the stated objectives. In such cases, the auditor should mention
the fact that pending utilisation of the funds raised through Initial Public Offer
or Further Public Offer (including debt instruments) for the stated purpose,
the funds were temporarily used for the purpose other than for which they
were raised but were ultimately utilised for the stated end-use.
(m) Where the auditor concludes that moneys raised from the initial public offer
or the further public offer (including debt instruments) were not applied for the
purpose for which the same were raised, the auditor should mention in his
report the amount involved as well as the nature of default including delay in
utilization. The auditor is also required to report the details of any subsequent
rectifications made by the company.
(n) A suggested reporting format under this cause is as follows:
In our opinion and according to the information and explanations given to us,
the Company has utilized the money raised by way of initial public offer/
further public offer (including debt instruments) for the purposes for which
they were raised, except for the following:
85
Nature Purpose Total Amount Un- Details of Subsequently
of the for Amount utilized for utilized default rectified
fund which Raised the other balance (Reason (Yes/No) and
raised funds /opening purpose as at /Delay) details
were un- utilized Balance
raised balance sheet
date
Note: The reporting under this clause also seeks to cover the details of
non-compliances in respect of moneys which were raised during the
previous accounting period but were actually utilized in the current
accounting period.
65. Whether the company has made any preferential allotment or private
placement of shares or convertible debentures (fully, partially or optionally
convertible) during the year and if so whether the requirements of section 42
and section 62 of the Companies Act, 2013 have been complied with and the
funds raised have been used for the purposes for which the funds were
raised. If not, provide details in respect of amount involved and nature of
non-compliance; [Paragraph 3(x)(b)]
Relevant Provisions
(a) This clause requires that in case of preferential allotment or private
placement of shares or convertible debentures (fully, partially or optionally
convertible), during the year, whether the requirements of section 42 and
section 62 of the Act and the Rules framed thereunder have been complied
with. Further this clause also requires the auditor to report upon the
utilization of the said funds for the purposes for which it has been raised, if
not, the reporting is required giving details of the amount involved and nature
of non-compliance.
Audit Procedures and Reporting
(b) (i) The term `Private Placement' has been defined under the Explanation
(ii) to section 42(2) to mean any offer or invitation to subscribe or issue
of securities to a select group of persons by a company (other than by
way of public offer) through private placement offer-cum-application
which satisfies the conditions specified in section 42 of the Act. In
addition, the provisions of Rule 14 of the Companies (Prospectus and
Allotment of Securities) Rules, 2014 also need to be complied with
while reporting under this clause.
Reference may be made to Section 42 of the Act and Rule 14 of the
Companies (Prospectus & Allotment of Securities) Rules, 2014.
86
(ii) It may be noted that the term "preferential allotment" is not defined
under the Act. However section 62 of the Act read with Rule 13 of the
Companies (Share Capital and Debentures) Rules, 2014 deals with
issue of shares on preferential basis. In addition to the provisions of
section 62, the auditor should also evaluate compliance with Rule 13 of
the Companies (Share Capital and Debentures) Rules, 2014 while
reporting under this clause.
Reference may be made to Section 62 of the Act and Rule 13 of the
Companies (Share Capital and Debentures) Rules, 2014.
(c) Section 42 of the Act and Rule 14 of the Companies (Prospectus & Allotment
of Securities) Rules, 2014 require, inter alia, as under:
(i) A private placement, i.e., offer or invitation to subscribe or issue of
securities should be made to a select group of persons by a company
(other than by way of public offer) through issue of a private placement
offer-cum-application letter.
The offer or invitation to subscribe or issue of securities shall be made
only to a select group of persons who have been identified by the
Board, whose number shall not exceed two hundred, [excluding
qualified institutional buyers and employees of the company being
offered securities under a scheme of employees stock option as per
provisions of clause (b) of sub-section (1) of section 62], in a financial
year and on such conditions (including the form and manner of private
placement) as may be prescribed.
Qualified institutional buyer means the qualified institutional buyer as
defined in the Securities and Exchange Board of India (Issue of Capital
and Disclosure Requirements) Regulations, 2018. Section 42 provides
maximum number of persons 50 or higher number which is prescribed
by rule 14 of the Companies (Prospectus & Allotment of Securities)
Rules, 2014 as 200 persons.
(ii) For the purposes of sub-section (2) and sub-section (3) of section 42, a
company shall not make an offer or invitation to subscribe to securities
through private placement unless the proposal has been previously
approved by the shareholders of the company, by a special resolution
for each of the offers or invitation.
(iii) If a company, listed or unlisted, makes an offer to allot or invites
subscription, or allots, or enters into an agreement to allot, securities to
more than the prescribed number of persons, whether the payment for
the securities has been received or not or whether the company intends
to list its securities or not on any recognised stock exchange in or
outside India, the same shall be deemed to be an offer to the public and
shall accordingly be governed by the provisions of Public offer.
87
(iv) No fresh offer or invitation of private placement shall be made unless
the allotments with respect to any offer or invitation made earlier have
been completed or that offer or invitation has been withdrawn or
abandoned by the company.
(v) Any offer or invitation not in compliance with the provisions of section
42 of the Act shall be treated as a public offer and respective provisions
of the Act, the Securities Contracts (Regulation) Act, 1956 and the
Securities and Exchange Board of India Act, 1992 shall be required to
be complied with.
(vi) A company making an offer or invitation on private placement shall allot
its securities within sixty days from the date of receipt of the application
money for such securities and if the company is not able to allot the
securities within that period, it shall repay the application money to the
subscribers within fifteen days from the expiry of sixty days and if the
company fails to repay the application money within the aforesaid
period, it shall be liable to repay that money with interest at the rate of
twelve percent per annum from the expiry of the sixtieth day.
(vii) Also monies received on application under private placement shall be
kept in a separate bank account in a scheduled bank and shall not be
utilised for any purpose other than (a) for adjustment against allotment
of securities; or (b) for the repayment of monies where the company is
unable to allot securities.
(viii) No company issuing securities under section 42 of the Act shall release
any public advertisements or utilise any media, marketing or distribution
channels or agents to inform the public at large about such an offer.
(ix) The company making any allotment of securities under section 42 of
the Act shall file with the Registrar a return of allotment in form PAS-3
within fifteen days from the date of allotment in such manner as may be
prescribed, including a complete list of all allottees, with their full
names, addresses, number of securities allotted and such other
relevant information as may be prescribed.
(x) If a company makes an offer or accepts monies in contravention of
section 42 of the Act, the company, its promoters and directors shall be
liable for a penalty which may extend to the amount raised through the
private placement or two crore rupees, whichever is lower, and the
company shall also refund all monies with interest as specified in sub-
section (6) of Section 42 to subscribers within a period of thirty days of
the order imposing the penalty.
(d) Section 62 of the Act and Rule 13 of the Companies (Share Capital and
Debentures) Rules, 2014 requires, inter alia, as under:
(i) Where at any time, a company having a share capital proposes to
increase its subscribed capital by the issue of further shares, such
shares shall be offered to any persons, if it is authorised by a special
88
resolution, whether or not those persons include the persons referred to
in clause (a) of section 62 or clause (b) of section 62, either for cash or
for a consideration other than cash, if the price of such shares is
determined by the valuation report of a registered valuer, subject to the
compliance with the applicable provisions of Chapter III and any other
conditions as may be prescribed.
(ii) For the purposes of clause (c) of sub-section (1) of section 62, if
authorized by a special resolution passed in a general meeting, shares
may be issued by any company in any manner whatsoever including by
way of a preferential offer, to any persons whether or not those persons
include the persons referred to in clause (a) or clause (b) of sub-section
(1) of section 62 and such issue on preferential basis should also
comply with conditions laid down in section 42 of the Act, provided that
in case of any preferential offer made by a company to one or more
existing members only, the provisions of sub-rule (1) and proviso to
sub-rule (3) of rule 14 of Companies (prospectus and Allotment of
Securities) Rules, 2014 shall not apply and provided further that the
price of shares to be issued on a preferential basis by a listed company
shall not be required to be determined by the valuation report of a
registered valuer
(iii) Where the preferential offer of shares or other securities is made by a
company whose shares or other securities are listed on a recognized
stock exchange, such preferential offer shall be made in accordance
with the provisions of the Act and regulations made by the Securities
and Exchange Board, and if they are not listed, the preferential offer
shall be made in accordance with the provisions of the Act and rules.
(e) In case the requirements of section 42 and section 62 of the Act and rules
framed in this regard are not complied with, the auditor should report
incorporating following details:
Nature of securities viz. Type of Amount Nature of non-
Equity shares/ Preference issue Involved compliance
shares/ Convertible (preferential
debentures allotment or
private
placement)
(f) This clause also requires the auditor to examine whether funds so raised
from preferential allotment or private placement of shares or convertible
debentures (fully, partially or optionally convertible) were applied for the
purpose for which these securities were issued. The examination of auditor
may cover following aspects:
(i) Paragraph 2(i) of the Form PAS-4, Private Placement Offer cum
89
application Letter5, requires the company to provide particulars in
respect of the purposes and objects of the offer. Accordingly, the
auditor should compare such information provided by the Company in
Form PAS-4 with the actual utilization of the monies as per the books of
account of the Company.
(ii) Sub-clause (i) of clause (d) of sub-rule 2 of Rule 13 of the Companies
(Share Capital and Debentures) Rules, 2014, requires the company to
disclose the objects of the issue in the explanatory statement to be
annexed to the notice of the general meeting pursuant to section 102 of
the Act. Accordingly, the auditor should compare the objects of the
issue noted in the explanatory statement annexed to the notice of the
general meeting with the actual utilization of the monies as per the
books of account of the Company.
(iii) It is not necessary to establish a one-to-one relationship with the
amount of funds raised and its utilisation. It is quite often found that the
amount of fund raised is transferred to a common account of the
company from which subsequent utilisation is made. In such cases, it
should not be construed that the funds have not been utilised for the
purpose for which it was raised.
(iv) Companies may temporarily invest the surplus funds to reduce the cost
of capital or for other business reasons. However, subsequently the
same are utilised for the stated objectives. In such cases, the auditor
should mention the fact that pending utilisation of the fund raised for the
stated purpose, the funds were temporarily used for the purpose other
than for which they were raised but were ultimately utilised for the
stated end-use.
(v) It may so happen that the funds raised during the year might not have
been applied for the stated purpose during the year, for example, the
funds were raised at the fag-end of the year. In such a case, the
auditor should mention in his audit report that the funds raised during
the year has not been utilised. This also implies that the auditor, while
making inquiry in respect of this clause, should also consider the funds
raised, which although were raised in the previous accounting period
but have been actually utilised during the current accounting period and
report whether such funds have been applied for the purposes for which
they were raised.
(vi) In case the specific purpose is not recorded and the general
purpose/bona-fide business use etc., are stated then in such cases,
auditor should verify that the company has invested or utilized the
money for general purpose/bona-fide business use of the company.
(g) Where the auditor concludes that the funds raised were not applied for the
purpose for which the same were raised, the auditor should mention in his
report the amount involved as well as the nature of default including delay in
5
Prescribed in the Companies (Prospectus and Allotment of Securities) Rules, 2014.
90
utilization. The auditor is also required to report the details of any subsequent
rectifications made by the company.
(h) A suggested reporting format under this cause is as follows:
In our opinion and according to the information and explanations given to us,
the Company has utilized funds raised by way of preferential allotment or
private placement of shares or convertible debentures (fully, partially or
optionally convertible) for the purposes for which they were raised, except for
the following:
Nature of Purpose for Total Amount Un- Remarks, if
Securities viz. which funds Amount utilized for utilized any
Equity shares were raised Raised the other balance
/Preference /opening purpose as at
shares un- utilized Balance
/Convertible balance sheet
debentures date
Note: The reporting under this clause also seeks to cover the details of non-
compliances in respect of funds which were raised during the previous accounting
period but were actually utilized in the current accounting period.
66. Whether any fraud by the company or any fraud on the company has
been noticed or reported during the year; If yes, the nature and the amount
involved is to be indicated; [Paragraph 3(xi)]
Relevant Provisions
(a) Under this clause, the responsibilities of the auditor have been widened by
removing the words "officers or employees". This clause requires the auditor
to report whether any fraud has been noticed or reported either on the
company or by the company during the year and is not limited to frauds by
the officers or employees of the company while reporting under this clause. If
yes, the auditor is required to state the amount involved and the nature of
fraud. The clause does not require the auditor to discover such frauds on the
company and by the company. The scope of auditor's inquiry under this
clause is restricted to frauds `noticed or reported' during the year. The use of
the words "noticed or reported" indicates that the management of the
company should have the knowledge about the frauds by the company or on
the company that have occurred during the period covered by the auditor's
report. Thus, this clause requires reporting of `fraud noticed and reported by
company/management. It may be noted that this clause, by requiring the
auditor to report whether any fraud by the company or on the company has
been noticed or reported, does not relieve the auditor from his responsibility
to consider fraud and error in an audit of financial statements. In other words,
91
irrespective of the auditor's comments under this clause, the auditor is also
required to comply with the requirements of Standard on Auditing (SA) 240,
"The Auditor's Responsibilities Relating to Fraud in an Audit of Financial
Statements". Further, the auditor is required to comply with the requirements
of Section 143(12) of the Companies Act, 2013. In this context, the auditor
should also have regard to the Guidance Note on Reporting on Fraud under
Section 143(12) of the Companies Act, 2013, issued by ICAI.
(b) This clause uses the term `fraud' and therefore the auditor is required to
report `established' fraud and not `suspected/alleged fraud'. The term `fraud'
as defined in Section 447 of the Act in relation to affairs of a company or any
body corporate, includes any act, omission, concealment of any fact or abuse
of position committed by any person or any other person with the connivance
in any manner, with intent to deceive, to gain undue advantage from, or to
injure the interests of, the company or its shareholders or its creditors or any
other person, whether or not there is any wrongful gain or wrongful loss. The
definition of fraud as per SA 240 and the explanation of fraud as per Section
447 of the 2013 Act are similar, except that under Section 447, fraud includes
`acts with an intent to injure the interests of the company or its shareholders
or its creditors or any other person, whether or not there is any wrongful gain
or wrongful loss.' However, an auditor may not be able to detect acts that
have intent to injure the interests of the company or cause wrongful gain or
wrongful loss, unless the financial effects of such acts are reflected in the
books of account/financial statements of the company. For example, an
auditor may not be able to detect if an employee is receiving pay-offs for
favoring a specific vendor, which is a fraudulent act, since such pay-offs
would not be recorded in the books of account of the company. However, the
auditor should report all such frauds under this clause noticed or reported by
the management while conducting his/her duties as an auditor. It will also
cover frauds which may have an indirect impact on financial statements of
the company.
(c) The auditor is required to report separately on (i) fraud on the Company (ii)
fraud by the Company. Further, the auditor should consider the frauds
noticed or reported while performing audit.
(d) Although fraud is a broad legal concept, the auditor is concerned with
fraudulent acts that cause a material misstatement in the financial
statements. Misstatement of the financial statements may not be the
objective of some frauds. Auditors do not make legal determinations of
whether fraud has actually occurred. Fraud involving one or more members
of management or those charged with governance is referred to as
"management fraud"; fraud involving only employees including officers of the
entity is referred to as "employee fraud". In either case, there may be
collusion with third parties outside the entity. In fact, generally speaking, the
"management fraud" can be construed as "fraud by the company" while fraud
committee by the employees or third parties may be termed as "fraud on the
company".
92
(e) Two types of intentional misstatements are relevant to the auditor's
consideration of fraud - misstatements resulting from fraudulent financial
reporting and misstatements resulting from misappropriation of assets.
(f) Fraudulent financial reporting involves intentional misstatements or
omissions of amounts or disclosures in financial statements to deceive
financial statement users. Fraudulent financial reporting may involve:
(i) Deception such as manipulation, falsification, or alteration of accounting
records or supporting documents from which the financial statements are
prepared.
(ii) Misrepresentation in, or intentional omission from, the financial
statements of events, transactions or other significant information.
(iii) Intentional misapplication of accounting principles relating to
measurement, recognition, classification, presentation, or disclosure.
(g) Misappropriation of assets involves the theft of an entity's assets.
Misappropriation of assets can be accomplished in a variety of ways
(including embezzling receipts, stealing physical or intangible assets, or
causing an entity to pay for goods and services not received); it is often
accompanied by false or misleading records or documents in order to
conceal the fact that the assets are missing.
(h) Fraudulent financial reporting may be committed by the company because
management is under pressure, from sources outside or inside the entity, to
achieve an expected (and perhaps unrealistic) earnings target particularly
when the consequences to management of failing to meet financial goals can
be significant. The auditor must appreciate that a perceived opportunity for
fraudulent financial reporting or misappropriation of assets may exist when
an individual believes internal control could be circumvented, for example,
because the individual is in a position of trust or has knowledge of specific
weaknesses in the internal control system.
Audit Procedures and Reporting
(i) While planning the audit, the auditor should discuss with other members of
the audit team, the susceptibility of the company to material misstatements in
the financial statements resulting from fraud. While planning, the auditor
should also make inquiries of management to determine whether
management is aware of any known fraud or suspected fraud that the
company is investigating.
(j) The auditor should examine the reports of the internal auditor with a view to
ascertain whether any fraud has been reported or noticed by the auditor. The
auditor should examine the minutes of the audit committee, if available, to
ascertain whether any instance of fraud pertaining to the company has been
reported and actions taken thereon. The auditor should enquire from the
management about any frauds on the company that it has noticed or that
93
have been reported to it. The auditor should also discuss the matter with
other employees including officers of the company. The auditor should also
examine the minutes book of the board meeting of the company in this
regard.
(k) The auditor should obtain written representations from management that:
(i) it acknowledges its responsibility for the implementation and operation
of accounting and internal control systems that are designed to prevent
and detect fraud and error;
(ii) it believes the effects of those uncorrected misstatements in financial
statements, aggregated by the auditor during the audit are immaterial,
both individually and in the aggregate, to the financial statements taken
as a whole. A summary of such items should be included in or attached
to the written representation;
(iii) it has disclosed to the auditor all significant facts relating to any frauds
or suspected frauds known to management that may have affected the
entity; and
(iv) it has disclosed to the auditor the results of its assessment of the risk
that the financial statements may be materially misstated as a result of
fraud.
(l) Because management is responsible for adjusting the financial statements to
correct material misstatements, it is important that the auditor obtains written
representation from management that any uncorrected misstatements
resulting from fraud are, in management's opinion, immaterial, both
individually and in the aggregate. Such representations are not a substitute
for obtaining sufficient appropriate audit evidence. In some circumstances,
management may not believe that certain of the uncorrected financial
statement misstatements aggregated by the auditor during the audit are
misstatements. For that reason, management may want to add to their
written representation words such as, "We do not agree that items constitute
misstatements because [description of reasons]."
(m) The auditor is required to report whether he/she has considered whistle-
blower complaints, if any, received during the year by the company as part of
Clause 3(xi)(c). The auditor should be mindful while performing the
procedure under this clause and consider complaints under whistle
blower mechanism. The auditor should consider whether additional
procedures are required to be performed under SA 240 in this regard.
(n) Where the auditor notices that any fraud by the company or on the company
has been noticed or reported during the year, the auditor should, apart from
reporting the existence of fraud, also required to report, the nature of fraud
and amount involved. For reporting under this clause, the auditor may
consider the following:
94
(i) This clause requires all frauds noticed or reported during the year shall
be reported indicating the nature and amount involved.
(ii) While reporting under this clause with regard to the nature and the
amount involved of the frauds noticed or reported, the auditor may also
consider the principles of materiality outlined in Standards on Auditing.
The following is an example of reporting under the clause:
"We have been informed that the accountant of the company had misappropriated
funds amounting to rupees ten lakhs during the preceding year and the year under
audit. Investigations are in progress and the accountant has been dismissed and
arrested. The company has withheld his terminal benefits and it is estimated that
the amount misappropriated may not exceed the terminal benefits due to the
accountant. The company is also adequately covered by fidelity insurance cover."
67. Whether any report under sub-section (12) of section 143 of the
Companies Act has been filed by the auditors in Form ADT-4 as prescribed
under rule 13 of Companies (Audit and Auditors) Rules, 2014 with the
Central Government; [Paragraph 3(xi)(b)]
Relevant Provisions
(a) This clause requires the auditor to report if any report under sub-section (12)
of section 143 of the Companies Act 2013 has been filed by the auditors in
Form ADT 4. Rule 13 of the Companies (Audit and Auditors) Rules, 2014
specifies the manner in which the auditor is required to report on fraud to the
Central Government and Form ADT 4 to these Rules provides the format and
information to be included in such report.
(b) As per Section 143(12), "Notwithstanding anything contained in this section,
if an auditor of a company, in the course of the performance of his duties as
auditor, has reason to believe that an offence of fraud involving such amount
or amounts as may be prescribed, is being or has been committed against
the company by officers or employees of the company, he shall immediately
report the matter to the Central Government within such time and in such
manner as may be prescribed.
Provided that in case of a fraud involving lesser than the specified amount,
the auditor shall report the matter to the audit committee constituted
under section 177 or to the Board in other cases within such time and in such
manner as may be prescribed.
Provided further that the companies, whose auditors have reported frauds
under this sub-section to the audit committee or the Board but not reported to
the Central Government, shall disclose the details about such frauds in the
Board's report in such manner as may be prescribed."
(c) Section 143(12) of the Act read with Rule 13(1) of the Companies (Audit and
Auditors) Rules, 2014 prescribes that if an auditor of a company in the
95
course of the performance of his duties as auditor, has reason to believe that
an offence of fraud involving an amount of rupees one crore or above , is
being or has been committed in the company by its officers or employees,
the auditor shall report the matter to the Board or the Audit Committee, as
the case may be, immediately but not later than two days of his knowledge of
the fraud, seeking their reply or observations within forty-five days.
(d) On receipt of such reply or observations, the auditor shall forward his report
in Form ADT-4 and the reply or observations of the Board or the Audit
Committee along with his comments (on such reply or observations of the
Board or the Audit Committee) to the Central Government within fifteen days
from the date of receipt of such reply or observations. In case the auditor fails
to get any reply or observations from the Board or the Audit Committee within
the stipulated period of forty-five days, he shall forward his report in Form
ADT-4 to the Central Government along with a note containing the details of
his report that was earlier forwarded to the Board or the Audit Committee for
which he has not received any reply or observations. Further, in this regard
ICAI has issued Guidance Note on Reporting on Fraud under Section
143(12) of the Companies Act 2013.
Audit Procedures and Reporting
(e) The auditor should consider if any fraud has been reported by him during the
year under section 143(12) of the Act and if so same needs to be reported
under this clause.
(f) Reporting requirement under Section 143(12) is for the statutory auditors of
the company and also equally applies to the cost accountant in practice,
conducting cost audit under Section 148 of the Act; and to the company
secretary in practice, conducting secretarial audit under Section 204 of the
Act. The auditor should consider if cost auditor or secretarial auditor has filed
any report under section 143(12) of the Act in Form ADT-4. The auditor
should obtain written representations from management in this regard.
68. Whether the auditor has considered whistle-blower complaints, if any,
received during the year by the company; [Paragraph 3(xi)(c)]
Relevant Provisions
(a) This is a new reporting requirement in CARO 2020 and requires the auditor
to consider whistle blower complaints, if any, received by the company during
the year under audit.
(b) The establishment of whistle blower mechanism is not mandatory for all
companies and therefore the auditor should consider the requirements
prescribed in the Companies Act, 2013 and in SEBI Listing Regulations.
Section 177(9) of the Act requires the following class of companies to
establish a vigil mechanism for their directors and employees to report their
genuine concerns or grievances:
every listed company.
96
Companies which accept deposits from the public.
Companies which have borrowed money from banks and public
financial institutions in excess of fifty crore rupees.
The vigil mechanism should provide for adequate safeguards against
victimisation of employees and directors who avail of the vigil mechanism
and also provide for direct access to the Chairperson of the Audit Committee
or the authorised representative, as the case may be.
(c) Regulation 4(2)(d) of the SEBI Listing Regulations also mandates all listed
entities for devising an effective whistle blower mechanism enabling
directors, employees or any other person, to freely communicate their
concerns about illegal or unethical practices. Regulation 46(2)(e) of SEBI
Listing Regulations requires a listed company to disseminate on its website
details of establishment of vigil mechanism/ whistle Blower policy. Further,
the role of audit committee also includes review the functioning of the whistle
blower mechanism.
(d) Other companies i.e. companies not covered in the thresholds specified in
paragraph (b) & (c) above may voluntarily establish vigil/whistle blower
mechanism through which instances of whistle blower and fraud are
reported. Also, in case a fraud has already been reported or has been
identified/detected by the management or through the company's vigil/whistle
blower mechanism and has been/is being remediated/dealt with by them and
such case is informed to the auditor, the latter will not be required to report
the same under Section 143(12) since he has not per se identified the fraud.
However, all such cases should be considered by the auditor in accordance
with the requirements of SA 240 and will also be required to be considered
as part of this clause.
Audit Procedures and Reporting
(e) Where establishment of whistle blower mechanism is mandated by law (as
discussed above), the auditor should check as to whether the company has
an ethics/whistle blower hotline/process with adequate procedures to handle
anonymous complaints (received from inside and outside the company), and
to accept confidential submission of concerns about questionable
accounting, internal accounting control, or auditing matters. The auditor is
required to consider every complaint received by the company including
anonymous complaints while deciding the nature, timing and extent of audit
procedures. The auditor should also evaluate whether whistle blower
complaints are investigated and resolved by the company in an appropriate
and timely manner.
(f) In case of a listed company, the auditor should also examine whether vigil
mechanism has been established in accordance with the requirements of
Section 177 of the Companies Act, 2013 and Regulation 4(2)(d) of SEBI
Listing Regulations (as amended). For unlisted (public or private) companies
required to establish vigil mechanism as per Companies Act, 2013, the
97
auditor should ensure compliance with the provisions of Section 177 of the
Act.
(g) For other companies, the auditor should examine whether companies have
established a vigil mechanism/whistle blower mechanism on a voluntary
basis. If the companies have established it on a voluntary basis, the auditor
should perform the procedures as stated in paragraph (e) above.
(h) Where there is no whistle blower mechanism established by the company
considering it is not a mandatory requirement either under the Companies
Act, 2013 or under SEBI Regulations or under any other law, the auditor
should ask from the management to share all whistle blower complaints and
review the whistle blower complaints while expressing an opinion on the
financial statements.
(i) The auditor should enquire from the management about investigation of all
such whistle blower complaints received and the findings, if any.
(j) The auditor should also consider when whistle-blower complaint is received
or have been identified, during the course of audit, about a fraud or
suspected fraud, whether the auditor has analysed the stages of fraud as per
paragraph 80 of the Guidance Note on Reporting on Fraud under Section
143(12) of the Companies Act, 2013 (Revised 2016).
(k) While reporting under this clause with regard to the consideration of the
whistle blower complaints, the auditor may also consider the principles of
materiality outlined in Standards on Auditing.
(l) The auditor should obtain written representation from the Board/ Audit
Committee, management for completeness of such whistle blower
complaints, if any, received by the company. If management represents that
they have not received any whistle blower complaints during the year and the
auditor has no other reason to believe so while performing his duties as an
auditor, he should rely on the management representation in this regard.
(m) The following is an example of reporting by the auditor under this clause:
For a listed company and other companies which are required to establish
vigil mechanism under Section 177 of the Act /SEBI LODR- "We have taken
into consideration the whistle blower complaints received by the company
during the year while determining the nature, timing and extent of audit
procedures".
For other companies - "Though establishment of vigil mechanism is not
mandated by Companies Act, 2013 or by SEBI LODR Regulations, we have
taken into consideration the whistle blower complaints received by the
company during the year and shared with us for reporting under this clause".
In case there is no whistle-blower complaints received during the year
"As represented to us by the management, there are no whistle blower
complaints received by the company during the year".
98
69. (a) Whether the Nidhi Company has complied with the Net Owned Funds
to Deposits in the ratio of 1: 20 to meet out the liability;
(b) Whether the Nidhi Company is maintaining ten per cent Unencumbered
term deposits as specified in the Nidhi Rules, 2014 to meet out the
liability;
(c) Whether there has been any default in payment of interest on deposits
or repayment thereof for any period and if so, the details thereof;
[Paragraph 3(xii)]
Relevant Provisions
(a) This clause requires the auditor to report whether, in the case of a Nidhi
Company, net-owned funds to deposit liability ratio is more than 1:20 and the
Nidhi Company is maintaining ten per cent unencumbered term deposits
as specified in the Nidhi Rules 2014 to meet out the liability and whether
there has been any default in payment of interest on deposits or
repayment thereof for any period and if so, the details thereof;
(b) Section 406(1) of the Act defines "Nidhi" to mean a company which has been
incorporated as a Nidhi with the object of cultivating the habit of thrift and
savings amongst its members, receiving deposits from, and lending to, its
members only, for their mutual benefit, and which complies with such rules
as are prescribed by the Central Government for regulation of such class of
companies.
(c) It may be noted that Ministry of Corporate Affairs on 31st March 2014, vide its
Notification No. GSR 258(E) notified the `Nidhi Rules 2014', which came into
force on the first day of April 2014. Reference may be made to said Rules.
These Rules apply to Nidhi company incorporated as a Nidhi pursuant to the
provisions of Section 406 of the Act and also to the Nidhi companies
declared under sub-section (1) of section 620A of the Companies Act 1956.
Audit Procedures and Reporting
(d) It may be noted that Rule 5(1) of these rules prescribes the requirements for
minimum number of members, net owned fund etc. As per Rule 5(1) every
Nidhi shall, within a period of one year from the commencement of these
rules, ensure that it has--
(i) not less than two hundred members;
(ii) net owned funds of ten lakh rupees or more;
(iii) unencumbered term deposits of not less than ten per cent of the
outstanding deposits as specified in Rule 14; and
99
(iv) ratio of net owned funds to deposits of not more than 1:20.
The auditor should note that as such a Nidhi Company can accept deposits
not exceeding twenty times of its net owned funds as per last audited
balance sheet. Furthermore, as per Rule 14, every Nidhi is to invest and
continue to keep invested, in encumbered term deposits with a Scheduled
commercial bank (other than a co-operative bank or a regional rural bank), or
post office deposits in its own name an amount which shall not be less than
ten per cent of the deposits outstanding at the close of business on the last
working day of the second preceding month, which needs to be examined.
(e) As per Rule 3(d) Net Owned Funds are defined as the aggregate of paid up
equity share capital and free reserves as reduced by accumulated losses
and intangible assets appearing in the last audited balance sheet:
Provided that, the amount representing the proceeds of issue of preference
shares, shall not be included for calculating Net Owned Funds.
(f) A Nidhi company can accept fixed deposits, recurring deposits accounts and
savings deposits from its members in accordance with the directions notified
by the Central Government. The aggregate of such deposits is referred to as
"deposit liability".
(g) The auditor should ask the management to provide the computation of the
deposit liability and net owned funds on the basis of the requirements
mentioned above. This would enable him to verify that the ratio of deposit
liability to net owned funds is in accordance with the requirements prescribed
in this regard. The auditor should verify the ratio using the figures of net
owned funds and deposit liability computed in accordance with what is stated
above. The comments of the auditor should be based upon such a statement
provided by the management and verification of the same by the auditor.
(h) The auditor should obtain the schedule of payments of interest and
repayments of deposits. The schedule should indicate the amount and the
due dates of the payment of interest and repayments of deposits.
(i) The auditor should examine the documents containing the terms and
conditions of the deposits. This examination would enable the auditor in
verifying the amount and due dates of the payments mentioned in the
documents. The auditor should then verify whether the repayments as well
interest as per books of accounts are in accordance with the terms and
conditions of the relevant documents.
(j) A question that arises is whether the scope of the auditor's enquiry would
cover defaults made by the Nidhi company during the year only or whether
the defaults committed in previous years and continuing until the year would
also be covered. It is clarified that the auditor should report the period and
amount of all defaults:
Existing as at the year-end; and
100
Defaults existing during any period and made good during the year.
(k) The auditor may come across a situation where there may be disputes
between the company and the depositor on certain issues relating to
repayments. In such situations, the auditor should consider the prevailing
terms and conditions only. However, he may give a brief nature of the
dispute while reporting under this clause
(l) The auditor should report, incorporating the following as at the balance sheet
date:-
(i) In case of shortfall in the ratio of net owned funds to the deposits, report
the amount of shortfall and state the actual ratio of net owned funds to
the deposits.
(ii) In case of shortfall with regard to the minimum amount of 10% as
unencumbered term deposits, as specified in Nidhi Rules 2014, report
the amount thereof.
(iii) In case there is no default, the auditor should report accordingly. In
case of default of either payment of interest on deposit or
repayment thereof or both, the auditor may report:
Nature of default,
Amount of default,
Period of Default,
Number of persons to whom there was default in payment,
Any other detail.
70. Whether all transactions with the related parties are in compliance with
sections 177 and 188 of Companies Act, where applicable and the details
have been disclosed in the Financial Statements etc., as required by the
applicable accounting standards; [Paragraph 3(xiii)]
Relevant Provisions
(a) The duty of the auditor, under this clause is to report:
(i) Whether all transactions with the related parties are in compliance with
section 177 and 188 of the Companies Act, 2013 ("Act")
(ii) Whether related party disclosures as required by relevant Accounting
Standards (AS 18 or Ind-AS 24, as may be applicable) are disclosed in
the financial statements
(b) Section 188 of the Act is applicable to all classes of companies (including
private companies). The Act envisages the approval of Board of Directors
101
and/or the approval of the shareholders (by way of resolution passed in the
general meeting of the company), as the case may be, in accordance with
the provisions of section 188. However:-
(i) approval of shareholders by way of resolution is not required for
transactions entered into between a holding company and its wholly
owned subsidiary whose accounts are consolidated with such holding
company and placed before the shareholders at the general meeting
for approval.
(ii) approval of the Board of Directors and shareholders is not required in
respect of related party transactions entered into by the company in its
ordinary course of business and on an arm's length basis.
(c) The Related Party, with reference to a company is defined in section 2(76) of
the Act. The transactions which are covered by section 188 are:
(i) sale, purchase or supply of any goods or materials;
(ii) selling or otherwise disposing of, or buying, property of any kind;
(iii) leasing of property of any kind;
(iv) availing or rendering of any services;
(v) appointment of any agent for purchase or sale of goods, materials,
services or property;
(vi) such related party's appointment to any office or place of profit in the
company, its subsidiary company or associate company; and
(vii) Underwriting the subscription of any securities or derivatives thereof,
of the company.
(d) Explanation (b) to Section 188(1) defines `arm's length transaction' to mean a
transaction between two related parties that is conducted as if they were
unrelated, so that there is no conflict of interest.
Standard on Auditing (SA) 550, Related Parties defines arm's length
transaction as "a transaction conducted on such terms and conditions as
between a willing buyer and a willing seller who are unrelated and are acting
independently of each other and pursuing their own best interest." The
decision as to whether a transaction is at an arm's length or not would need
considering several factors such as benefits/ consideration for each of the
parties to enter into the agreement, the prevalent market/industry practice,
economic circumstances, the specific contractual understanding and / or
terms between the parties, similar contracts executed between other
unrelated parties, etc. For the purpose of this Clause the auditor may test the
transaction of arm's length basis based on the transfer pricing mechanism in
use for the purposes of Income Tax Act, 1961.
102
(e) The phrase `ordinary course of business' is not defined under the Act. It
seems that the ordinary course of business will cover the usual transactions,
customs and practices of a business and of a Company. In many cases, it
may be obvious that a transaction is in the `ordinary course of business.' For
example, a car manufacturing company sells a car to its group company. The
price charged for the sale is the same as what it charges to other corporate
customers who are unrelated parties. In this case, one may be able to
conclude, without much difficulty, that the transaction has been entered into
by the company in its ordinary course of business. Similarly, in certain
extreme cases, it may be clear that the transaction is highly unusual and/ or
extraordinary from the perspective of the company as well as its line of
business. Hence, it may not be construed as being in the `ordinary course of
business. SA 550, Related Parties (Paragraph A25) has listed certain
examples of transactions outside the entity's normal course of business:
(i) Complex equity transactions, such as corporate restructurings or
acquisitions
(ii) Transactions with offshore entities in jurisdictions with weak corporate
laws
(iii) The leasing of premises or the rendering of management services by
the entity to another party if no consideration is exchanged
(iv) Sales transactions with unusually large discounts or returns
(v) Transactions with circular arrangements, for example, sales with a
commitment to repurchase
(vi) Transactions under contracts whose terms are changed before expiry.
(f) The above examples are just illustrative and are not conclusive for the
purposes of analysis under the Act. However, it provides some indicators
based on which one may consider following aspects while performing
evaluation of `ordinary course of business':
(i) Whether the transaction is covered in the objects of the company as
envisaged in the Memorandum of Association;
(ii) Whether a transaction is usual or unusual, both from the company and
its line of business perspective;
(iii) Frequency: If a transaction is happening quite frequently over a period
of time, it is more likely to be treated as an ordinary course of business.
However, the inverse does not necessarily hold true;
(iv) Whether transaction is taking place at arm's length;
(v) Business purpose of the transaction;
103
(vi) Whether transaction is done on similar basis with other third parties;
and
(vii) Size and volume of transaction.
The assessment of whether a transaction is in the ordinary course of
business is likely to be very subjective, judgmental and will vary on case-to-
case basis. The factors mentioned above may help in making this
assessment.
Audit Procedures and Reporting
(g) The auditor should obtain written representations from management and,
where appropriate, those charged with governance that:
(i) They have disclosed to the auditor the identity of the entity's related
parties and all the related party relationships and transactions of which
they are aware; and
(ii) They have appropriately accounted for and disclosed such relationships
and transactions in accordance with the requirements of the applicable
financial reporting framework.
(h) Circumstances in which it may be appropriate to obtain written
representations from those charged with governance include:
(i) When they have approved specific related party transactions that
a) materially affect the financial statements, or
b) involve management.
(ii) When they have made specific oral representations to the auditor on
details of certain related party transactions.
(iii) When they have financial or other interests in the related parties or the
related party transactions.
(iv) Management's assertion of responsibility that related party transactions
were conducted on terms equivalent to those prevailing in an arm's
length transaction.
(i) The auditor may also decide to obtain written representations regarding
specific assertions that management may have made, such as a
representation that specific related party transactions do not involve
undisclosed side agreements.
(j) In addition to management representation, the auditor may review the
minutes of Audit committee meetings as well as Board of Directors meetings.
The copies of minutes of such meetings that are found relevant and
important from the perception of auditor may be preserved as working
papers.
104
(k) The auditor should obtain a list of companies, firms or other parties, the
particulars of which are required to be entered in the register maintained
under section 189 of the Act. The auditor should verify the entries made in
the register maintained under section 189 of the Act from the declarations
made by the directors in Form MBP-1 i.e., general notice received from a
director under Rule 9(1) of The Companies (Meetings of Board and Power)
Rules, 2014. The auditor should also obtain a written representation from the
management concerning the completeness of the information so provided to
the auditor. The auditor should review the information provided by the
management. The auditor should also perform the following procedures in
respect of the completeness of this information:
(i) review his working papers for the prior years, if any, for names of
known companies, firms or other parties the particulars of which are
required to be entered in the register maintained under section 189 of
the Act; and
(ii) review the entity's procedures for identification of companies, firms or
other parties the particulars of which are required to be entered in the
register maintained under section 189 of the Act.
(l) A difficulty in judging the arm's length of prices may also arise in cases
where transactions are entered with sole suppliers. In such cases, the
auditor may examine the prices paid with reference to list prices of the
supplier concerned, other trade terms of the supplier, etc. It may be noted
that the Company while determining whether the transactions entered into by
it in its ordinary course of business with its related parties are on an arm's
length basis must have documentary proof of same while entering into the
transaction.
(m) Section 177(4)(iv) of the Act requires that audit committee (of every listed
companies and other classes of companies which is required to constitute
audit committee) to approve transactions of the company with related
parties.
(n) The auditor is required to perform appropriate procedures to satisfy himself
as regards compliance with section 177 and 188 of the Act so that auditor is
able to appropriately report under this clause. Auditor can refer SA 550
Related Parties which has prescribed auditor's responsibilities regarding
related party relationships and transactions when performing an audit of
financial statements, including guidance on the procedures to be performed
by auditors. The key aspects of SA 550 which would be relevant for reporting
on this clause are:
(i) Identified significant related party transactions outside the entity's
normal course of business, detailed guidance is available in paragraph
A38 to A41 of SA 550.
105
(ii) Assertions that related party transactions were conducted on terms
equivalent to those prevailing in an arm's length transaction, detailed
guidance is available in paragraph A42 to A45 of SA 550.
(iii) Evaluation of the accounting for and disclosure of identified related
party relationships and transactions, detailed guidance is available in
paragraph A46 to A47 of SA 550.
(o) A smaller entity may not have the same controls provided by different levels
of authority and approval that may exist in a larger entity. Accordingly, when
auditing a smaller entity, the auditor may rely to a lesser degree on
authorization and approval for audit evidence regarding the validity of
significant related party transactions outside the entity's normal course of
business. Instead, the auditor may consider performing other audit
procedures such as inspecting relevant documents, confirming specific
aspects of the transactions with relevant parties, or observing the owner-
manager's involvement with the transactions.
(p) The disclosure requirements as per AS 18 or Ind-AS 24 (as may be
applicable) need to be checked. There are certain specific additional
requirements in respect of Ind-AS 24, where the issues like Significant
Influence, close members of Key management personnel's (KMP) family
who has significant influence/ control over entity also need to be carefully
documented.
(q) Based on the procedures performed by the auditor, if the auditor comes
across any non-compliance of requirements of Section 177 and 188, then, it
should be duly reported. The non-compliance of disclosure requirements as
per AS 18 or Ind AS 24 (as may be applicable) may also be reported and the
categorisation may be made as:
Non-compliance of requirements of Section 177and 188
Non-compliance of disclosure requirements as per AS 18 or Ind-AS
24(as may be applicable). The following particulars may be
incorporated:
Nature of the related Amount involved Remarks (details of non-
party relationship and (Rs.) compliance may be
the underlying given)
transaction
71. Whether the company has an internal audit system commensurate with
the size and nature of its business; [Paragraph 3(xiv)(a)]
Relevant provisions
(a) This clause requires the auditor to comment whether the company has an
internal audit system commensurate with the size and nature of its business.
106
(b) In accordance with Section 138 of the Companies Act, 2013 this clause has
a mandatory application for the listed companies irrespective of the size of
paid-up share capital, turnover, borrowings or deposits. It may be noted that
the Order does not specify the date with reference to which the listing status
of the company should be determined. In this regard, it is clarified that if the
company is listed on a recognised stock exchange as on the date of the
balance sheet, it should be considered as listed for the purpose of this
clause. In respect of non-listed companies the clause is applicable as under:
(i) in case of private limited companies if the turnover is greater than
rupees two hundred crores during the previous financial year or
outstanding loans/borrowings from banks /Public financial institutions is
greater or equal to Rupees one hundred crores at any time during the
previous financial year.
(ii) in case of unlisted public limited companies if the paid up share capital
is greater than rupees fifty crores during the previous financial year or
the turnover is greater than rupees two hundred crores during previous
financial year or outstanding loans/borrowings from banks /Public
financial institutions is greater or equal to Rupees one hundred crores
at any time during the previous financial year or outstanding deposits is
greater or equal to rupees 25 crores at any time during the previous
financial year.
Section 138 read with Rule 13 of Companies (Accounts) Rules, 2014,
Internal Auditor may be either an individual or a partnership firm or a body
corporate. The Qualification of Internal Auditor, shall be chartered accountant
or a cost accountant, (whether engaged in practice or not), or such other
professional as may be decided by the Board to conduct internal audit of the
functions and activities of the company. Internal auditor may or may not be
an employee of the company.
The Audit Committee of the company or the Board shall, in consultation with
the Internal Auditor, formulate the scope, functioning, periodicity and
methodology for conducting the internal audit.
(c) Definition of Internal audit function: As per SA 610 (Revised) Using the
Work of Internal Auditor, the term Internal Audit Function is defined as
follows
"A function of an entity that performs assurance and consulting activities
designed to evaluate and improve the effectiveness of the entity's
governance, risk management and internal control processes".
(d) Generally Internal Audit Function includes the following activities with regard
to the entity:
(i) Evaluation of Internal Controls
(ii) Examination of Financial and Operational Information
(iii) Review of Operating Activities
107
(iv) Review of Compliance of Laws and Regulations
(e) A company may either have its own internal audit department or entrust the
work of internal audit to an external agency, which shall include a firm of
chartered accountants, cost accountants or such other professionals as may
be decided by the Board of directors of the Company. In the case of a group
of companies, it is also quite common to have a central internal audit
department. The arrangement which is more suitable will depend upon the
circumstances of each company but generally, where a company is small, it
may find it expensive to have its own internal audit department staffed by
personnel having the requisite qualifications.
Audit procedures and reporting
(f) The auditor needs to examine whether the internal audit system is
commensurate with the size of the company and the nature of its business.
In this regard, the auditor should evaluate the following:
(i) The size of the internal audit department: In considering the adequacy
of internal audit staff, it is necessary to consider the nature of the
business, the number of operating locations, the extent to which control
is decentralised, the effectiveness of other forms of internal control, etc.
(ii) Qualifications of the persons who undertake the internal audit work:
Internal auditing, as its name implies, is an aspect of audit and,
therefore, it is reasonable to expect that the internal audit department
should normally be headed by a qualified professional and that,
depending upon the size of the department, it employs other qualified
persons. In deciding the adequacy of the internal audit department, it is,
therefore, necessary that there is adequate number of qualified
personnel. In cases where external agencies are appointed the auditor
would need to evaluate their competency, objectivity and the
independence. The auditor may do this by assessing the qualifications,
experience and the professional standing.
(iii) Reporting responsibility of the internal auditor: In general, the higher the
level to which the internal auditor reports, the wider would be the
independence. It is expected that the internal auditors would report to
those charged with governance.
In case of Listed Companies, compliance of Provisions of LODR
regulations with regard to review of Internal Audit Function by Audit
Committee and the presence of Head of Internal Audit in the Audit
Committee meeting shall also be verified.
Auditor should also cross check the entrusted function of Audit
Committee with regard to Appointment, removal and terms of
remuneration of the Chief Internal Auditor
Also, LODR requirements as to establishing a direct communication link
with the Internal Auditor by the Audit Committee and providing him
108
necessary independence and reviewing the effectiveness of the internal
controls by the Committee shall also be verified by the Auditor.
(iv) The Audit Committee of the company or the Board shall, in
consultation with the Internal Auditor, formulate the scope,
functioning, periodicity and methodology for conducting the internal
audit. It is also imperative that statutory auditors are also involved
by the internal auditor/ those charged with governance in
determining the scope of work and periodicity of reporting.
(v) Technical assistance of the internal auditor: In number of companies,
where the operations are highly technical in nature, an internal auditor
cannot function effectively unless he has adequate technical
assistance. This can be provided either by having full-time technically
qualified persons in the internal audit department or by such persons
being deputed to the internal audit department for specific assignments.
Similar considerations would apply where a large part of the
transactions are computerised. In such cases, the internal auditor
should have the assistance of persons who are able to audit computer
systems.
(vi) What are the reports which are submitted by the internal auditor or what
other evidence is there of his work? It is important that the auditor
should satisfy himself that the internal audit system exists and also that
it is functioning effectively. He can do so by examining the reports
submitted by the internal auditor.
(vii) What is the follow-up mechanism for ensuring implementation of
internal audit observations. It is not sufficient that the internal audit
system should merely point out errors in operation or deficiencies in the
internal control system. It is equally necessary that there is an adequate
follow-up system to ensure that the deficiencies pointed out are
corrected and remedial action taken on the deficiencies reported upon.
(viii) The auditor should examine the minutes of the meetings of the Board of
Directors and audit committee, if any. These minutes would provide the
auditor useful evidence regarding the efficiency and efficacy of the
internal audit system.
(ix) It is equally important to note that the internal audit system is a part of
the overall internal control system. Therefore, the scope of the internal
audit and the extent of its coverage will, to some extent, depend upon
the existence or otherwise of other forms of internal control. This is also
a factor to be considered when evaluating the adequacy of the internal
audit system.
(x) In respect of companies which are excluded from the ambient of
internal audit under section 138, (with regard to mandatory applicability
of Internal Audit System), the auditor would still be well-advised to
make inquiries regarding the existence of internal audit system and to
109
report the fact under this clause.
Suggested reporting pattern:
Situation A Company has an adequate Internal Control System:
"In our opinion, the Company has an internal audit system
commensurate with the size and nature of its business."
Situation B Company does not have Internal Audit Function
though mandated under section 138:
"In our Opinion and based on our examination, though the Company is
required to have an Internal Audit system under section 138 of the act,
it does not have the same established for the year."
Situation C Company does not have Internal Audit Function also,
not mandated under section 138:
"In our Opinion and based on our examination, The Company does not
have an Internal Audit system and is not required to have an Internal
Audit System as per Companies Act 2013."
(xi) The auditor should include in the audit documentation as to how assessment
of internal audit was made and conclusions reached thereon.
72. Whether the reports of the Internal Auditors for the period under audit
were considered by the statutory auditor; [Paragraph 3(xiv)(b)]
Relevant provisions
a) Normally the Statutory Auditor reporting under CARO, as part of his regular
audit procedures shall review the Internal Audit reports to evaluate the
system of Internal Controls operated in the entity.
b) There shall also be a situation, where the Auditor shall consider the work
done by the Internal Auditor for his Audit purposes, in such situation,
guidance from and Compliance of SA 610 (Revised) Using the work of
Internal Auditor, is mandatory for the Statutory Auditor.
As a part of his audit procedure, he is required to consider the reports of the
internal auditor before conclusion of audit and finalization of his audit report.
Audit Procedures
c) The statutory auditor should discuss and agree with the management that
the internal audit is completed as per the plan and the periodic reports of the
internal auditors are made available sufficiently in advance for statutory
auditor to review and assess the impact of the internal audit observations.
d) The auditor may have meeting with internal auditors to discuss the findings
and observations of internal auditor in order to independently evaluate the
impact of the observations on the financial statements.
110
e) The statutory auditor as a part of his audit procedure should ensure that all
observations having a financial impact are considered by the management
and also control deficiencies pointed out by the internal auditors are rectified.
f) The statutory auditor should also assess the impact of the control
deficiencies , if any pointed by the internal auditors, while framing his report
on the Internal Financial Controls Over Financial Reporting (ICoFR) under
Clause (i) of Sub-section 3 of Section 143 of the Companies Act, 2013 ("the
Act")
g) As guided by SA 610(Revised), "Using the Work of Internal Auditors", the
statutory auditor may also consider whether to reassess the nature, timing
and extent of his audit procedures based on the observations of the internal
audit, to enable him to obtain sufficient and appropriate audit evidence in
forming his opinion.
h) The statutory auditor should also maintain as a part of his working papers,
the evidence of evaluating the reports of the internal auditors and the
conclusion reached thereon.
i) The statutory auditor should, consider all the internal audit reports covering
upto the end of the financial year under audit prior to concluding on his audit
report (including his report on ICoFR). Towards this, he should set this
expectation both in his engagement letter which is signed off with the
Company as well as during the interactions with Senior Management /
Those Charged with Governance.
j) The Statutory Auditor is vested with the right to receive the full-fledged
Internal Audit Reports (including draft audit reports) together with annexures
and not merely the Executive Summary / Power Point presentations. The
Statutory Auditor should prepare a list of gaps in Control Design and
impacting the operational effectiveness of controls and classify each such
gap as one of normal control deficiency, significant deviation or material
weakness. The auditor should also consider the pervasiveness of the same
as per Guidance Note on ICoFR principles as well consider if the
effects/possible effects of the material weakness in such internal controls are
material.
k) The Statutory Auditor should consider the internal audit reports shared by the
Company till the date of completing the audit. Where some or all internal
audit reports are not available, or provided at very short notice or do not
adequately address the plan and scope required, the Statutory Auditor
should consider appropriate reporting in this clause as well as consider its
effect on the overall Control Environment with regard to Internal Control
Reporting on Financial Reporting Processes (IFC Report).
The following may be considered for reporting under this Clause:
Situation A Internal Audit Reports Considered Adequate and
Complete in plan and scope
111
We have considered the Internal Audit reports of the Company issued till
date, for the period under audit.
Situation B Internal Audit System does not exist for the Company
The Company did not have an internal audit system for the period under
audit.
Situation C Internal Audit Reports entirely unavailable or provided at
short notice or only partly (either by date of issue or scope) available -
hence not considered
We were unable to obtain [any/ some/ on timely basis] of the Internal Audit
Reports of the Company, hence the Internal Audit Reports have not been
[entirely] considered by us.
[The Statutory Auditor may also determine whether this is a material internal
control weakness under ICFoR]
73. Whether the company has entered into any non-cash transactions with
directors or persons connected with him and if so, whether the provisions of
section 192 of Companies Act, have been complied with; [Paragraph 3(xv)]
Relevant Provisions
Section 192 of the Companies Act, 2013, on Restriction on non-cash transactions
involving directors provides as under:
(1) No company shall enter into an arrangement by which--
(a) a director of the company or its holding, subsidiary or associate
company or a person connected with him acquires or is to acquire
assets for consideration other than cash, from the company; or
(b) the company acquires or is to acquire assets for consideration other
than cash, from such director or person so connected, unless prior
approval for such arrangement is accorded by a resolution of the
company in general meeting and if the director or connected person is a
director of its holding company, approval under this sub-section shall
also be required to be obtained by passing a resolution in general
meeting of the holding company.
(2) The notice for approval of the resolution by the company or holding company
in general meeting under sub-section (1) shall include the particulars of the
arrangement along with the value of the assets involved in such arrangement
duly calculated by a registered valuer.
(3) Any arrangement entered into by a company or its holding company in
contravention of the provisions of this section shall be voidable at the
instance of the company unless--
112
(a) the restitution of any money or other consideration which is the subject
matter of the arrangement is no longer possible and the company has
been indemnified by any other person for any loss or damage caused to
it; or
(b) any rights are acquired bona fide for value and without notice of the
contravention of the provisions of this section by any other person.
(a) Section 192 of the Companies Act 2013, deals with restriction on non-cash
transactions involving directors or persons connected with them. The section
prohibits the company from entering into following types of arrangements
unless it meets the conditions laid out in the said section:
(i) An arrangement by which a director of the company or its holding,
subsidiary or associate company or a person connected with such
director acquires or is to acquire assets for consideration other than
cash, from the company.
(ii) An arrangement by which the company acquires or is to acquire assets
for consideration other than cash, from such director or person so
connected.
(b) Arrangements, as discussed herein above, can only be entered by the
company on fulfillment of the conditions laid out in Section 192 of the Act
which are as under:
(i) The company should have obtained prior approval for such
arrangement through a resolution of the company in general meeting.
(ii) In case the concerned director or the person connected therewith, is
also a director of its holding company, a similar approval should have
been obtained by the holding company through a resolution at its
general meeting.
(c) The reporting requirements under this clause are in two parts. The first part
requires the auditor to report on whether the company has entered into any
non-cash transactions with the directors or any persons connected with such
director/s. The second part of the clause requires the auditor to report
whether the provisions of section 192 of the Act have been complied with.
Therefore, the second part of the clause becomes reportable only if the
answer to the first part is in affirmative.
(d) In other words, such transactions involving change in the assets or liabilities
of a company but not involving "cash" or cash equivalents" as defined under
Accounting Standard (AS) 3, "Cash Flow Statement" or as defined under IND
AS 7, "Cash Flow Statement (as may be applicable), may be construed as
non-cash transactions. At this point, it may be appropriate to also refer to the
definition and discussion on "non-cash transactions" & "cash and cash
equivalents", as given in AS 3 or IND AS 7 as may be applicable.
113
(e) There may be a situation where the acquisition of the asset takes place in
one year and the corresponding liability is created in the financial statements,
the corresponding settlement in the following year. The said transaction will
not be considered as non-cash transaction. Further, mergers under Court
schemes would be entered into subject to requisite approvals of Court etc.,
would not be considered non-cash transactions.
(f) The term "person connected with the director" has not been defined in the
Act, or the Rules thereunder. Instead, the term "to any other person in whom
the director is interested" is defined in the Explanation to sub section (1) of
section 185 of the Act, which is reproduced as under and may be used as the
reference point for reporting under this clause.
"(a) any director of the lending company, or of a company which is its
holding company or any partner or relative of any such director;
(b) any firm in which any such director or relative is a partner;
(c) any private company of which any such director is a director or
member;
(d) any body corporate at a general meeting of which not less than twenty-
five per cent of the total voting power may be exercised or controlled by
any such director, or by two or more such directors, together; or
(e) any body corporate, the Board of directors, managing director or
manager, whereof is accustomed to act in accordance with the
directions or instructions of the Board, or of any director or directors, of
the lending company."
(g) Section 2(77) of the Companies Act, 2013 read with Rule 4 of the Companies
(Specification of Definition Details) Rules, 2014 defines the term "relative".
As per the aforesaid section 2(77),
"Relative, with reference to any person, means anyone who is related to
another, if
(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be
prescribed"
As per Rule 4 of the Companies (Specification of Definition Details) Rules,
2014, a person shall be deemed to be the relative of another, if he or she is
related to another in the following manner, namely
(i) Father, including step father
(ii) Mother, including step mother
114
(iii) Son, including step son
(iv) Son's wife
(v) Daughter
(vi) Daughter's husband
(vii) Brother, including step brother
(viii) Sister, including step sister
(h) The term "acquire" simply means to come into possession of something. A
thing that cannot be sold cannot be acquired6. Thus, an acquisition would
necessarily involve existence of two parties and a transfer of rights and/or
obligations in a thing. In the context of section 192 of the Act, this transfer is
between the company and the director and/or a person connected with a
director. Such "director" is not restricted to being a director of the concerned
company, but extends to director of a holding company, subsidiary or
associate of the company under question.
(i) As provided in section 192, the acquisition by/from the company has to be
that of an "asset". Further, the term asset should be construed to have the
same meaning as described in the Framework for Preparation and
Presentation of Financial Statements, issued by the Institute of Chartered
Accountants of India. The auditor would need to evaluate whether the
subject matter of acquisition by/ from the company satisfies the characteristic
of an "asset".
Audit Procedures and Reporting
(j) For reporting on the first part of this clause, the starting point of the auditor's
procedures could be obtaining a management representation as to whether
the company has undertaken any non-cash transactions with the directors or
persons connected with the directors, as envisaged in section 192(1) of the
Act. The auditor would need to corroborate the management representation
with sufficient appropriate audit evidence. A scrutiny of the following books of
account, records and documents could provide source of such audit
evidence to the auditor as to the existence of such non-cash transactions as
well as persons connected with the Directors:
Persons connected with Acquisition by/ From Company
Director
Form No. MBP 1, Notice of Form No. MBP 2, Register of Loans,
Interest by Director, filed Guarantee, Security and Acquisition Made
pursuant to the Companies by the Company, filed pursuant to the
(Meetings of Board and Its Companies (Meetings of Board and Its
Powers) Rules, 2014 Powers) Rules, 2014
6
Acquire. (n.d.) A Law Dictionary, Adapted to the Constitution and Laws of the United States. By John
Bouvier(1856). Retrieved March 26, 2016 from http://legal-dictionary.thefreedictionary.com/acquire.
115
[Ref: Sec 184(1) and Rule 9(1)] [Ref: Sec 186(9) and Rule 12(1)]
Form No. MBP 4, Register of Contracts
with Related Party and Contracts and
Bodies etc in which Directors are
Interested, filed pursuant to the Companies
(Meetings of Board and Its Powers) Rules,
2014
[Ref: Sec 189(1) and Rule 16(1)]
Movements in the Property, Plant and
Equipment Register
Minutes book of the General Meeting and
Meetings of Directors
Reports available in the public domain,
which are to be substantiated from the
company.
Report on Annual General Meeting
pursuant to Companies (Management and
Administration) Rules, 2014
{Ref Sec 121(1) and Rule 31(2)}
(k) The above documents and records would provide evidence of any such non-
cash transactions that have actually taken place. The language of section
192(1) also uses the term "is to acquire" in the context of such transactions,
indicating the existence of intention to acquire. The management may be
requested to provide details of its intention to enter into transactions covered
under section 192, after the date of the financial statements under audit. The
minutes of the meetings of the Board of Directors and the Audit Committee
may provide evidence of such intention. Besides, a scrutiny of the
information for subsequent period as contained in the aforesaid records and
documents may provide corroborative audit evidence of such intention
having existed as at the date of the auditor's report.
(l) Where the company has entered into/is to enter into any non-cash
transactions as discussed above, the auditor would make a report to that
effect under this clause. The second part of the clause requires the auditor
to report whether the Company has complied with the provisions of section
192 in this regard. Section 192(1) and (2) envisage the following
compliances in respect of such transactions:
(i) The company should have obtained a prior approval for such
arrangement by a resolution in the General Meeting.
(ii) If the concerned Director or connected person is a director of the
company's holding company, the latter too should have obtained a
similar prior approval for the arrangement by a resolution at its General
Meeting.
116
(iii) Notice for approval of the resolution should contain details of the
arrangement along with the value of assets involved duly calculated by
a registered valuer, as per valuation rules specified under "Companies
(Registered Valuers and Valuation) Rules, 2017.
The auditor should check compliance with Section 192(2) and verify the
notice of the general meeting that it includes particulars of arrangement
along with the value of the assets involved in such arrangements. The said
value should be calculated by the register valuer in compliance of
Companies (Registered Valuers and Valuation) Rules, 2017.
(m) In case where the concerned director/connected person is also a director of
the holding company, the auditor would need to check whether the holding
company has complied with the requirements. For this purpose, the auditor
would need to obtain a management representation letter from the holding
company through the management of the auditee company.
Suggested paragraph on reporting:
a) In case there are non-cash transactions entered into:
According to the information and explanations given to us, the Company has
entered into non-cash transactions with one of the directors/ person
connected with the director during the year, by the acquisition of assets
and/or by assuming directly related liabilities, which in our opinion is covered
under the provisions of Section 192 of the Act, and for which approval has
not yet been obtained in a general meeting of the Company.
In case the said non-cash transactions are entered into by the company after
obtaining prior approval of shareholders in the general meeting, then, such
factual position giving approval details must be disclosed.
b) In case there are no non-cash transactions entered into:
On the basis of the information and explanations given to us, in our opinion
during the year the company has not entered into any non-cash transactions
with its directors or persons connected with its directors and hence
provisions of section 192 of the Companies Act, 2013 are not applicable to
the Company.
74. Whether the company is required to be registered under section 45-IA of
the Reserve Bank of India Act, 1934 and if so, whether the registration has
been obtained. [Paragraph 3(xvi)(a)]
Relevant Provisions
(a) The auditor is required to examine whether the company is engaged in the
business which attract the requirements of the registration. The registration is
required where the company is engaged in the business of a non-banking
117
financial institution (as defined in section 45 I(a) of the Reserve Bank of India
Act, 1934) as its principal business.
(b) The Reserve Bank of India restricts companies from carrying on the business
of a non-banking financial institution without obtaining the certificate of
registration. Reference may be made to Section 45-IA of Reserve Bank of
India Act, 1934.
(c) A Non-Banking Financial Company (NBFC) is a company registered under
the Act, engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local
authority or other marketable securities of a like nature, leasing, hire-
purchase, insurance business, chit business but does not include any
institution whose principal business is that of agriculture activity, industrial
activity, purchase or sale of any goods (other than securities) or providing
any services and sale/purchase/construction of immovable property.
A non-banking institution which is a company and has principal business of
receiving deposits under any scheme or arrangement in one lump sum or in
installments by way of contributions or in any other manner, is also a non-
banking financial company (Residuary non-banking company).
(d) What does conducting financial activity as "principal business" mean? The
definition of "principal business" provided by the RBI vide press release
1998-99/1269 dated April 8, 1999, which is further clarified in a response to
an FAQ as given by Reserve Bank of India is required to be considered while
examining the requirement of registration: -
"Financial activity as principal business is when a company's financial assets
constitute more than 50 per cent of the total assets and income from financial
assets constitute more than 50 per cent of the gross income. A company
which fulfils both these criteria will be registered as NBFC by RBI. The
Reserve Bank has defined it so as to ensure that only companies
predominantly engaged in financial activity get registered with it and are
regulated and supervised by it. Hence if there are companies engaged in
agricultural operations, industrial activity, purchase and sale of goods,
providing services or purchase, sale or construction of immovable property
as their principal business and are doing some financial business in a small
way, they will not be regulated by the Reserve Bank. Interestingly, this test is
popularly known as 50-50 test and is applied to determine whether or not a
company is into financial business.
(As per FAQ response of question - What does conducting financial activity
as "principal business" mean?
https://www.rbi.org.in/Scripts/FAQView.aspx?Id=92)"
(e) NBFCs are doing functions similar to banks, however there exist difference
between banks & NBFCs. NBFCs lend and make investments and hence
118
their activities are akin to that of banks; however, there are a few differences
as given below:
(i) NBFC cannot accept demand deposits;
(ii) NBFCs do not form part of the payment and settlement system and
cannot issue cheques drawn on itself;
(iii) deposit insurance facility of Deposit Insurance and Credit Guarantee
Corporation is not available to depositors of NBFCs, unlike in case of
banks.
(As per FAQ response of question NBFCs are doing functions similar to
banks. What is difference between banks & NBFCs?
https://www.rbi.org.in/Scripts/FAQView.aspx?Id=92)"
(f) Section 45I Clause (c) of Reserve Bank of India Act, 1934 defines "financial
Institution". Any Non banking Institution which carries on carries on as its
business or part of its business any of the specified activities, shall be
considered as Financial Institution. Reference may be made to Section 45I(c)
of Reserve Bank of India Act, 1934.
(g) Further, reference may be made to Section 45-I Clause (f) of the Reserve
Bank of India Act, 1934 which defines the Non-Banking Financial Company.
(h) The Reserve Bank of India defines "net owned fund" under section 45-IA as
(a) the aggregate of the paid-up equity capital and free reserves as disclosed
in the latest balance-sheet of the company after deducting there from (i)
accumulated balance of loss; (ii) deferred revenue expenditure; and (iii) other
intangible assets; and (b) further reduced by the amounts representing (1)
investments of such company in shares of (i) its subsidiaries; (ii) companies
in the same group; (iii) all other non-banking financial companies; and (2)
the book value of debentures, bonds, outstanding loans and advances
(including hire-purchase and lease finance) made to, and deposits with, (i)
subsidiaries of such company; and (ii) companies in the same group, to the
extent such amount exceeds ten per cent of (a) above. ("Subsidiaries" shall
have the same meanings assigned to it in the Companies Act, 2013.)
"Companies in the group" has been defined in the Master Direction - Non-
Banking Financial Company - Systemically Important Non-Deposit taking
Company and Deposit taking Company (Reserve Bank) Directions, 2016 and
Master Direction - Non-Banking Financial Company Non-Systemically
Important Non-Deposit taking Company (Reserve Bank) Directions, 2016.
Audit Procedures and Reporting
(i) The auditor should examine the transactions of the company with relation to
the activities covered under the RBI Act and directions related to the Non-
Banking Financial Companies.
119
(j) The financial statements should be examined to ascertain whether
company's financial assets constitute more than 50 per cent of the total
assets and income from financial assets constitute more than 50 per cent of
the gross income. The terms financial assets and income from financial
assets have not been defined by RBI. However, the auditor should examine
this with reference to the business of a non-banking financial institution, as
defined in section 45 I(a) of the Reserve Bank of India Act, 1934. Also, the
auditor should take into consideration any specific exclusions prescribed by
the RBI (for instance: fixed deposits and income from fixed deposits are
required to be excluded for computation of the asset/ income pattern).
(k) Whether the company has net owned funds as required for the registration
as NBFC.
(l) Whether the company has obtained the registration as NBFC, if not, the
reasons should be sought from the management and documented.
(m) The auditor should report incorporating the following details: -
(i) Whether the registration is required under section 45-IA of the RBI Act,
1934.
(ii) If so, whether the company has obtained the registration.
(iii) If the registration is not obtained, reasons thereof.
75. Whether the company has conducted any Non-Banking Financial or
Housing Finance activities without a valid Certificate of Registration (CoR)
from the Reserve Bank of India as per the Reserve Bank of India Act, 1934;
[Paragraph 3(xvi)(b)]
Relevant Provisions
(a) This clause is an extension of the clause (a) and requires reporting on where
the company is carrying on Non-Banking Financial or Housing Finance
activities without a valid Certificate of Registration from the Reserve Bank of
India.
(b) The Reserve Bank of India prohibits companies from carrying on the
business of a non-banking financial institution without obtaining the certificate
of registration.
(c) For the Meaning of the Term Non-Banking Financial Company refer the
discussion made under Clause 3(xvi)(a) above.
(d) Housing Finance Activities are carried on by Housing Finance Institutions.
The term "Housing Finance Institution" is not defined in RBI Act. Reference
can be made to National Housing Bank Act, 1987, which defines such
institutions as follows:
"housing finance institution" includes every institution, whether incorporated
or not, which primarily transacts or has as one of its principal objects , the
120
transacting of the business of providing finance for housing, whether directly
or indirectly;
Further, housing finance companies are defined under The Housing Finance
Companies (NHB) Directions, 2010 as follows:
"housing finance company" means a company incorporated under the
Companies Act, 1956 (1 of 1956) which primarily transacts or has as one of
its principal objects, the transacting of the business of providing finance for
housing, whether directly or indirectly"
(e) The registering Authority for Housing Finance Company has been National
Housing Bank. However, based on the Amendments made to the Housing
Finance Bank Act, 1987 through The Finance (No.2) Act, 2019 such
registration in future is to be done by RBI. Press release to this effect, by RBI
numbering 2019-2020/419 dated13.08.2019 can be accessed from the link
https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=47871.
Reference may be made to said press release.
Audit Procedures and Reporting
(f) The auditor shall obtain sufficient knowledge of the company's business and
nature of its Revenues & Assets to ascertain whether the Company is
conducting any Non-Banking Financial or Housing Finance activities.
(g) The auditor shall ascertain whether a certificate of Registration is obtained as
per Clause 3(xvi)(a). Similar Audit procedures as provided under the said
clause, shall be adopted by the Auditor for reporting under this clause.
(h) The auditor shall obtain written representation from the Management and
examine, whether the Certificate of Registration has been withdrawn/
revoked/suspended/ surrendered during the period under review and
whether Business is continued to be carried after such withdrawal/
revocation/suspension/ surrender.
(i) In the event the company has conducted such activities without holding a
valid Certificate of Registration, the Auditor shall Report the same under this
clause along with reasons (if any) for not obtaining registration.
76. Whether the company is a Core Investment Company (CIC) as defined in
the regulations made by the Reserve Bank of India, if so, whether it
continues to fulfil the criteria of a CIC, and in case the company is an
exempted or unregistered CIC, whether it continues to fulfil such criteria;
[Paragraph 3(xvi)(c)]
Relevant Provisions
(a) The auditor is required to examine whether the company is engaged in the
business which attracts the requirement of registration as Core Investment
Company from RBI.
121
(b) As per RBI Master Direction Core Investment Companies (Reserve Bank)
Directions, 2016, (Reference may be made to said Master Direction Core
Investment Company (CIC), that is to say, a non-banking financial company
carrying on the business of acquisition of shares and securities and which
satisfies the following conditions as on the date of the last audited balance
sheet:-
i. it holds not less than 90% of its net assets in the form of investment in
equity shares, preference shares, bonds, debentures, debt or loans in
group companies;
ii. its investments in the equity shares (including instruments compulsorily
convertible into equity shares within a period not exceeding 10 years
from the date of issue) in group companies and units of Infrastructure
Investment Trust only as sponsor constitute not less than 60% of its net
assets as mentioned in clause (i) above;
Provided; that the exposure of such CICs towards InvITs shall be
limited to their holdings as sponsors and shall not, at any point in time,
exceed the minimum holding of units and tenor prescribed in this regard
by SEBI (Infrastructure Investment Trusts) Regulations, 2014, as
amended from time to time.
iii. it does not trade in its investments in shares, bonds, debentures, debt
or loans in group companies except through block sale for the purpose
of dilution or disinvestment;
iv. it does not carry on any other financial activity referred to in Section
45I(c) and 45I (f) of the Reserve Bank of India Act, 1934 except
a. investment in
i) bank deposits,
ii) money market instruments, including money market mutual
funds and liquid mutual funds
iii) government securities, and
iv) bonds or debentures issued by group companies,
b. granting of loans to group companies and
c. issuing guarantees on behalf of group companies.
(c) Core Investment companies having total assets of not less than Rs.100
Crores either individually or in aggregate along with other CICs in the Group
and which raises or holds public funds are categorized as Systematically
Important Core Investment Company (CIC-ND-SI).
(d) All CIC-ND-SI are required to apply to RBI for grant of Certificate of
Registration. Every CIC shall apply to the RBI for grant of Certificate of
122
Registration within a period of three months from the date of becoming a
CIC-ND-SI
(e) Companies which fall under the definition of Core Investment Company but
do not have asset size of more than Rs.100 Crores and Core Investments
Companies that do not have access to public funds are exempted from
registration requirement with RBI. However, these CICs exempted from
registration with the RBI shall pass a Board Resolution that it will not, in the
future, access public funds.
(f) All CICs investing in Joint Venture/Subsidiary/Representative Offices
overseas in the financial sector shall require prior approval from the RBI.
CICs desirous of making overseas investment in financial sector shall hold a
Certificate of Registration (CoR) from the Bank and shall comply with all the
regulations applicable to CIC-ND-SI. CICs that are presently exempted from
the regulatory framework of the RBI (exempted CICs), shall be required to be
registered with the Bank and shall be regulated like CICs-ND-SI, where they
intend to make overseas investment in financial sector.
(g) Further CICs may be required to issue guarantees or take on other
contingent liabilities on behalf of their group entities. Before doing so, all
CICs must ensure that they can meet the obligations thereunder, as and
when they arise. In particular CICs which are exempt from registration
requirement must be in a position to do so without recourse to public funds in
the event the liability devolves, else they shall approach the Bank for
registration before accessing public funds. If unregistered CICs with asset
size above 100 crore access public funds without obtaining a Certificate of
Registration (CoR) from the Bank, they shall be seen as violating Core
Investment Companies (Reserve Bank) Directions, 2016.
(h) "Companies in the Group" is defined in the Core Investment Company
(Reserve Bank) Directions 2016 as follows:
"Companies in the Group" means an arrangement involving two or more
entities related to each other through any of the following relationships, viz.
Subsidiary parent (defined in terms of AS 21), Joint venture (defined in
terms of AS 27), Associate (defined in terms of AS 23), Promoter-promotee
[as provided in the SEBI (Acquisition of Shares and Takeover) Regulations,
1997] for listed companies, a related party (defined in terms of AS 18)
Common brand name, and investment in equity shares of 20% and above).
Audit Procedures and Reporting
(i) The auditor should examine whether the activities carried on by the company
satisfies the conditions of a Core Investment Company as per the Core
Investments Companies (Reserve Bank) Directions, 2016.
(j) The auditor shall examine the last audited balance sheet of the company to
ascertain whether the company holds not less than 90% of its net assets in
123
form of investment in equity shares, preference shares, bonds, debentures,
debt or loan in group companies.
(k) In respect of CIC-ND-SI i.e. Core investment companies having total assets
of not less than Rs.100 Crores either individually or in aggregate along with
other CICs in the Group and which raise or hold public funds, the auditor
should verify whether the Company has obtained registration as a Core
Investment Company or has made an application for registration with
Reserve Bank of India.
(l) In case of exempted CIC which are not required to be registered, viz,
Unregistered CIC, the auditor shall ascertain whether the company continues
to fulfil the exemption requirements of not accessing public funds or issue of
Guarantees or take on other contingent liabilities on behalf of their group
entities.
a) In case of all CICs (including CICs that are presently exempted from the
regulatory framework of the Bank (exempted CICs)) making overseas
investment in financial sector, the auditor shall verify whether they hold
a Certificate of Registration (CoR) from RBI as per paragraph 32 of
Core Investment Companies (Reserve Bank) Directions 2016.
b) The auditor shall ascertain, whether the CIC which is not exempt from
registration as CIC and consequently required to get registered as per
Core Investment Companies (Reserve Bank) Directions 2016, but is not
registered.
c) In case of the companies being categorized as Core Investment
Company the Auditor shall examine whether all the Directions provided
in the Core Investment Companies (Reserve Bank) Directions 2016 as
updated from time to time are complied with along with periodical filings
with RBI.
d) The auditor should report under this clause incorporating the following
details:
i. Whether the company is a Core Investment Company as defined
in the regulations made by Reserve Bank of India
[If the answer to point (i) above is affirmative, report on two of the
following four points (i.e. either point (ii) and (iii) or point (iv) and
(v))]
ii. If so, whether it has obtained Registration with RBI, if not reasons
thereof
iii. If registered, whether it continues to fulfil the criteria of a CIC; if
not reasons thereof
OR
124
i. If the company is exempted from Registration whether the
company continues to meet the criteria for non-registration; if not
reasons thereof
ii. If the company is required to be registered and it is not registered
or has not applied for registration the fact shall be reported along
with the reasons for non-registration.
(m) If any of the non-compliance is reported in CARO regarding the Core
Investment Company Regulations, the Auditor should also consider whether
such non-compliance should be reported by way of an Exception Report to
Reserve Bank of India in terms of Non-Banking Financial Companies
Auditor's Report (Reserve Bank) Directions, 2016.
77. Whether the Group has more than one CIC as part of the Group, if yes,
indicate the number of CICs which are part of the Group; [Paragraph 3(xvi)
(d)]
Relevant Provisions
(a) This clause requires the auditor to Report whether there is more than one
CIC as a part of the Group and if there are more than one CIC in the Group
the number of CICs shall be indicated in the Report.
(b) "Companies in the Group" is defined in the Core Investment Company
(Reserve Bank) Directions as follows:
"Companies in the Group" means an arrangement involving two or more
entities related to each other through any of the following relationships, viz.
Subsidiary parent (defined in terms of AS 21), Joint venture (defined in
terms of AS 27), Associate (defined in terms of AS 23), Promoter-promotee
[as provided in the SEBI (Acquisition of Shares and Takeover) Regulations,
1997] for listed companies, a related party (defined in terms of AS 18)
Common brand name, and investment in equity shares of 20% and above).
Audit Procedures and Reporting
(c) The auditor should obtain the list of Companies in the group as defined in
Core Investment Company (Reserve Bank) Directions
(d) The auditor shall obtain a written representation from management about the
CIC in the group (including CICs exempt from registration and CICs not
registered) and completeness thereof; to the extent possible the auditor shall
corroborate with the list of registered CICs in the RBI Website. (Link for
accessing such details from RBI website is
https://rbidocs.rbi.org.in/rdocs/content/docs/FACNBFC220914.xlsx)
(e) If the group has no CIC or not more than one CIC, the auditor shall report
this fact.
125
If the group has more than one CIC (including CICs exempt from
registration and CICs not registered), the auditor shall report the number
of CICs in the Group.
78. Whether the Company has incurred cash losses in the financial year
and in the immediately preceding financial year, if so, state the amount
of cash losses; [Paragraph 3(xvii)]
Relevant Provisions
(a) This clause is applicable to all the companies. The clause requires the
auditor to report:
Whether the company has incurred cash losses during the period
covered by the report and in the immediately preceding financial year
covered by the report.
If so, the auditor is required to report amount of cash losses for the
period covered under audit and immediately preceding financial year.
Audit Procedures and Reporting
(b) It is important to note that the term "Cash Losses" is not defined in the
Act and the Accounting Standards. The figure of cash losses is not
readily available from the financial statements of the company.
Accordingly, for the purpose of reporting under this clause, the auditor
would need to determine the figure of cash losses for the period covered
by the report and for the financial year immediately preceding the period
covered by the report. The term `cash losses' needs to be distinguished
from `distributable surplus' and `realised profits/losses'. Further, while
this term may have a different meaning for other regulatory purposes, the
following approach can be considered as far as reporting under this
clause is concerned.
(i) In case of an entity preparing its Financial Statements in
accordance with Accounting Standards (AS), the figure of Net
Profit/Loss After Taxes (PLAT) shown by the Statement of Profit
and Loss is adjusted for the effects of transactions of non-cash
nature such as depreciation provided as per provisions of AS 10
Property, Plant & Equipment and amortization as per AS 26
Intangible Assets.
(ii) In case of an entity preparing its Financial Statements in
accordance with Indian Accounting Standards (Ind AS), the figure of
Profit or Loss (excluding Other Comprehensive Income) as shown
by the Statement of Profit and Loss (hereinafter referred to as "Net
Profit/Loss after Tax") is adjusted for the effects of transactions of
non-cash nature such as depreciation provided as per provisions of
Ind AS 16 Property, Plant and Equipment, Ind AS 116 - Leases
126
and amortisation as per Ind AS 38 Intangible Assets.
Given the objective of this clause, Net Profit/Loss after Tax would not
require adjustment for deferred tax income/expense, foreign exchange
gain/loss, fair value changes for determination of cash losses.
(c) The abovementioned amount of Net Profit/Loss After Tax should however
not be adjusted for items of expenses of contingent nature such as claims
not acknowledged as due by the enterprise, demand for tax liability which
has been appealed against by the enterprise etc.
(d) It may be noted that the Cash Flow Statement also presents cash flows from
operating activities. However, it may not be appropriate to consider such
cash flows for the specific and limited purpose of this clause considering that
items such as interest income/expense are also relevant for determination of
cash losses.
(e) The figure of cash loss of the company for the financial year covered by the
audit report and the immediately preceding financial year should also be
adjusted for the effect of qualifications in the respective audit reports to the
extent the qualifications are quantified.
79. Whether there has been any resignation of the statutory auditors during
the year, if so, whether the auditor has taken into consideration the issues,
objections or concerns raised by the outgoing auditors; [Paragraph 3(xviii)
Relevant Provisions
(a) This is a new reporting requirement in CARO 2020 wherein the auditor is
required to report if there has been any resignation of the statutory auditors
during the year. Additionally, it also requires auditor to consider the issues,
objections or concerns raised by the outgoing auditors in case of resignation.
(b) This clause is applicable where new auditor (`incoming auditor') is appointed
during the year to fill a casual vacancy caused by resignation of the auditor
created in the office of the previous auditor under section 140(2) of the
Companies Act 2013. Auditor's resignation can occur for various reasons.
(c) When an incoming auditor is appointed by an entity, the incoming auditor,
prior to accepting the position as auditor in accordance with the requirements
of Code of Ethics 7 is required to communicate with the previous auditor to
know the reasons for the change in order to be able to safeguard his own
interest, the legitimate interest of the public and the independence of the
existing accountant.
(d) Section 140(2) of the Companies Act, 2013 requires the auditor who has
resigned from the company to file within a period of thirty days from the date
7
Refer to Clause 8 of Part I of the First Schedule to the Chartered Accountants Act, 1949, "Professional
misconduct in relation to Chartered Accountants in Practice".
127
of resignation, a statement in Form ADT 3 Notice of Resignation by the
Auditor, as required by Rule 8 of Companies (Audit and Auditors) Rules 2014
with Registrar of Companies (ROC) indicating the reasons and other facts as
may be relevant with regard to his/her resignation.
(e) As mentioned in Implementation Guide on Resignation/ Withdrawal from an
Engagement to Perform Audit of Financial Statements (the "Implementation
Guide"), the auditor is expected to describe the circumstances while giving
the reasons for resignation suitably, instead of mentioning ambiguous
reasons such as other pre-occupation or personal reasons or administrative
reasons or health reasons or mutual consent or unavoidable reasons.
Reasons like pending/ non-payment of audit fees is a valid reason for
resignation. Paragraph 19 of the said Implementation Guide also advises
auditor to include to include the following in the letter of resignation, as
applicable: (a) If the withdrawal or resignation results from an inability to
obtain sufficient appropriate audit evidence, the reasons for that inability; (b)
The possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive; (c) If the matter
is related to a material misstatement of the financial statements that relates
to specific amounts in the financial statements (including quantitative
disclosures), the auditor should include a description and quantification of the
financial effects of the misstatement, unless impracticable; (d) If the
withdrawal or resignation results from inability of the auditor/the firm to
complete the engagement due to bonafide reasons; (e) The fact that
circumstances leading to withdrawal or resignation from the engagement
were communicated to an appropriate level of the management, and where
appropriate, to those charged with governance; (f) The response from the
management or those charged with governance on the written
communication made by the auditor. If response is not received, state the
fact. (g) Prior to resignation, the last audit/ limited review report issued by the
auditor.
(f) In respect of listed companies, SEBI vide its Circular CIR/CFD/CMD1/
114/2019 dated October 18, 2019 prescribes conditions and disclosure
requirements to be complied with when the statutory auditors of a listed entity
or its material subsidiary resigns, in relation to a limited review/audit report.
Upon resignation, the Company to obtain information from the Auditor in the
format specified in Annexure A of the Circular. The format includes
information such as detailed reasons for resignation, details of association
with the listed entity/its material subsidiary, whether the inability to obtain
sufficient appropriate audit evidence was due to a management-imposed
limitation or circumstances beyond the control of the management, whether
the lack of information was prevalent in the previous reported financial
statements/results. Further, a declaration of the information needs to be
given by the statutory auditor that the information so provided is correct and
complete and there are no other material reasons for resignation other than
those provided by the statutory auditor. The listed entities are required to
128
ensure disclosure of the same under sub-clause (7A) of Clause A in Part A of
Schedule III under Regulation 30(2) of SEBI LODR Regulations.
Audit Procedures and Reporting
(g) The incoming auditor should comply with the provisions of ICAI Code of
ethics, abovementioned Implementation Guide, requirements of Companies
Act, 2013 and abovementioned SEBI circular for listed entities.
(h) Incoming auditor should obtain a copy of letter of resignation stating the
reasons as submitted to the management and copy of Form ADT 3 as
submitted to ROC. In case of listed companies, incoming auditor should also
obtain copy of Annexure A from the listed company. The incoming auditor
should also carry out the following additional audit procedures:
reading Board Minutes.
inquiring from the management and reading the communication to audit
committees e.g. audit committee presentation to determine if there is
any matter communicated to TCWG.
exercise his/her professional Judgment while evaluating the reasons for
resignation.
Further, the auditor should also consider the audit evidence obtained during
the audit while performing audit procedures under SA 500, Audit Evidence.
For example, if the auditor obtains additional audit evidence which relates to
reasons for resignation of the outgoing auditor, the auditor should consider
such evidence obtained while issuing an audit opinion on the financial
statements of the current year.
(i) The incoming auditor should consider the reasons for resignation. The
auditor should also refer to last audit/review report issued by the previous
auditor to understand the modifications, if any, in the audit/review report. As
part of obtaining `no objection' from previous auditor, the incoming auditor
should enquire in respect of such modifications/adverse comments included
by the previous auditor in his/her last issued audit/review report, since the
clause casts an obligation on the incoming auditor to consider the objections,
concerns/reasons, if any, raised by the previous auditors. To illustrate, where
a modification in audit report relates to non-availability of sufficient and
appropriate audit evidence the incoming auditor should specifically enquire
from previous auditor on nature of such audit evidence and responses
received from the management/those charged with governance (as
applicable). Auditor is further expected to assess the potential impact of such
a matter on his/her audit strategy/reporting.
(j) The auditor should obtain a management representation letter on the matter
that there is no concerns of outgoing auditor beyond those stated in no
objection certificate received from the outgoing auditor, resignation letter.
129
(k) If there is a joint auditor appointed by a company and one of the auditor
resigns, the other auditor should consider the reasons for resignation by the
outgoing auditor in accordance with the guidance stated in the above
paragraphs.
(l) The following is an example of reporting by the auditor under this clause:
Where there is resignation of statutory auditor during the year
"There has been resignation of the statutory auditors during the year and we
have taken into consideration the issues, objections or concerns raised by
the outgoing auditors."
Where there is no resignation of statutory auditor during the year
"There has been no resignation of the statutory auditors during the year and
accordingly this clause is not applicable."
80. On the basis of the financial ratios, ageing and expected dates of
realization of financial assets and payment of financial liabilities, other
information accompanying the financial statements, the auditor's knowledge
of the Board of Directors and management plans, whether the auditor is of
the opinion that no material uncertainty exists as on the date of the audit
report that company is capable of meeting its liabilities existing at the date
of balance sheet as and when they fall due within a period of one year from
the balance sheet date. [Paragraph 3(xix)]
Under this clause the auditor is required to report whether the auditor is of the
opinion that no material uncertainty exists as on the date of the audit report about
the company's capability of meeting its liabilities existing at the date of balance
sheet as and when they fall due within a period of one year from the balance sheet
date. The auditor needs to form his opinion on the basis of the financial ratios,
ageing and expected dates of realization of financial assets and payment of
financial liabilities, other information accompanying the financial statements, the
auditor's knowledge of the Board of Directors and management plans.
Relevant Provisions
(a) Currently, there is no legal requirement under the Act for the companies to
provide explicit disclosure in the financial statements or in the Director's
Report that whether material uncertainty exists about the company's
capability of meeting its liabilities existing at the date of balance sheet as and
when they fall due within a period of one year from the balance sheet date.
However, AS 1 considers Going Concern as a fundamental accounting
assumption and paragraph 27 of AS 1 requires a disclosure where such
assumption is not followed. Paragraph 25 of Ind AS 1 requires that when
preparing financial statements, management shall make an assessment of
an entity's ability to continue as a going concern. When management is
130
aware, in making its assessment, of material uncertainties related to events
or conditions that may cast significant doubt upon the entity's ability to
continue as a going concern, the entity shall disclose those uncertainties.
Further if the main audit report contains a paragraph on "material uncertainty
relating to going concern or Key Audit Matter on going concern indicators", it
should be duly considered while making comment under this clause.
This clause requires different level of assessment as required to be made
under SA 570(Revised), Going Concern. Auditor is required to opine that no
material uncertainty exists as on the date of the audit report about company's
ability to meeting its liabilities existing at the date of balance sheet as and
when they fall due within a period of one year from the balance sheet date.
The emphasis, therefore, is only company's ability to meet its liabilities and
not on going concern. There can be a situation wherein going concern
assumption may be appropriate due to support letters provided by the
holding company but the company may not be able to meet its liabilities
falling due within a period of one year from the balance sheet date.
(b) As per SA 570(Revised) Going Concern, the auditor's responsibilities are to
obtain sufficient appropriate audit evidence regarding, and to conclude on,
the appropriateness of management's use of the going concern basis of
accounting in the preparation of the financial statements, and to conclude,
based on the audit evidence obtained, whether a material uncertainty exists
about the entity's ability to continue as a going concern.
(c) The Schedule III of the Companies Act, 2013 states that if, in the opinion of
the Board, any of the assets other than fixed assets and non-current
investments do not have a value on realization in the ordinary course of
business at least equal to the amount at which they are stated, the fact that
the Board is of that opinion, shall be stated. It is difficult to contemplate a
situation where any asset other than fixed assets and non-current
investments has a realizable value that is lower than its carrying value, and
the same is not given effect to in the books of account, since Accounting
Standards do not permit the same. AS 13 "Accounting for Investments" or
IND-AS 9 "Financial Instruments" requires current investments to be valued
at lower of cost and fair value. AS 2 "Valuation of Inventories" or IND-AS 2
"Inventories" also requires inventories to be valued at the lower of cost and
net realizable value. Further, Allowance for bad and doubtful debts is
required to be shown as a deduction from both Long-term loans & advances
and Other Non-current assets as well as Trade Receivables and Short-term
loans and advances as per Schedule III of the Act.
(d) Under this clause, the auditor needs to comment that no material uncertainty
exists as on the date of audit report that company is capable of meeting its
liabilities existing at the date of balance sheet as and when they fall due
within a period of one year from the balance sheet date. Accordingly, the test
131
of existence of material uncertainty is to be done as on the date of audit
report for the position of liabilities existed at the date of balance sheet. In
other words, the auditor needs to consider the subsequent period
transactions between the date of balance sheet and the date of audit report.
While doing audit of the financial statements, the auditor is required to carry
out audit procedures in accordance with SA 560 "Subsequent Events". As
per paragraph 6 of SA 560, the auditor shall perform audit procedures
designed to obtain sufficient appropriate audit evidence that all events
occurring between the date of the financial statements and the date of the
auditor's report that require adjustment of, or disclosure in, the financial
statements have been identified. The auditor is not, however, expected to
perform additional audit procedures on matters to which previously applied
audit procedures have provided satisfactory conclusions.
(e) The liabilities to be examined for payment should exist at the date of balance
sheet which falls due within a period of one year from the balance sheet
date. For this, the classification of liabilities into current and non-current in
the financial statements as per the requirements of Schedule III of the Act
should be taken into consideration.
(f) The auditor needs to comment on the basis of:
a. The financial ratios;
b. Ageing and expected dates of realization of financial assets and
payment of financial liabilities;
c. Other information accompanying the financial statements, for example -
the Director's Report, Management Discussion and Analysis forming
part of the Annual Report of the Company;
d. Auditor's knowledge of the plans of the Board of Directors and
management plans.
The parameters prescribed in this clause appear to be exclusive, and the
auditor needs to perform audit procedures based on these parameters.
(g) The auditor generally tests the ageing and expected dates of realization of
financial assets and payment of financial liabilities in the normal course of
audit of the financial statements, for example subsequent status of trade
receivables and payables, subsequent payment of statutory liabilities, etc.
Audit Procedures and Reporting
(h) The suggestive audit procedures under this clause are enumerated as under:
The auditor should obtain the details of liabilities existing at the date of
balance sheet along with their due dates of payment as per the relevant
agreements/contracts to evaluate that the liabilities due within one year
from the balance sheet date shall be duly discharged as and when
these fall due for payment.
132
He should perform sufficient and appropriate audit procedures including
going through the underlying documents and correspondence with the
lenders to verify expected due dates of liabilities.
He should obtain the subsequent payment status as on the date of
audit report or date nearer to audit report, of liabilities those existed at
the date of balance sheet to capture any material deviation as on the
audit report date
For the liabilities, which remain unpaid as on the date of audit report or
date nearer to audit report, the auditor should inquire with the
management on their plan and capability to pay off the liabilities as and
when they fall due for payment. This may be supported by position of
realisable financial assets as on that day or management plans to
garner financial resources, to meet the financial liabilities becoming due
for payment within a period of one year from the balance sheet date.
The auditor should test the recoverability of financial assets based on
the agreements/contracts, historical trends and the correspondence
with the debtors and borrowers to assess whether those shall be
sufficient to meet the liabilities as and when they fall due for payment.
The plan submitted by the management should be supported with
related documentary evidences.
The auditor must read the section of Director's Report, Management
Discussion and Analysis forming part of the Annual Report of the
company, to align his reporting in accordance with SA 720(Revised)
and also to be able to respond to this paragraph which specifically
requires these reports to be considered.
The auditor should obtain the calculation of financial ratios as on the
date of balance sheet and also on the date of audit report or date
nearer to audit report and corroborate the same. (Auditor can refer the
Liquidity Ratios such as current ratio, acid-test ratio, cash ratio and
Efficiency Ratios such as asset turnover ratio, inventory turnover ratio,
accounts receivable turnover ratio etc.)
The auditor should obtain interim financial information prepared after
the balance sheet date e.g., MIS for subsequent months, cash flow
projections for the future period of 12 months from the date of balance
sheet, to assess the assumptions of the management
(i) The auditor should obtain written representation from the management
including:
Plans for realization of receivables and other financial assets.
Documentation of Board of Directors related to review of liability
position (payable within one year) and corresponding payment plans.
All material events/transactions post balance sheet date but before
audit report date that could impact the paying capacity which are in the
knowledge of the Management/Board.
133
(j) It is not necessary to establish a one-to-one relationship between the unpaid
liabilities and the realizable financial assets. The evaluation should be done
on an overall basis.
(k) Where the auditor concludes, based on the information obtained from the
management and audit procedures performed as above, that no material
uncertainty exists as on the date of the audit report and that the company is
capable of meeting its liabilities existing at the date of balance sheet as and
when they fall due within a period of one year from the balance sheet date,
the auditor should mention the affirmative opinion in his report. A suggested
reporting format under this clause is as follows:
According to the information and explanations given to us and on the basis of
the financial ratios, ageing and expected dates of realization of financial
assets and payment of financial liabilities, other information accompanying
the financial statements, our knowledge of the Board of Directors and
management plans, we are of the opinion that no material uncertainty exists
as on the date of the audit report that company is capable of meeting its
liabilities existing at the date of balance sheet as and when they fall due
within a period of one year from the balance sheet date.
(l) Where the auditor concludes, based on the information obtained from the
management and audit procedures performed that there exists material
uncertainty then the auditor should discuss his findings and conclusion with
the management and the Board of Directors, and should make suitable
comment in his report by stating the existence of material uncertainty and
reasons thereof.
(m) Where the auditor concludes that material uncertainty exists, the auditor
should evaluate the impact on the main audit report regarding going concern.
SA 700(Revised), "Forming an Opinion and Reporting on Financial
Statements" requires auditor to include a separate paragraph regarding
material uncertainty related to going concern. As per SA 570 (Revised) on
Going Concern, auditor will also need to ensure there are adequate
disclosures in the financial statements regarding material uncertainty related
to going concern. Auditor may consider detailed guidance on going concern
given in the implementation guide on SA 570 (Revised) Going Concern.
81. Whether, in respect of other than ongoing projects, the company has
transferred unspent amount to a Fund specified in Schedule VII to the
Companies Act within a period of six months of the expiry of the financial
year in compliance with second proviso to sub-section (5) of section 135 of
the said Act [Paragraph 3(xx)(a)]
Relevant Provisions
(a) This clause requires the auditor to comment whether the company has
transferred the unspent amount, in respect of "other than ongoing projects",
to a fund specified in Schedule VII of the Act within a period of six months of
134
the expiry of the financial year in compliance with the second proviso to sub-
section (5) of section 135 of the said Act.
(b) Section 135 of the Companies Act, 2013 requires, inter alia, as under
(i) Every company having net worth of rupees five hundred crore or more,
or turnover of rupees one thousand crore or more or a net profit of
rupees five crore or more during the immediately preceding financial
year shall constitute a Corporate Social Responsibility Committee of the
Board.
(ii) The Corporate Social Responsibility Committee shall,
(a) formulate and recommend to the Board, a Corporate Social
Responsibility Policy which shall indicate the activities to be
undertaken by the company in areas or subject, specified in
Schedule VII;
(b) recommend the amount of expenditure to be incurred on the
activities referred to in clause (a); and
(c) monitor the Corporate Social Responsibility Policy of the company
from time to time.
(iii) The Board of every company referred to in sub-section (1) of section
135 of the Act, shall ensure that the company spends, in every financial
year, at least two per cent. of the average net profits of the company
made during the three immediately preceding financial years or where
the company has not completed the period of three financial years
since its incorporation, during such immediately preceding financial
years, in pursuance of its Corporate Social Responsibility Policy.
(iv) Explanation to the sub-section (5) of Section 135, states that for the
purposes of section 135 "net profit" shall not include such sums as may
be prescribed, and shall be calculated in accordance with the provisions
of Section 198 of the Act.
(v) The second proviso to sub-section (5) of Section 135 requires that if the
company fails to spend such amount, the Board shall, in its report made
under clause (o) of sub-section (3) of section 134, specify the reasons
for not spending the amount and, unless the unspent amount relates to
any ongoing project referred to in sub-section (6), transfer such unspent
amount to a Fund specified in Schedule VII, within a period of six
months of the expiry of the financial year.
(c) Schedule VII of the Companies Act 2013 lists the activities which may be
included by Companies in their Corporate Social Responsibility Policies.
Schedule VII also lists the funds to which company can contribute which shall
be recognized as Corporate Social Responsibility spending.
135
Audit procedures and reporting
(d) The auditor needs to evaluate the applicability of Section 135 to the
company.
(e) The auditor needs to obtain:
(i) Board Approval of CSR Policy as recommended by CSR Committee.
(ii) Agenda and Minutes of CSR Committee.
(iii) the workings of the amount required to be spent under section 135 of
the Act detailing the calculations of the average net profits as calculated
in accordance with the provisions of Section 198 of the Act and
evaluate if the total amount required to be spent by the Company has
been appropriately determined at two percent. of such average net
profits.
(f) The auditor is required to obtain confirmation from the Management and
review whether the CSR Activities undertaken by the Company are in
accordance with the Schedule VII of the Companies Act, 2013.
(g) The auditor should obtain from the management, details of the amount spent,
in respect of projects other than ongoing projects. In respect of amounts
spent on ongoing projects, the auditor should perform the procedures given
in clause 3(xx)(b) below.
(h) If, the Board of a company decides to undertake its CSR activities through a
company established under section 8 of the Act or a registered trust or a
registered society, other than those specified in sub-rule 2(b) of Rule 4 of
The Companies (Corporate Social Responsibility Policy) Rules, 2014, the
auditor shall verify whether conditions stipulated in the said rules are satisfied
including the modalities of utilisation of funds of such projects and programs
and the monitoring and reporting mechanism of the same.
(i) In respect of the amounts spent on other than ongoing projects, the auditor
should examine the supporting documents such as expenditure receipts,
bank statements etc. to verify the quantum of such expenditure. The auditor
should also verify if the amount spent is in accordance with the Corporate
Social Responsibility Policy of the Company and in accordance with the
provisions of the Act and the rules made thereunder.
(j) On the basis of verification of the amounts, the auditor should further verify
that any unspent amount, in respect of other than ongoing projects, has been
transferred to a Fund specified in Schedule VII to the Act within a period of
six months of the expiry of the financial year. The auditor should obtain
supporting documents such as receipts, payment challans, bank statements
to obtain evidence that the amounts have been appropriately transferred to a
fund mentioned in Schedule VII of the Act.
(k) The auditor shall check whether the Company has recorded a provision as at
the balance sheet date, to the extent considered necessary in accordance
136
with the provisions of AS 29/ Ind AS 37, Provisions, Contingent Liabilities and
Contingent Assets, in respect of the unspent amount.
(l) In addition to the procedures given above, the auditor should also consider
the provisions of the Companies (Corporate Social Responsibility Policy)
Rules, 2014 while reporting on the unspent amounts under this clause.
(m) The auditor may refer to the guidance given in the Guidance Note on
Accounting for Expenditure on Corporate Social Responsibility Activities
issued by the Institute of Chartered Accountants of India until the
amendments made under section 135 of the Companies Act, 2013 are
notified.
(n) The auditor may also consider obtaining a representation from the
management regarding Compliance of requirements of Section135.
(o) In case the Company has not transferred the unspent amount, in respect of
other than ongoing projects, to a fund specified in Schedule VII of the Act
within the time limits, the auditor should ascertain the following details as a
part of his documentation working paper, for reporting under this clause:
Amount
identified Amount Due date Actual
for Transferred of date of Number
Relevant spending Unspent to Fund transfer transfer of days
Financial on CSR amount specified in to the to the of delay
year* activities of (b) Sch. VII of specified specified if any
"other the act fund fund
than On
going
Projects"
(a) (b) (c) (d) (e) (f) (g)
(*For Current year and for the previous year/(s) for which the amount
remains unspent)
(p) The auditor shall report Compliance with the clause as follows:
"In respect of other than ongoing projects, the company has transferred
unspent amount to a Fund specified in Schedule VII to the Companies
Act,2013 within a period of six months of the expiry of the financial year in
compliance with second proviso to sub-section (5) of section 135 of the said
Act, except in respect of the following:
137
Amount
Transferred to Amount
Amount unspent on
Financial Fund specified in Transferred after
CSR activities "other
year* Sch VII within 6 the due date
than On going
months from the (specify the date
Projects"
end of the of deposit)
Financial Year
(a) (b) (c) (d)
(*For Current year and for the previous year/(s) for which the amount
remains unspent)
(q) The reporting under this clause in respect of a financial year will arise only
when an audit report is issued after the period of 6 months from the end of
that financial year. The non compliance, if any, of above clause in respect of
earlier Financial year(s), will have to be reported in the format given above.
(r) It may be noted that the amendments to section 135 of the Act through The
Companies (Amendment) Act, 2019 are yet to be notified and until such time
of notification of the effective date, the auditor may make the following
comment under this clause:
"The amendments to section 135 of the Companies Act, 2013 by addition of
the second proviso to sub-section (5), through the introduction of The
Companies (Amendment) Act, 2019 is yet to be notified and as such
provisions of this clause is not yet applicable to the Company."
82. Whether any amount remaining unspent under section (5) of section 135
of Companies Act, pursuant to any ongoing project, has been transferred to
special account in compliance with provision of sub section (6) of section
135 of the said Act [Paragraph 3 (xx) (b)]
Relevant Provisions
(a) This clause requires the auditor to comment whether the company has
transferred the unspent amount in respect of any "ongoing projects", to a
special account within a period of thirty days from the end of the financial
year in compliance with the provision of sub section (6) of section 135 of the
said Act.
138
(b) For detailed discussion on Section 135 of the Act refer clause 3(xx)(a) above.
(c) Any amount remaining unspent under sub-section (5) of Section 135,
pursuant to any ongoing project, fulfilling such conditions as may be
prescribed, undertaken by a company in pursuance of its Corporate Social
Responsibility Policy, shall be transferred by the company within a period of
thirty days from the end of the financial year to a special account to be
opened by the company in that behalf for that financial year in any scheduled
bank to be called the Unspent Corporate Social Responsibility Account, and
such amount shall be spent by the company in pursuance of its obligation
towards the Corporate Social Responsibility Policy within a period of three
financial years from the date of such transfer, failing which, the company
shall transfer the same to a Fund specified in Schedule VII, within a period of
thirty days from the date of completion of the third financial year.
Audit Procedures and Reporting
(d) The auditor needs to evaluate the applicability of Section 135 to the
company.
(e) The auditor needs to obtain:
(i) Board Approval of CSR Policy as recommended by CSR Committee
(ii) Agenda and Minutes of CSR Committee
(iii) the workings of the amount required to be spent under section 135 of
the Act detailing the calculations of the average net profit as calculated
in accordance with the provisions of Section 198 of the Act and
evaluate if the total amount required to be spent by the Company has
been appropriately determined at two percent. of such average net
profits.
(f) The auditor is required to obtain confirmation from the Management and
review whether the CSR Activities undertaken by the Company are in
accordance with the Schedule VII of the Companies Act, 2013.
(g) The auditor shall verify the amount spent in respect of ongoing projects with
the supporting documents such as expenditure receipts, bank statements
etc.
(h) In respect of unspent amount, the auditor shall verify the bank account to
ensure whether it is earmarked for CSR activity, opened for that respective
financial year only and called as Unspent Corporate Social Responsibility
Account.
(i) Though the auditor is not required to report under this clause, the auditor is
required to ensure that the amount transferred to such specified bank
accounts has been utilized for the CSR activities as per CSR policy within
three years from the date of such transfer, failing to which the amount should
139
be transferred to the fund as specified under Schedule VII.
(j) The auditor shall check whether the Company has recorded a provision as at
the balance sheet date, to the extent considered necessary in accordance
with the provisions of AS 29/ Ind AS 37, Provisions, Contingent Liabilities and
Contingent Assets, in respect of the unspent amount on ongoing projects.
(k) In addition to the procedures given above, the auditor should also consider
the provisions of the Companies (Corporate Social Responsibility Policy)
Rules, 2014 while reporting on the unspent amounts under this clause.
(l) The auditor may refer to the guidance given in the Guidance Note on
Accounting for Expenditure on Corporate Social Responsibility Activities
issued by the Institute of Chartered Accountants of India until the
amendments made under section 135 of the Companies Act, 2013 are
notified.
(m) The auditor may also consider obtaining a representation from the
management regarding Compliance of requirements of Section135.
(n) In case the Company has not transferred the unspent amount, in respect of
ongoing projects, to a special account as specified u/s 135(6) of the Act
within the time limits, the auditor should ascertain the following details for
reporting under this clause:
Relevant Amount Unspent Amount Due date Actual Number
Financial identified amount Transferred of date of of days
year* for of (b) to Special transfer transfer of delay
spending Account to the to the
on CSR u/s 135(6) account account
activities
for "On
going
Projects"
(a) (b) (c) (d) (e) (f) (g)
(*For Current year and for the previous year/(s) for which the amount
remains unspent)
(o) The auditor shall report Compliance with the clause as follows:
"In respect of ongoing projects, the company has transferred unspent amount
to a Special Account, within a period of 30 days from the end of the financial
year in compliance with Sec.135(6) of the said Act, except in respect of the
following:
140
Financial Amount Amount Transferred to Amount
year* unspent on Special Account within Transferred after
CSR activities 30 days from the end the due date
for "On going of the Financial Year (specify the date of
Projects" transfer)
(a) (b) (c) (d)
(p) The reporting under this clause in respect of a financial year will arise only
when an audit report is issued after the period of 30 days from the end of that
financial year. The non compliance, if any, of the above clause in respect of
earlier Financial year(s), will have to be reported in the format given above.
(q) It may be noted that the amendments to section 135 of the Act through The
Companies (Amendment) Act, 2019 are yet to be notified and until such time
of notification of the effective date, the auditor may make the following
comment under this clause:
"The amendments to section 135 of the Act, by inclusion of sub section (6),
through the introduction of The Companies (Amendment) Act, 2019 is yet to
be notified and as such provisions of this clause is not yet applicable to the
Company."
83. Whether there have been any qualifications or adverse remarks by the
respective auditors in the Companies (Auditor's Report) Order (CARO)
reports of the companies included in the consolidated financial statements?
If yes, indicate the details of the companies and the paragraph numbers of
the CARO report containing the qualifications or adverse remarks.
[Paragraph 3(xxi)]
Relevant provisions
(a) This Clause requires the auditor to comment whether there have been any
qualifications or adverse remarks by the respective auditors ("component
auditors") in the Companies (Auditor's Report) Order (CARO) reports of the
companies included in the consolidated financial statements. This clause
further requires the auditor to provide the details of the companies and the
paragraph numbers of the respective CARO report containing the
qualifications or adverse remarks.
Audit Procedures and Reporting
(b) The term "qualifications" or "adverse remarks" used in this clause and the
term "unfavourable" or qualified answers used in paragraph 4 of CARO 2020
intend that the auditor should comment on those matters in which the
141
response to the clause is negative/ unfavourable. Hence, the three terms are
interpreted to have the same meaning. The term qualification/adverse remark
used in this clause does not mean a qualified/adverse opinion as per
principles enunciated in SA 705(Revised), "Modifications to the Opinion in
the Independent Auditor's Report". This is because qualified/adverse opinion
used in SA 705(Revised) is in connection with issuance of auditor's opinion
on the financial statements as a whole whereas the responses to questions
in CARO 2020 are responses to specific questions which are expected to be
answered in affirmative or negative.
(c) The principal auditor may as part of his planning procedures scope out
certain entities from inclusion in consolidated financial statements on account
of materiality. In such situation, the principal auditor should specifically state
in his report that CARO responses in respect of clause 3(xxi) do not include
comments in respect of those entities which are not in scope and hence not
included in consolidated financial statements on account of materiality.
(d) Further, there may be situations where the component auditor has not issued
his statutory audit report by the date of the principal auditor's audit report.
This may happen because unlisted companies in the group may have time till
six months from the year-end to conduct their annual general meeting and
hence their statutory audit report/CARO report may be finalised later than the
principal auditor's report. In such situations, the principal auditor should
clearly mention while reporting on this clause, the name of the component
and the fact that CARO report of that component has not been issued by its
auditor till the date of principal auditor's report.
(e) The clause requires reporting of qualifications or adverse remarks in the
reports of companies included in the consolidated financial statements.
Accordingly, qualifications/adverse remarks given in the parent company's
standalone CARO report are also required to be included while reporting on
consolidated financial statements. Further, the requirement is to provide the
paragraph numbers of the CARO report containing the qualifications or
adverse remarks, so text of those paragraphs are not required to be
reproduced.
(f) For the purpose of reporting the qualifications/adverse remarks, the principal
auditor may report in the following manner in the consolidated audit report
Sr. Name CIN Holding Clause number of the
No Company/subsidiary/Associate/Joint CARO report which
Venture is qualified or
adverse
142
Comments on Form of Report
84. The Order requires that the auditor should make a statement on all such
matters contained therein as are applicable to the company. The Order further
provides that where an auditor is unable to express any opinion on any such
matter which is applicable to the company, he is also required to indicate in his
report such a fact, together with the reasons as to why he is unable to express any
opinion. The auditor is also required to give reasons for any unfavourable or a
qualified answer.
85. A question may also arise whether it is necessary for the auditor to include in
his report, the management's explanation for any matter on which he makes an
unfavourable comment. Normally, such an explanation need not be included but
there may be circumstances where the auditor feels such inclusion is necessary.
Examples of such circumstances would be:
(a) to make the comment itself more meaningful and complete. For example,
physical verification of inventories, though planned, may not have been
carried out because of a strike or a lockout. An unfavourable comment
without this explanation could be misleading;
(b) to explain the fact why despite an unfavourable comment, the true and fair
view of the financial statements is not vitiated. For example, physical
verification of a part of the inventories at the year-end may not have been
carried out, but there is sufficient other evidence produced by the
management, which satisfies the auditor regarding the existence, condition
and value of the inventories.
86. If any of the comments on matters specified in the Order are adverse, the
auditor should consider whether his comments have a bearing on the true and fair
view presented by the financial statements and, therefore, might warrant a
modification in the report under sub-sections (2), (3) and (4) of section 143 of the
Act.
87. If the auditor is of the opinion that any of the unfavourable comments on
matters specified in the Order results in a qualification under sub-sections (2) and
(3) of section 143 of the Act, the manner of reporting would have to be in
accordance with the principles enunciated in SA 705 (Revised), "Modifications to
the Opinion in the Independent Auditor's Report".
88. Even where there are no unfavourable comments under the Order, it may be
advisable for the auditor to preface his report under sub-sections (2) and (3) of
section 143 of the Act with the words:
"Further to our comments in the Annexure, we state that..........................."
89. It should not, however, be assumed that every unfavourable comment under
the Order would necessarily result in a qualification in the report under sub-
143
sections (2) and (3) of section 143 of the Act. Firstly, the unfavourable comment
may be regarding a matter which has no relevance to a true and fair view
presented by the financial statements, for example, the failure of the company to
deposit provident fund dues in time or to comply with the requirements regarding
acceptance of deposits. Secondly, while the non-compliance may be material
enough to warrant an unfavourable comment under the Order, it may not be
material enough to affect the true and fair view presented by the financial
statements. Finally, the non-compliance may be in an area which calls for remedial
action on the part of the management, and may be important for that reason, but
may not be sufficiently important in the context of the report under sub-sections (2)
and (3) of section 143 of the Act. In deciding, therefore, whether a qualification in
the report under sub-sections (2) and (3) of section 143 of the Act is necessary,
the auditor should use his professional judgement in the facts and circumstances
of each case.
90. Where there is an unfavourable comment both under sub-section (1) of
section 143 of the Act and under the Order, it is suggested that the qualification
under sub-section (1) precede the qualification under the Order.
91. It is important to note that replies to many of the requirements of the Order
will involve expression of an opinion and not necessarily statement of facts. It is
necessary, therefore, that this is indicated when making the report under the
Order. This can be done in either of the following ways:
(a) by a general preface to the comments under the Order on the following lines:
"In terms of the information and explanations sought by us and given by the
company and the books of account and records examined by us in the
normal course of audit and to the best of our knowledge and belief, we state
that.............................."
or
(b) by a preface to individual comments, for example,
"In our opinion" or "In our opinion and according to the information and
explanations given to us during the course of the audit..."
92. The Order requires that where the answer to a question is unfavourable or
qualified, the auditor's report should also state the reasons for such unfavourable
or qualified answer. While it is not necessary for the auditor to give very detailed
reasons for an unfavourable or qualified answer, he is expected to explain the
general nature of the qualification or adverse comment in clear and unambiguous
terms. The auditor may consider the principles enunciated in SA 705 (Revised),
"Modifications to the Opinion in the Independent Auditor's Report" while explaining
the reasons for such unfavourable or qualified answer.
93. Similar considerations would apply when the auditor is unable to express an
opinion. In such circumstances, he should clearly state that he is unable to
express an opinion because such records or evidence have not been produced
before him.
144
94. In expressing an opinion or giving any statement, the auditor should evaluate
as to whether the circumstances of the case warrant a negative answer or whether
his opinion/statement can be expressed subject to a qualification.
95. The auditor's report under sub-section (3) of section 143 of the Act is
required to state whether the auditor has sought and obtained all the information
and explanations, which to the best of his knowledge and belief, were necessary
for the purposes of his audit, and if not, the details thereof and the effect of such
information on the financial statements. The term "audit" would include the
reporting requirements under the Order. Therefore, when making his report, the
auditor has to consider whether he has sought and obtained the information and
explanations needed, not merely for the purposes of audit, but also for the purpose
of reporting in terms of the Order. If he has sought but not received the information
and explanations necessary for reporting in terms of the Order, he should mention
that fact, both when reporting on the specific question in the Order and also
consider the impact of such non receipt of the information on the auditor's report
under section 143(3)(a) of the Act.
Board of Director's Report
96. Section 134(3)(f) of the Act requires that the board of directors shall be
bound to give in its report, all the information and explanations regarding every
reservation, qualification or adverse remark or disclaimer contained in the auditor's
report. The auditor's comments in terms of the Order form part of his report and,
therefore, the Board will be bound to give in its report all the information and
explanations regarding every unfavourable comment or qualification therein.
97. The auditor's comments in terms of the Order may be in respect of matters of
fact or they may be an expression of opinion. It is necessary that there should be
no inconsistency in the facts as stated by the auditor and as explained in the
board's report. It is, therefore, suggested that wherever possible, a draft report
should be submitted to the Board to verify and confirm the facts stated therein.
98. It is, however, possible that, on the same facts, there may be a genuine
difference of opinion between the auditor and the Board. In such a case, each is
entitled to hold his or its view. Therefore, the expression of a different opinion in
the Board's report should not be regarded as any reflection on the opinion
expressed by the auditor.
145
Appendix I
Text of the Companies (Auditor's Report) Order, 2020
[TO BE PUBLISHED IN THE GAZETTE OF INDIA, EXTRAORDINARY, PART II,
SECTION 3, SUB-SECTION (ii)]
MINISTRY OF CORPORATE AFFAIRS ORDER
New Delhi, the 25th February, 2020
S.O ..................... (E).-- In exercise of the powers conferred by sub-section (11) of
section 143 of the Companies Act, 2013 (18 of 2013 ) and in supersession of the
Companies (Auditor's Report) Order, 2016, published in the Gazette of India,
Extraordinary, Part II, Section 3, Sub-section (ii), vide number S.O. 1228 (E), dated
the 29th March, 2016, except as respects things done or omitted to be done before
such supersession, the Central Government, after consultation with the National
Financial Reporting Authority constituted under section 132 of the Companies Act,
2013, hereby makes the following Order, namely:--
1. Short title, application and commencement. - (1) This Order may be called
the Companies (Auditor's Report) Order, 2020.
(2) It shall apply to every company including a foreign company as defined in
clause (42) of section 2 of the Companies Act, 2013 (18 of 2013) [hereinafter
referred to as the Companies Act], except
(i) a banking company as defined in clause (c) of section 5 of the Banking
Regulation Act, 1949 (10 of 1949);
(ii) an insurance company as defined under the Insurance Act,1938 (4 of 1938);
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company as defined in clause (62) of section 2 of the
Companies Act and a small company as defined in clause (85) of section
2 of the Companies Act; and
(v) a private limited company, not being a subsidiary or holding company of a
public company, having a paid up capital and reserves and surplus not
more than one crore rupees as on the balance sheet date and which does
not have total borrowings exceeding one crore rupees from any bank or
financial institution at any point of time during the financial year and which
does not have a total revenue as disclosed in Scheduled III to the
Companies Act (including revenue from discontinuing operations)
exceeding ten crore rupees during the financial year as per the financial
statements.
(3) It shall come into force on the date of its publication in the Official Gazette.
2. Auditor's report to contain matters specified in paragraphs 3 and 4. -
Every report made by the auditor under section 143 of the Companies Act on the
accounts of every company audited by him, to which this Order applies, for the
146
financial years commencing on or after the 1st April, 2019, shall in addition,
contain the matters specified in paragraphs 3 and 4, as may be applicable:
Provided this Order shall not apply to the auditor's report on consolidated financial
statements except clause (xxi) of paragraph 3.
3. Matters to be included in auditor's report. - The auditor's report on the
accounts of a company to which this Order applies shall include a statement on the
following matters, namely:-
(i) (a) (A) whether the company is maintaining proper records showing full
particulars, including quantitative details and situation of Property, Plant and
Equipment;
(B) whether the company is maintaining proper records showing full
particulars of intangible assets;
(b) whether these Property, Plant and Equipment have been physically
verified by the management at reasonable intervals; whether any material
discrepancies were noticed on such verification and if so, whether the same
have been properly dealt with in the books of account;
(c) whether the title deeds of all the immovable properties (other than
properties where the company is the lessee and the lease agreements are
duly executed in favour of the lessee) disclosed in the financial statements are
held in the name of the company, if not, provide the details thereof in the
format below:-
Description Gross Held in Whether Period held Reason
of property carrying name promoter, indicate for not
value of director or range, being held
their relative where in name of
or employee appropriate company*
- -- - - - *also
indicate if
in dispute
(d) whether the company has revalued its Property, Plant and Equipment
(including Right of Use assets) or intangible assets or both during the year
and, if so, whether the revaluation is based on the valuation by a Registered
Valuer; specify the amount of change, if change is 10% or more in the
aggregate of the net carrying value of each class of Property, Plant and
Equipment or intangible assets;
(e) whether any proceedings have been initiated or are pending against the
company for holding any benami property under the Benami Transactions
(Prohibition) Act, 1988 (45 of 1988) and rules made thereunder, if so, whether
the company has appropriately disclosed the details in its financial statements;
(ii) (a) whether physical verification of inventory has been conducted at
reasonable intervals by the management and whether, in the opinion of the
147
auditor, the coverage and procedure of such verification by the management is
appropriate; whether any discrepancies of 10% or more in the aggregate for
each class of inventory were noticed and if so, whether they have been
properly dealt with in the books of account;
(b) whether during any point of time of the year, the company has been
sanctioned working capital limits in excess of five crore rupees, in aggregate,
from banks or financial institutions on the basis of security of current assets;
whether the quarterly returns or statements filed by the company with such
banks or financial institutions are in agreement with the books of account of
the Company, if not, give details;
(iii) whether during the year the company has made investments in, provided any
guarantee or security or granted any loans or advances in the nature of loans,
secured or unsecured, to companies, firms, Limited Liability Partnerships or
any other parties, if so,-
(a) whether during the year the company has provided loans or provided
advances in the nature of loans, or stood guarantee, or provided security to any
other entity [not applicable to companies whose principal business is to give
loans], if so, indicate-
(A) the aggregate amount during the year, and balance outstanding at
the balance sheet date with respect to such loans or advances and
guarantees or security to subsidiaries, joint ventures and associates;
(B) the aggregate amount during the year, and balance outstanding at
the balance sheet date with respect to such loans or advances and
guarantees or security to parties other than subsidiaries, joint ventures
and associates;
(b) whether the investments made, guarantees provided, security given
and the terms and conditions of the grant of all loans and advances in the
nature of loans and guarantees provided are not prejudicial to the company's
interest;
(c) in respect of loans and advances in the nature of loans, whether the
schedule of repayment of principal and payment of interest has been
stipulated and whether the repayments or receipts are regular;
(d) if the amount is overdue, state the total amount overdue for more than
ninety days, and whether reasonable steps have been taken by the company
for recovery of the principal and interest;
(e) whether any loan or advance in the nature of loan granted which has
fallen due during the year, has been renewed or extended or fresh loans
granted to settle the overdues of existing loans given to the same parties, if so,
specify the aggregate amount of such dues renewed or extended or settled by
fresh loans and the percentage of the aggregate to the total loans or advances
in the nature of loans granted during the year [not applicable to companies
whose principal business is to give loans];
148
(f) whether the company has granted any loans or advances in the nature
of loans either repayable on demand or without specifying any terms or period
of repayment, if so, specify the aggregate amount, percentage thereof to the
total loans granted, aggregate amount of loans granted to Promoters, related
parties as defined in clause (76) of section 2 of the Companies Act, 2013;
(iv) in respect of loans, investments, guarantees, and security, whether provisions
of sections 185 and 186 of the Companies Act have been complied with, if not,
provide the details thereof;
(v) in respect of deposits accepted by the company or amounts which are
deemed to be deposits, whether the directives issued by the Reserve Bank of
India and the provisions of sections 73 to 76 or any other relevant provisions
of the Companies Act and the rules made thereunder, where applicable, have
been complied with, if not, the nature of such contraventions be stated; if an
order has been passed by Company Law Board or National Company Law
Tribunal or Reserve Bank of India or any court or any other tribunal, whether
the same has been complied with or not;
(vi) whether maintenance of cost records has been specified by the Central
Government under sub-section (1) of section 148 of the Companies Act and
whether such accounts and records have been so made and maintained;
(vii) (a) whether the company is regular in depositing undisputed statutory dues
including Goods and Services Tax, provident fund, employees' state
insurance, income-tax, sales-tax, service tax, duty of customs, duty of excise,
value added tax, cess and any other statutory dues to the appropriate
authorities and if not, the extent of the arrears of outstanding statutory dues as
on the last day of the financial year concerned for a period of more than six
months from the date they became payable, shall be indicated;
(b) where statutory dues referred to in sub-clause (a) have not been deposited
on account of any dispute, then the amounts involved and the forum where
dispute is pending shall be mentioned (a mere representation to the
concerned Department shall not be treated as a dispute);
(viii) whether any transactions not recorded in the books of account have been
surrendered or disclosed as income during the year in the tax assessments
under the Income Tax Act, 1961 (43 of 1961), if so, whether the previously
unrecorded income has been properly recorded in the books of account
during the year;
(ix) (a) whether the company has defaulted in repayment of loans or other
borrowings or in the payment of interest thereon to any lender, if yes, the
period and the amount of default to be reported as per the format below:-
149
Nature of Name of lender* Amount Whether No. of Remarks,
borrowing, not paid principal days delay if any
including on due or or unpaid
debt date interest
securities
*lender wise
details to be
provided in case
of defaults to
banks, financial
institutions and
Government.
(b) whether the company is a declared wilful defaulter by any bank or
financial institution or other lender;
(c) whether term loans were applied for the purpose for which the loans
were obtained; if not, the amount of loan so diverted and the purpose for which
it is used may be reported;
(d) whether funds raised on short term basis have been utilised for long
term purposes, if yes, the nature and amount to be indicated;
(e) whether the company has taken any funds from any entity or person on
account of or to meet the obligations of its subsidiaries, associates or joint
ventures, if so, details thereof with nature of such transactions and the amount
in each case;
(f) whether the company has raised loans during the year on the pledge of
securities held in its subsidiaries, joint ventures or associate companies, if so,
give details thereof and also report if the company has defaulted in repayment
of such loans raised;
(x) (a) whether moneys raised by way of initial public offer or further public offer
(including debt instruments) during the year were applied for the purposes for
which those are raised, if not, the details together with delays or default and
subsequent rectification, if any, as may be applicable, be reported;
(b) whether the company has made any preferential allotment or private
placement of shares or convertible debentures (fully, partially or optionally
convertible) during the year and if so, whether the requirements of section 42
and section 62 of the Companies Act, 2013 have been complied with and the
funds raised have been used for the purposes for which the funds were raised,
if not, provide details in respect of amount involved and nature of non-
compliance;
(xi) (a) whether any fraud by the company or any fraud on the company has been
noticed or reported during the year, if yes, the nature and the amount involved
150
is to be indicated;
(b) whether any report under sub-section (12) of section 143 of the
Companies Act has been filed by the auditors in Form ADT-4 as prescribed
under rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central
Government;
(c) whether the auditor has considered whistle-blower complaints, if any,
received during the year by the company;
(xii) (a) whether the Nidhi Company has complied with the Net Owned Funds to
Deposits in the ratio of 1:20 to meet out the liability;
(b) whether the Nidhi Company is maintaining ten per cent. unencumbered
term deposits as specified in the Nidhi Rules, 2014 to meet out the liability;
(c) whether there has been any default in payment of interest on deposits
or repayment thereof for any period and if so, the details thereof;
(xiii) whether all transactions with the related parties are in compliance with
sections 177 and 188 of Companies Act where applicable and the details
have been disclosed in the financial statements, etc., as required by the
applicable accounting standards;
(xiv) (a) whether the company has an internal audit system commensurate with
the size and nature of its business;
(b) whether the reports of the Internal Auditors for the period under audit
were considered by the statutory auditor;
(xv) whether the company has entered into any non-cash transactions with
directors or persons connected with him and if so, whether the provisions of
section 192 of Companies Act have been complied with;
(xvi) (a) whether the company is required to be registered under section 45-IA of
the Reserve Bank of India Act, 1934 (2 of 1934) and if so, whether the
registration has been obtained;
(b) whether the company has conducted any Non-Banking Financial or
Housing Finance activities without a valid Certificate of Registration (CoR)
from the Reserve Bank of India as per the Reserve Bank of India Act, 1934;
(c) whether the company is a Core Investment Company (CIC) as
defined in the regulations made by the Reserve Bank of India, if so, whether
it continues to fulfil the criteria of a CIC, and in case the company is an
exempted or unregistered CIC, whether it continues to fulfil such criteria;
(d) whether the Group has more than one CIC as part of the Group, if yes,
indicate the number of CICs which are part of the Group;
(xvii) whether the company has incurred cash losses in the financial year and in
the immediately preceding financial year, if so, state the amount of cash
losses;
151
(xviii) whether there has been any resignation of the statutory auditors during the
year, if so, whether the auditor has taken into consideration the issues,
objections or concerns raised by the outgoing auditors;
(xix) on the basis of the financial ratios, ageing and expected dates of realisation
of financial assets and payment of financial liabilities, other information
accompanying the financial statements, the auditor's knowledge of the Board
of Directors and management plans, whether the auditor is of the opinion that
no material uncertainty exists as on the date of the audit report that company
is capable of meeting its liabilities existing at the date of balance sheet as
and when they fall due within a period of one year from the balance sheet
date;
(xx) (a) whether, in respect of other than ongoing projects, the company has
transferred unspent amount to a Fund specified in Schedule VII to the
Companies Act within a period of six months of the expiry of the financial year
in compliance with second proviso to sub-section (5) of section 135 of the said
Act;
(b) whether any amount remaining unspent under sub-section (5) of section
135 of the Companies Act, pursuant to any ongoing project, has been
transferred to special account in compliance with the provision of sub- section
(6) of section 135 of the said Act;
(xxi) whether there have been any qualifications or adverse remarks by the
respective auditors in the Companies (Auditor's Report) Order (CARO)
reports of the companies included in the consolidated financial statements, if
yes, indicate the details of the companies and the paragraph numbers of the
CARO report containing the qualifications or adverse remarks.
4. Reasons to be stated for unfavourable or qualified answers.- (1) Where, in
the auditor's report, the answer to any of the questions referred to in paragraph 3
is unfavourable or qualified, the auditor's report shall also state the basis for such
unfavourable or qualified answer, as the case may be.
(2) Where the auditor is unable to express any opinion on any specified matter,
his report shall indicate such fact together with the reasons as to why it is not
possible for him to give his opinion on the same.
[F. No. 17/45/2015-CL-V Part I]
K.V.R. Murty, Jt. Secretary
152
Appendix II
Clause-by-clause comparison of the reporting requirements of
the Order and the erstwhile CARO 2016
Short title, application and commencement.-. (1) This Order may be called the
Companies (Auditor's Report) Order, 2016.2020.
(2) It shall apply to every company including a foreign company as defined in
clause (42) of section 2 of the Companies Act, 2013 (18 of 2013) (hereinafter
referred to as the Companies Act), except
(i) a banking company as defined in clause (c) of section 5 of the Banking
Regulation Act, 1949 (10 of 1949);
(ii) an insurance company as defined under the Insurance Act, 1938 (4 of 1938);
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company as defined underin clause (62) of section 2 of the
Companies Act and a small company as defined underin clause (85) of section
2 of the Companies Act; and
(v) a private limited company, not being a subsidiary or holding company of a
public company, having a paid up capital and reserves and surplus not more
than rupees one crore rupees as on the balance sheet date and which does
not have total borrowings exceeding rupees one crore rupees from any bank
or financial institution at any point of time during the financial year and which
does not have a total revenue as disclosed in Scheduled III to the Companies
Act, 2013 (including revenue from discontinuing operations) exceeding rupees
ten crore rupees during the financial year as per the financial statements.
(3) It shall come into force on the date of its publication in the Official Gazette.
2. Auditor's report to contain matters specified in paragraphs 3 and 4. - Every
report made by the auditor under section 143 of the Companies Act, 2013 on the
accounts of every company audited by him, to which this Order applies, for the
financial years commencing on or after the 1st April, 20152019, shall in addition,
contain the matters specified in paragraphs 3 and 4, as may be applicable:
Provided thethis Order shall not apply to the auditor's report on consolidated
financial statements. except clause (xxi) of paragraph 3
3. Matters to be included in the auditor's report. - The auditor's report on the
accounts of a company to which this Order applies shall include a statement on
the following matters, namely:
(i) (a) (A) whether the company is maintaining proper records showing full
particulars, including quantitative details and situation of fixed assetsProperty,
Plant and Equipment;
(B) whether the company is maintaining proper records showing full particulars
153
of Intangible assets.
(b) whether these fixed assetsProperty, Plant and Equipment have been physically
verified by the management at reasonable intervals; whether any material
discrepancies were noticed on such verification and if so, whether the same have
been properly dealt with in the books of account;
(c) whether the title deeds of all the immovable properties. (other than properties
where the Company is the lessee and the lease agreements are duly executed in
favour of the lessee) disclosed in the financial statements are held in the name of
the company. If not, provide the details thereof; in the format below;
Description Gross Held in the Whether Period held Reason for
of property carrying name of promoter, indicate not being
value director or range, held in
their where name of
relative or appropriate company*
employee
- - - - - *also
indicate if in
dispute
(d) Whether the Company has revalued its Property, Plant and Equipment
(including Right of Use assets) or intangible assets or both during the year and, if
so, whether the revaluation is based on the valuation by a Registered Valuer.
Specify the amount of change, if change is 10% or more in the aggregate of the
net carrying value of each class of Property, Plant and Equipment or intangible
assets
(e) Whether any proceedings have been initiated or are pending against the
company for holding any Benami property as defined under the "Benami
Transactions (Prohibition) Act, 1988 (45 of 1988) and Rules made thereunder; if
so, whether the Company has appropriately disclosed the details in its financial
statements;
(ii) (a) whether physical verification of inventory has been conducted at
reasonable intervals by the management and whether , in the opinion of the
auditor, the coverage and procedure of such verification by the management is
appropriate; whether any material discrepancies of 10% or more in the
aggregate for each class of inventory were noticed and if so, whether they
have been properly dealt with in the books of account;
(b) whether during any point of time of the year, the Company has been
sanctioned working capital limits in excess of Rs. 5 crores, in aggregate, from
banks or financial institutions on the basis of security of current assets; whether
the quarterly returns or statements filed by the Company with such banks or
financial institutions are in agreement with the books of account of the Company.
If not, give details.
154
(iii) whether during the year the company has made investments in , provided any
guarantee or security or granted any loans or advances in the nature of loans,
secured or unsecured, to companies, firms, Limited Liability Partnerships or any
other parties. covered in the register maintained under section 189 of the
Companies Act, 2013.. If so,
(a) Whether during the year the company has provided loans or provided
advances in the nature of loans, or stood guarantee, or provided security to any
other entity. [Not applicable to companies whose principal business is to give
loans], If so, indicate -
(A) the aggregate amount during the year, and balance outstanding at the
balance sheet date with respect to such loans or advances and guarantees or
security to subsidiaries, joint ventures and associates;
(B) the aggregate amount during the year, and balance outstanding at the
balance sheet date with respect to such loans or advances and guarantees or
security to parties other than subsidiaries, joint ventures and associates;
(a) (b) whether the investments made, guarantees provided, security given and the
terms and conditions of the grant of such all loans and advances in the nature of
loans and guarantees provided are not prejudicial to the company's interest;
(b)(c) in respect of loans and advances in the nature of loans whether the
schedule of repayment of principal and payment of interest has been stipulated
and whether the repayments or receipts are regular;
(c) d) if the amount is overdue, state the total amount overdue for more than
ninety days, and whether reasonable steps have been taken by the company for
recovery of the principal and interest;
(e) whether any loan or advance in the nature of loan granted which has fallen due
during the year, has been renewed or extended or fresh loans granted to settle the
overdues of existing loans given to the same parties; If so, specify the aggregate
amount of such dues renewed or extended or settled by fresh loans and the
percentage of the aggregate to the total loans or advances in the nature of loans
granted during the year. [Not applicable to companies whose principal business is
to give loans);
(f) whether the Company has granted any loans or advances in the nature of loans
either repayable on demand or without specifying any terms or period of
repayment; if so, specify the aggregate amount, percentage thereof to the total
loans granted, aggregate amount of loans granted to Promoters, related parties as
defined in clause (76) of section 2 of the Companies Act, 2013;
(iv) in respect of loans, investments, guarantees, and security whether provisions
of sections 185 and 186 of the Companies Act, 2013 have been complied with. If
not, provide the details thereof.
(v) in case, the company hasrespect of deposits accepted by the Company or
amounts which are deemed to be deposits, whether the directives issued by the
Reserve Bank of India and the provisions of sections 73 to 76 or any other
155
relevant provisions of the Companies Act, 2013 and the rules framedmade
thereunder, where applicable, have been complied with? If not, the nature of such
contraventions be stated; if an order has been passed by Company Law Board or
National Company Law Tribunal or Reserve Bank of India or any court or any
other tribunal, whether the same has been complied with or not?
(vi) whether maintenance of cost records has been specified by the Central
Government under sub-section (1) of section 148 of the Companies Act, 2013
and whether such accounts and records have been so made and maintained.
(vii) (a) whether the company is regular in depositing undisputed statutory dues
including Goods and Service Tax, provident fund, employees' state insurance,
income-tax, sales-tax, service tax, duty of customs, duty of excise, value
added tax, cess and any other statutory dues to the appropriate authorities
and if not, the extent of the arrears of outstanding statutory dues as on the last
day of the financial year concerned for a period of more than six months from
the date they became payable, shall be indicated;
(b) where statutory dues of income tax or sales tax or service tax or duty of
customs or duty of excise or value added tax referred to in sub-clause (a)
have not been deposited on account of any dispute, then the amounts
involved and the forum where dispute is pending shall be mentioned. (A mere
representation to the concerned Department shall not be treated as a
dispute).
(viii) Whether any transactions not recorded in the books of account have been
surrendered or disclosed as income during the year in the tax assessments under
the Income Tax Act, 1961 (43 of 1961); if so, whether the previously unrecorded
income has been properly recorded in the books of account during the year?
(viii) (ix)(a) whether the company has defaulted in repayment of loans or other
borrowings or in the payment of interest thereon to a financial institution, bank,
government or dues to debenture holders?any lender? If yes, the period and
the amount of default to be reported (in case of defaults to banks, financial
institutions, and government, lender wise details to be provided) as per the
format below:
Nature of Name of Amount not Whether No. of days Remarks, if
borrowing, lender* paid on due principal or delay or any
including date interest unpaid
debt
securities
* lender wise
details to be
provided in
case of
defaults to
banks,
financial
156
institutions
and
Government.
(b) Whether the company is a declared wilful defaulter by any bank or financial
institution or other lender?
(c) Whether term loans were applied for the purpose for which the loans were
obtained; If not, the amount of loan so diverted and the purpose for which it is
used, may be reported.
(d) whether funds raised on short term basis have been utilised for long term
purposes? If yes, the nature and amount to be indicated.
(e) whether the Company has taken any funds from any entity or person on
account of or to meet the obligations of its subsidiaries, associates or joint
ventures? If so, details thereof with nature of such transactions and the amount in
each case
(f) whether the Company has raised loans during the year on the pledge of
securities held in its subsidiaries, joint ventures or associate companies? If so,
give details thereof and also report if the company has defaulted in repayment of
such loans raised.
(ix) (x)(a) whether moneys raised by way of initial public offer or further public offer
(including debt instruments) and term loans during the year were applied for
the purposes for which those are raised. If not, the details together with delays
or default and subsequent rectification, if any, as may be applicable, be
reported;
xiv) (b) whether the company has made any preferential allotment or private
placement of shares or fully or partly convertible debentures (fully, partially or
optionally convertible) during the year under review and if so, as to whether
the requirements of section 42 and section 62 of the Companies Act, 2013
have been complied with and the amount funds raised have been used for the
purposes for which the funds were raised. If not, provide the details in respect
of the amount involved and nature of non-compliance;
(x)(xi) (a) whether any fraud by the company or any fraud on the Company by its
officers or employees has been noticed or reported during the year; If yes,
the nature and the amount involved is to be indicated;
(b) whether any report under sub-Section (12) of Section 143 of the Companies
Act has been filed by the auditors in Form ADT-4 as prescribed under Rule
13 of Companies (Audit and Auditors) Rules 2014 with the Central
Government?
(c) whether the auditor has considered whistle-blower complaints, if any,
received during the year by the Company?
157
(xi) whether managerial remuneration has been paid or provided in accordance
with the requisite approvals mandated by the provisions of section 197 read
with Schedule V to the Companies Act? If not, state the amount involved
and steps taken by the company for securing refund of the same;
(xii) (a) whether the Nidhi Company has complied with the Net Owned Funds to
Deposits in the ratio of 1: 20 to meet out the liability. and
(b) whether the Nidhi Company is maintaining ten per cent unencumbered
term deposits as specified in the Nidhi Rules, 2014 to meet out the liability;
(c). whether there has been any default in payment of interest on deposits or
repayment thereof for any period and if so, the details thereof.
(xiii) whether all transactions with the related parties are in compliance with
sections 177 and 188 of Companies Act, 2013 where applicable and the
details have been disclosed in the Financial Statements etc., as required by
the applicable accounting standards;
(xiv) (a) whether the company has an internal audit system commensurate with
the size and nature of its business?
(b) Whether the reports of the Internal Auditors for the period under audit
were considered by the statutory auditor?
(xv) whether the company has entered into any non-cash transactions with
directors or persons connected with him and if so, whether the provisions of
section 192 of Companies Act, 2013 have been complied with;
xvi) (a) whether the company is required to be registered under section 45-IA of
the Reserve Bank of India Act, 1934 (2 of 1934) and if so, whether the
registration has been obtained.
(b) whether the Company has conducted any Non-Banking Financial or
Housing Finance activities without a valid Certificate of Registration (CoR)
from the Reserve Bank of India as per the Reserve Bank of India Act 1934?
(c) whether the Company is a Core Investment Company (CIC) as defined in
the Regulations made by the Reserve Bank of India? If so, whether it
continues to fulfil the criteria of a CIC and in case the company is an exempted
or unregistered CIC, whether it continues to fulfil such criteria
(d) Whether the Group has more than one CIC as part of the Group. If yes,
indicate the number of CICs which are part of the Group.
(xvii) whether the Company has incurred cash losses in the Financial Year and in
the immediately preceding Financial year? If so, state the amount of cash losses.
(xviii) whether there has been any resignation of the statutory auditors during the
year? If so, whether the auditor has taken into consideration the issues,
objections or concerns raised by the outgoing auditors?
(xix) on the basis of the financial ratios, ageing and expected dates of realisation
of financial assets and payment of financial liabilities, other information
158
accompanying the financial statements, the auditor's knowledge of the Board
of Directors and management plans, whether the auditor is of the opinion that
no material uncertainty exists as on date of the Audit Report that company is
capable of meeting its liabilities existing at the date of balance sheet as and
when they fall due within a period of one year from the balance sheet date.
(xx) (a) whether, in respect of other than ongoing projects, the company has
transferred unspent amount to a Fund specified in Schedule VII to the Companies
Act within a period of six months of the expiry of the financial year in compliance
with second proviso to sub-section (5) of section 135 of the said Act.
(b) whether any amount remaining unspent under sub-section (5) of section 135 of
the Companies Act, pursuant to any ongoing project, has been transferred to
special account in compliance with the provision of sub section (6) of section 135
of the said Act;
(xxi) whether there have been any qualifications or adverse remarks by the
respective auditors in the Companies (Auditor's Report) Order (CARO) reports
of the companies included in the consolidated financial statements? If yes,
indicate the details of the companies and the paragraph numbers of the
CARO report containing the qualifications or adverse remarks.
4. Reasons to be stated for unfavourable or qualified answers.- (1) Where, in
the auditor's report, the answer to any of the questions referred to in paragraph 3
is unfavourable or qualified, the auditor's report shall also state the basis for such
unfavourable or qualified answer, as the case may be.
(2) Where the auditor is unable to express any opinion on any specified matter, his
report shall indicate such fact together with the reasons as to why it is not possible
for him to give his opinion on the same.
159
Appendix III
Definitions
Sr. Nomenclature Definition CARO 2020 Clause
No. reference
1 Act "Act" means the Companies Act, 2013 Short title,
(18 of 2013). application and
commencement
2 Foreign Foreign Company as defined in clause Short title,
Company (42) of section 2 of the Act: application and
commencement
Any company or body corporate
incorporated outside India which
(a) has a place of business in India
whether by itself or through an
agent, physically or through
electronic mode; and
(b) conducts any business activity in
India in any other manner."
3 Banking Banking Company as defined in clause Short title,
Company (c) of section 5 of the Banking application and
Regulation Act, 1949: commencement
"Banking company" means any
company which transacts the business
of banking [in India].
Explanation - Any company which is
engaged in the manufacture of goods or
carries on any trade and which accepts
deposits of money from the public
merely for the purpose of financing its
business as such manufacturer or trader
shall not be deemed to transact the
business of banking within the meaning
of this clause.
4 Insurance Insurance Company as defined in Short title,
Company clause (8) of section 2 of the Insurance application and
Act,1938 [As Amended By Insurance commencement
(Amendment) Act, 2002]:
"Insurance company" means any insurer
160
being a company, association or
partnership which may be wound up
under the Act or to which the Indian
Partnership Act, 1932 applies.
5 One Person One Person Company as defined under Short title,
Company clause (62) of section 2 of the Act: application and
commencement
"One Person Company" means a
company which has only one person as
a member.
6 Small Small Company as defined under clause Short title,
Company (85) of section 2 of the Act: application and
commencement
"Small Company" means a company,
other than a public company, --
(i) paid-up share capital of which
does not exceed fifty lakh
rupees or such higher amount
as may be prescribed which
shall not be more than five
crore rupees; or
(ii) turnover of which as per its last
profit and loss account does
not exceed two crore rupees or
such higher amount as may be
prescribed which shall not be
more than twenty crore rupees:
Provided that nothing in this clause shall
apply to
(A) a holding company or a
subsidiary company;
(B) a company registered under
section 8; or
(C) a company or body corporate
governed by any special Act.
7 Private Limited Private Limited Company should be Short title,
Company construed to mean a company application and
registered as a "private company" {as commencement
defined in sub-section (68) of section 2
of the Act}:
"Private company" means a company
having a minimum paid-up share capital
161
as may be prescribed, and which by its
articles, -
(i) restricts the right to transfer its
shares;
(ii) except in case of One Person
Company, limits the number of its
members to two hundred:
Provided that where two or more
persons hold one or more shares in
a company jointly, they shall, for the
purposes of this clause, be treated
as a single member:
Provided further that--
(A) persons who are in the
employment of the
company; and
(B) persons who, having been
formerly in the employment
of the company, were
members of the company
while in that employment
and have continued to be
members after the
employment ceased, shall
not be included in the
number of members; and
(iii) prohibits any invitation to the
public to subscribe for any
securities of the company.
8 Public Public Company as defined under Short title,
Company clause (71) of section 2 of the Act: application and
commencement
"public company" means a company
which -
(a) is not a private company; [and]
(b) has a minimum paid-up share
capital as may be prescribed
Provided that a company which is a
subsidiary of a company, not being a
private company, shall be deemed to be
public company for the purposes of this
Act even where such subsidiary
162
company continues to be a private
company in its articles.
9 Paid-up Share Paid-up Share Capital as defined under Short title,
Capital clause (64) of section 2 of the Act: application and
"Paid-up share capital" or "Share capital commencement
paid-up" means such aggregate amount
of money credited as paid-up as is
equivalent to the amount received as
paid-up in respect of shares issued and
also includes any amount credited as
paid-up in respect of shares of the
company, but does not include any other
amount received in respect of such
shares, by whatever name called.
The Guidance Note on Terms Used in
Financial Statements, issued by the
Institute of Chartered Accountants of
India, defines the term "paid-up share
capital" as, "that part of the subscribed
share capital for which consideration in
cash or otherwise has been received.
This includes bonus shares allotted by
the corporate enterprise". Paid-up share
capital would include both equity share
capital as well as the preference share
capital. While calculating the paid-up
capital, amount of calls unpaid should
be deducted from and the amount
originally paid-up on forfeited shares
should be added to the figure of paid-up
capital. Share application money
received should not be considered as
part of the paid-up capital.
10 Reserve The Guidance Note on Terms Used in Short title,
Financial Statements, issued by the application and
Institute of Chartered Accountants of commencement
India, defines the term "reserve" as, the
portion of earnings, receipts or other
surplus of an enterprise (whether capital
or revenue) appropriated by
management for a general or specific
purpose other than provision for
depreciation or diminution in the value of
assets or for a known liability.
163
11 Property, plant Revised Accounting Standard (AS) 10 Clause (i)(a)(A),
and equipment and Indian Accounting Standard (Ind (i)(b) and (i)(d)
AS) 16 - Property Plant and Equipment
defines the term "Property, plant and
equipment" as tangible items that:
(a) are held for use in the production
or supply of goods or services, for
rental to others, or for
administrative purposes; and
(b) are expected to be used during
more than a period of twelve
months / one period.
12 Intangible Accounting Standard (AS) 26 - Clause (i)(a)(B)
Asset Intangible Assets, defines the term
"Intangible Asset" as an identifiable non-
monetary asset, without physical
substance, held for use in the production
or supply of goods or services, for rental
to others, or for administrative purposes.
Indian Accounting Standard (Ind AS) 38
- Intangible Assets, defines the term
"Intangible Asset" as an identifiable non-
monetary asset, without physical
substance.
13 Right of Use Indian Accounting Standard (Ind AS) Clause (i)(d)
Assets 116 Leases defines the term "right-of-
use asset" as an asset that represents a
lessee's right to use an underlying asset
for the lease term.
14 Registered Companies (Registered valuers and Clause (i)(d)
Valuer valuation) Rules, 2017 defines
"registered valuer" as a valuer registered
with the Registration Authority under
Rule 7(6) for carrying out valuation of
assets belonging to a class or classes of
assets.
15 Benami Section 2(8) of The Benami Transaction Clause (i)(e)
Property and (Prohibition) Act,1988 defines the term
Benami "benami property" as any property
Transaction which is the subject matter of
a benami transaction and also includes
164
the proceeds from such property.
"benami transaction" means, -
(A) a transaction or an arrangement
-
(a) where a property is transferred
to, or is held by, a person, and
the consideration for such
property has been provided, or
paid by, another person; and
(b) the property is held for the
immediate or future benefit,
direct or indirect, of the person
who has provided the
consideration,
except when the property is held
by
(i) a Karta, or a member of a
Hindu undivided family, as
the case may be, and the
property is held for his
benefit or benefit of other
members in the family and
the consideration for such
property has been provided
or paid out of the known
sources of the Hindu
undivided family;
(ii) a person standing in a
fiduciary capacity for the
benefit of another person
towards whom he stands in
such capacity and includes a
trustee, executor, partner,
director of a company, a
depository or a participant as
an agent of a depository
under the Depositories Act,
1996 (22 of 1996) and any
other person as may be
notified by the Central
Government for this purpose;
(iii) any person being an
165
individual in the name of his
spouse or in the name of any
child of such individual and
the consideration for such
property has been provided
or paid out of the known
sources of the individual;
(iv) any person in the name of
his brother or sister or lineal
ascendant or descendant,
where the names of brother
or sister or lineal ascendant
or descendent and the
individual appear as joint-
owners in any document, and
the consideration for such
property has been provided
or paid out of the known
sources of the individual; or
(B) a transaction or an arrangement
in respect of a property carried
out or made in a fictitious name;
or
(C) a transaction or an arrangement
in respect of a property where
the owner of the property is not
aware of, or, denies knowledge
of, such ownership;
(D) a transaction or an arrangement
in respect of a property where
the person providing the
consideration is not traceable or
is fictitious.
Explanation - For the removal of
doubts, it is hereby declared
that benami transaction shall not
include any transaction involving the
allowing of possession of any property
to be taken or retained in part
performance of a contract referred to in
section 53A of the Transfer of Property
Act, 1882 (4 of 1882), if, under any law
for the time being in force, -
166
(i) consideration for such property has
been provided by the person to
whom possession of property has
been allowed but the person who
has granted possession thereof
continues to hold ownership of
such property;
(ii) stamp duty on such transaction or
arrangement has been paid; and
(iii) the contract has been registered;
16 Inventories Accounting Standard (AS) 2, "Valuation Clause (ii)(a)
of Inventories" defines "Inventories" as
assets"
(a) held for sale in the ordinary course
of business;
(b) in the process of production for
such sale; or
(c) in the form of materials or supplies
to be consumed in the production
process or in the rendering of
services."
17 Financial Financial Institution as defined under Clause(ii)(b), Clause
Institution clause (39) of section 2 of the Act: (ix)(b)
"Financial institution" includes a
scheduled bank, and any other financial
institution defined or notified under the
Reserve Bank of India ("RBI") Act, 1934
(2 of 1934).
Financial institution has been defined
under clause (c) of Section 45I of the
RBI Act, 1934 as under:
``financial institution'' means any non-
banking institution which carries on as
its business or part of its business any of
the following activities, namely:
(i) the financing, whether by way of
making loans or advances or
otherwise, of any activity other than
its own;
(ii) the acquisition of shares, stock,
bonds, debentures or securities
167
issued by a Government or local
authority or other marketable
securities of a like nature;
(iii) letting or delivering of any goods to
a hirer under a hire-purchase
agreement as defined in clause (c)
of section 2 of the Hire-Purchase
Act, 1972;
(iv) the carrying on of any class of
insurance business;
(v) managing, conducting or
supervising, as foreman, agent or
in any other capacity, of chits or
kuries as defined in any law which
is for the time being in force in any
State, or any business, which is
similar thereto;
(vi) collecting, for any purpose or under
any scheme or arrangement by
whatever name called, monies in
lumpsum or otherwise, by way of
subscriptions or by sale of units, or
other instruments or in any other
manner and awarding prizes or
gifts, whether in cash or kind, or
disbursing monies in any other
way, to persons from whom monies
are collected or to any other
person, but does not include any
institution, which carries on as its
principal business;
(a) agricultural operations; or
(aa) industrial activity; or
(b) the purchase or sale of any
goods (other than securities) or
the providing of any services;
or
(c) the purchase, construction or
sale of immovable property, so
however, that no portion of the
income of the institution is
derived from the financing of
168
purchases, constructions or
sales of immovable property by
other persons;
Explanation For the purposes of this
clause, ``industrial activity'' means any
activity specified in sub-clauses (i) to
(xviii) of clause (c) of section 2 of the
Industrial Development Bank of India
Act, 1964.
Further ``non-banking institution'' has
been defined under clause (e) of Section
45I of RBI Act 1934 as under:
``non-banking institution'' means a
company, corporation (cooperative
society).
Further, the term "financial institution" is
also referred to in the context of the
definition of a non-banking financial
company as defined by the RBI Act,
1934. The term ``non-banking financial
company'' has been defined under
clause (f) of Section 45I of RBI Act,
1934 as under:
``non-banking financial company'' means
(i) a financial institution which is a
company;
(ii) a non-banking institution which
is a company and which has as
its principal business the
receiving of deposits, under any
scheme or arrangement or in
any other manner, or lending in
any manner;
(iii) such other non-banking
institution or class of such
institutions, as the Bank may,
with the previous approval of
the Central Government and
by notification in the Official
Gazette, specify.
169
18 Current Assets Schedule III of the Act states that an Clause (ii)(b)
asset shall be classified as current
when it satisfies any of the following
criteria:
(a) it is expected to be realised in, or is
intended for sale or consumption
in, the entity's normal operating
cycle;
(b) it is held primarily for the purpose
of being traded;
(c) it is expected to be realised within
twelve months after the reporting
date; or
(d) it is cash or a cash equivalent
unless it is restricted from being
exchanged or used to settle a
liability for atleast twelve months
after the reporting date.
19 Subsidiary Subsidiary Company or Subsidiary as Clause (iii)(a)(A),
Company or defined under clause (87) of section 2 of Clause (ix)(e),
Subsidiary the Act:
Clause (ix)(f)
"subsidiary company" or "subsidiary", in
relation to any other company (that is to
say the holding company), means a
company in which the holding company
controls the composition of the Board of
Directors; or
(i) exercises or controls more than
one-half of the [total voting
power] either at its own or together
with one or more of its subsidiary
companies:
Provided that such class or classes
of holding companies as may be
prescribed shall not have
layers of subsidiaries beyond such
numbers as may be prescribed.
Explanation - For the purposes of
this clause, -
a) a company shall be deemed
to be a subsidiary company
170
of the holding company
even if the control referred
to in sub-clause (i) or sub-
clause (ii) is of another
subsidiary company of the
holding company;
b) the composition of a
company's Board of
Directors shall be deemed
to be controlled by another
company if that other
company by exercise of
some power exercisable by
it at its discretion can
appoint or remove all or a
majority of the directors;
c) the expression "company"
includes any body
corporate;
d) layer" in relation to a holding
company means its
subsidiary or subsidiaries.
20 Associate Associate Company as defined under Clause (iii)(a)(A),
Company clause (6) of section 2 of the Act:
Clause (ix)(e),
"associate company" in relation to
Clause (ix)(f)
another company, means a company in
which that other company has a
significant influence, but which is not a
subsidiary company of the
company having such influence and
includes a joint venture company.
Explanation - For the purpose of this
clause:
a) the expression "significant
influence" means control of at
least twenty per cent of total
voting power, or control of or
participation in business
decisions under an agreement;
b) the expression "joint venture"
means a joint arrangement
whereby the parties that have
171
joint control of the arrangement
have rights to the net assets of
the arrangement;
21 Free Reserves Free Reserves as defined under clause Clause (iv)
(43) of section 2 of the Act:
"free reserves" means such reserves
which, as per the latest audited balance
sheet of a company, are available for
distribution as dividend.
Provided that
(i) any amount representing
unrealised gains, notional gains
or revaluation of assets, whether
shown as a reserve or otherwise,
or
(ii) any change in carrying amount of
an asset or of a liability
recognized in equity, including
surplus in profit and loss account
on measurement of the asset or
the liability at fair value
22 To any other The term "person connected with the Clause (iv)
person in director" has not been defined in the Act,
whom the or the Rules thereunder. Instead, the
director is term "to any other person in whom the
interested director is interested" is defined in the
Explanation to sub section (1) of section
185 of the Act, which is reproduced as
under and may be used as the reference
point for reporting:
(a) any director of the lending
company, or of a company
which is its holding company or
any partner or relative of any
such director;
(b) any firm in which any such
director or relative is a partner;
(c) any private company of which
any such director is a director
or member;
(d) any body corporate at a
172
general meeting of which not
less than twenty-five per cent.
of the total voting power may
be exercised or controlled by
any such director, or by two or
more such directors, together;
or
(e) any body corporate, the Board
of directors, managing director
or manager, whereof is
accustomed to act in
accordance with the directions
or instructions of the Board, or
of any director or directors, of
the lending company."
23 Relative Section 2(77) of the Companies Act, Clause(iv)
2013 read with Rule 4 of the Companies
(Specification of Definition Details)
Rules, 2014 defines the term "relative".
As per the aforesaid section 2(77),
"Relative, with reference to any person,
means anyone who is related to
another, if
(i) they are members of a Hindu
Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in
such manner as may be
prescribed"
As per Rule 4 of the Companies
(Specification of Definition Details)
Rules, 2014, a person shall be deemed
to be the relative of another, if he or she
is related to another in the following
manner, namely
(i) Father, including step father
(ii) Mother, including step mother
(iii) Son, including step son
(iv) Son's wife
(v) Daughter
173
(vi) Daughter's husband
(vii) Brother, including step brother
(viii) Sister, including step sister
24 Deposit Deposits as defined under clause (31) of Clause (v)
section 2 of the Act:
"Deposit" includes any receipt of money
by way of deposit or loan or in any other
form by a company, but does not
include such categories of amount as
may be prescribed in consultation with
the Reserve Bank of India.
Deposits as defined under Section 45-I
(bb) of the Reserve Bank of India Act,
1934:
"Deposit" includes and shall be deemed
always to have include any receipt of
money by way of deposit or loan or in
any other form, but does not include, -
(i) amounts raised by way of share
capital;
(ii) amounts contributed as capital by
partners of a firm;
(iii) amounts received from a
scheduled bank or a co-operative
bank or any other banking
company as defined in clause (c)
of section 5 of the Banking
Regulation Act, 1949 (10 of
1949);
(iv) any amount received from, -
(a) State Financial Corporation,
(b) any financial institution
specified in or under section
6A of the Industrial
Development Bank of India
Act, 1964 (18 of 1964), or
(c) any other institution that may
be specified by the Bank in this
behalf;
(v) amounts received in the ordinary
174
course of business, by way of--
(a) security deposit,
(b) dealership deposit,
(c) earnest money, or
(d) advance against orders for
goods, properties or services;
(vi) any amount received from an
individual or a firm or an
association of individuals not
being a body corporate,
registered under any enactment
relating to money-lending which
is for the time being in force in
any State; and
(vii) any amount received by way of
subscriptions in respect of a chit.
25 Depositor ``Depositor'' means, Clause (v)
(i) any member of the company who
has made a deposit with the
company in accordance with the
provisions of subsection (2) of
section 73 of the Act, or
(ii)any person who has made a
deposit with a public company in
accordance with the provisions
of section 76 of the Act.
26 Eligible "Eligible company" means a public Clause (v)
Company company as referred to in sub-section
(1) of section 76, having a net worth of
not less than one hundred crore rupees
or a turnover of not less than five
hundred crore rupees and which has
obtained the prior consent of the
company in general meeting by means
of a special resolution and also filed the
said resolution with the Registrar of
Companies before making any invitation
to the Public for acceptance of deposits.
27 Cost Cost Accountant in Practice as defined Clause (vi)
Accountant in under clause (b) of section 2 of
Companies (cost records and audit)
175
practice Rules, 2014:
"Cost Accountant in practice" means a
cost accountant as defined in clause (b)
of sub-section (1) of section 2 of the
Cost and Works Accountants Act, 1959
(23 of 1959), who holds a valid
certificate of practice under sub-section
(1) of section 6 of that Act and who is
deemed to be in practice under sub-
section (2) of section 2 thereof, and
includes a firm or limited liability
partnership of cost accountants.
28 Cost Auditor Cost Auditor as defined under clause (c) Clause (vi)
of section 2 of Companies (cost records
and audit) Rules, 2014:
"Cost auditor" means a Cost Accountant
in practice, as defined in clause (b), who
is appointed by the Board.
29 Cost Audit Cost Audit Report as defined under Clause (vi)
Report clause (d) of section 2 of Companies
(cost records and audit) Rules, 2014:
"Cost audit report" means the report duly
audited and signed by the cost auditor
including attachment, annexure,
qualifications or observations etc. to cost
audit report.
30 Cost Records Cost records as defined under clause (e) Clause (vi)
of section 2 of Companies (cost records
and audit) Rules, 2014:
"cost records" means books of account
relating to utilisation of materials, labour
and other items of cost as applicable to
the production of goods or provision of
services as provided in section 148 of
the Act and these rules.
31 Income "Income" as defined in Section 2(24) of Clause (viii)
the Income Tax Act, 1961 includes:
(i) profits and gains;
(ii)dividend;
(iia) voluntary contributions received
by a trust created wholly or
176
partly for charitable or religious
purposes or by an institution
established wholly or partly for
such purposes or by an
association or institution referred
to in clause (21) or clause (23),
or by a fund or trust or institution
referred to in sub-clause (iv) or
sub-clause (v) or by any
university or other educational
institution referred to in sub-
clause (iiiad) or sub-clause (vi)
or by any hospital or other
institution referred to in sub-
clause (iiiae) or sub-clause (via)
of clause (23C) of section 10 or
by an electoral trust.
Explanation - For the purposes
of this sub-clause, "trust"
includes any other legal
obligation;
(iii) the value of any perquisite or
profit in lieu of salary taxable
under clauses (2) and (3)
of section 17;
(iiia) any special allowance or
benefit, other than perquisite
included under sub-clause (iii),
specifically granted to the
assessee to meet expenses
wholly, necessarily and
exclusively for the performance
of the duties of an office or
employment of profit;
(iiib) any allowance granted to the
assessee either to meet his
personal expenses at the place
where the duties of his office or
employment of profit are
ordinarily performed by him or at
a place where he ordinarily
resides or to compensate him
for the increased cost of living;
(iv) the value of any benefit or
177
perquisite, whether convertible
into money or not, obtained from
a company either by a director
or by a person who has a
substantial interest in the
company, or by a relative of the
director or such person, and any
sum paid by any such company
in respect of any obligation
which, but for such payment,
would have been payable by the
director or other person
aforesaid ;
(iva) the value of any benefit or
perquisite, whether convertible
into money or not, obtained by
any representative assessee
mentioned in clause (iii) or
clause (iv) of sub-section (1)
of section 160 or by any person
on whose behalf or for whose
benefit any income is receivable
by the representative assessee
(such person being hereafter in
this sub-clause referred to as
the "beneficiary") and any sum
paid by the representative
assessee in respect of any
obligation which, but for such
payment, would have been
payable by the beneficiary ;
(v) any sum chargeable to income-
tax under clauses (ii) and (iii)
of section 28 or section
41 or section 59;
(va) any sum chargeable to income-
tax under clause (iiia) of section
28;
(vb) any sum chargeable to income-
tax under clause (iiib) of section
28;
(vc) any sum chargeable to income-
tax under clause (iiic) of section
178
28;
(vd) the value of any benefit or
perquisite taxable under clause
(iv) of section 28;
(ve) any sum chargeable to income-
tax under clause (v) of section
28;
(vi) any capital gains chargeable
under section 45;
(vii) the profits and gains of any
business of insurance carried on
by a mutual insurance company
or by a co-operative society,
computed in accordance
with section 44 or any surplus
taken to be such profits and
gains by virtue of provisions
contained in the First Schedule;
(viia) the profits and gains of any
business of banking (including
providing credit facilities) carried
on by a co-operative society with
its members;
(viii) [Omitted by the Finance Act,
1988, w.e.f. 1-4-1988. Original
sub-clause (viii) was inserted by
the Finance Act, 1964, w.e.f. 1-
4-1964;]
(ix) any winnings from lotteries,
crossword puzzles, races
including horse races, card
games and other games of any
sort or from gambling or betting
of any form or nature
whatsoever.
Explanation - For the purposes
of this sub-clause, -
(i) "lottery" includes winnings
from prizes awarded to any
person by draw of lots or by
chance or in any other
manner whatsoever, under
179
any scheme or arrangement
by whatever name called;
(ii) "card game and other game
of any sort" includes any
game show, an
entertainment programme
on television or electronic
mode, in which people
compete to win prizes or any
other similar game;
(x) any sum received by the
assessee from his employees as
contributions to any provident
fund or superannuation fund or
any fund set up under the
provisions of the Employees'
State Insurance Act, 1948 (34 of
1948), or any other fund for the
welfare of such employees;
(xi) any sum received under a
Keyman insurance policy
including the sum allocated by
way of bonus on such policy.
Explanation - For the purposes
of this clause, the expression
"Keyman insurance policy" shall
have the meaning assigned to it
in the Explanation to clause
(10D) of section 10;
(xii) any sum referred to in clause
(va) of section 28;
(xiia) the fair market value of
inventory referred to in clause
(via) of section 28;
(xiii) any sum referred to in
clause (v) of sub-section (2)
of section 56;
(xiv) any sum referred to in
clause (vi) of sub-section (2)
of section 56;
(xv) any sum of money or value of
property referred to in clause
180
(vii) or clause (viia) of sub-
section (2) of section 56;
(xvi) any consideration received
for issue of shares as exceeds
the fair market value of the
shares referred to in clause
(viib) of sub-section (2)
of section 56;
(xvii) any sum of money referred
to in clause (ix) of sub-section
(2) of section 56;
(xviia) any sum of money or value of
property referred to in clause
(x) of sub-section (2) of section
56;
(xviib) any compensation or other
payment referred to in clause
(xi) of sub-section (2)
of section 56;]
(xviii) assistance in the form of a
subsidy or grant or cash
incentive or duty drawback or
waiver or concession or
reimbursement (by whatever
name called) by the Central
Government or a State
Government or any authority or
body or agency in cash or kind
to the assessee other than, -
(a) the subsidy or grant or
reimbursement which is taken
into account for determination of
the actual cost of the asset in
accordance with the provisions
of Explanation 10 to clause (1)
of section 43; or
(b) the subsidy or grant by the
Central Government for the
purpose of the corpus of a trust
or institution established by the
Central Government or a State
Government, as the case may
181
be;
32 Securities Securities as defined under clause (81) Clause (ix)(f)
of section 2 of the Act:
"Securities" means the securities as
defined in clause (h) of section 2 of the
Securities Contracts (Regulation) Act,
1956 (42 of 1956).
Section 2(h) of the Securities Contracts
(Regulation) Act, 1956 stated that the
term "Securities" include
i. shares, scrips, stocks,
bonds, debentures,
debenture stock or other
marketable securities of a
like nature in or of any
incorporated company or
other body corporate
ia derivative
ib units or any other instrument
issued by any collective
investment scheme to the
investors in such schemes
ic security receipt as defined in
clause (zg) of section 2 of
the Securitisation and
Reconstruction of Financial Assets and
Enforcement of Security Interest
Act,2002
id units or any other such
instrument issued to the investors
under any mutual fund scheme
ii. Government securities;
iia such other instruments as
may be declared by the Central
Government to be securities; and
iii. rights or interest in
securities.
33 Public offer "Public offer" includes initial public offer Clause (x)(a)
or further public offer of securities to
public by a company, or an offer for sale
182
of securities to the public by an existing
shareholder, through issue of
prospectus.
34 Debt SEBI (Issue and Listing of Debt Clause (x)(a)
Instrument Securities), Regulations, 2008 which
apply to public issue of debt securities
and its listing, define the term "debt
securities". In terms of Regulation
2(1)(e) of the said regulations, it means
a non-convertible debt securities which
create or acknowledge indebtedness,
and include debenture, bonds and such
other securities of a body corporate or
any statutory body constituted by virtue
of a legislation, whether constituting a
charge on the assets of the body
corporate or not, but excludes bonds
issued by Government or such other
bodies as may be specified by the
Board, security receipts and securitized
debt instruments.
35 Private Explanation I of section 42 of the Act Clause (x)(b)
Placement defines the term Private placement" as
any offer or invitation to subscribe or
issue of securities to a select group of
persons by a company (other than by
way of public offer) through private
placement offer-cum-application, which
satisfies the conditions specified in this
section.
36 Fraud The term "fraud" refers to an intentional Clause (xi)
act by one or more individuals among
management, those charged with
governance, employees, involving the
use of deception to obtain an unjust or
illegal advantage.
37 Nidhi Section 406(1) of the Act defines Clause (xii)(a)
"Nidhi" or "Mutual Benefit Society" as a
company which the Central Government
may, by notification in the Official
Gazette, declare to be a Nidhi or Mutual
Benefit Society, as the case may be.
183
38 Net owned As per Explanation I to section 45-IA of Clause (xii)(a)
fund the Reserve Bank of India Act, 1934 "net
owned fund" means:
(a) the aggregate of the paid-up
equity capital and free reserves
as disclosed in the latest
balance-sheet of the company
after deducting there from
(i) accumulated balance of
loss;
(ii) deferred revenue
expenditure; and
(iii) other intangible assets;
and
(b) further reduced by the amounts
representing
(1) investments of such
company in shares of
(i) its subsidiaries;
(ii) companies in the same
group;
(iii) all other non-banking
financial companies; and
(2) the book value of
debentures, bonds,
outstanding loans and
advances (including hire-
purchase and lease
finance) made to, and
deposits with,
(i) subsidiaries of such
company; and
(ii) companies in the same
group,
to the extent such amount
exceeds ten per cent of (a)
above.
39 Related Party Related party as defined under clause Clause (xiii)
(76) of section 2 of the Act:
184
"related party", with reference to a
company, means
(i) a director or his relative;
(ii) a key managerial personnel
or his relative;
(iii) a firm, in which a director,
manager or his relative is a
partner;
(iv) a private company in which a
director or manager [or his
relative] is a member or
director;
(v) a public company in which a
director or manager is a
director [and] holds along with
his relatives, more than two
per cent of its paid-up share
capital;
(vi) any body corporate whose
Board of Directors, managing
director or manager is
accustomed to act in
accordance with the advice,
directions or instructions of a
director or manager;
(vii) any person on whose
advice, directions or
instructions a director or
manager is accustomed to
act:
Provided that nothing in sub-
clauses (vi) and (vii) shall apply
to the advice, directions or
instructions given in a
professional capacity;
(viii) any body corporate which is
A. a holding, subsidiary or
an associate company of
such company;
B. a subsidiary of a holding
185
company to which it is
also a subsidiary; or
C. an investing company or
the venturer of the
company.
Explanation - For the purpose of
this clause, "the investing
company or the venturer of a
company" means a body
corporate whose investment in
the company would result in the
company becoming an associate
company of the body corporate.]
(ix) such other person as may
be prescribed;
40 Internal As per Section 138 of the Act internal Clause (xiv)(b)
Auditor auditor, shall either be a chartered
accountant or a cost accountant, or such
other professional as may be decided by
the Board to conduct internal audit of the
functions and activities of the company.
41 Cash or Cash Accounting Standard (AS) 3 Cash Clause (xv)
equivalents Flow Statements define the term Cash
or Cash Equivalent as under:
"Cash" comprises cash on hand and
demand deposits with banks.
"Cash equivalents" are short term,
highly liquid investments that are readily
convertible into known amounts of cash
and which are subject to an insignificant
risk of changes in value.
42 Core As per Master Direction Core Clause (xvi)(c)
Investment Investment Companies (Reserve Bank)
Company Directions, 2016:
(CIC) "Core Investment Company (CIC)" is a
non-banking financial company carrying
on the business of acquisition of shares
and securities and which satisfies the
following conditions as on the date of the
last audited balance sheet:
(i) it holds not less than 90% of its
186
net assets in the form of
investment in equity shares,
preference shares, bonds,
debentures, debt or loans in
group companies;
(ii) its investments in the equity
shares (including instruments
compulsorily convertible into
equity shares within a period not
exceeding 10 years from the date
of issue) in group companies and
units of Infrastructure Investment
Trust only as sponsor constitute
not less than 60% of its net
assets as mentioned in clause (i)
above;
Provided; that the exposure of such
CICs towards InvITs shall be limited to
their holdings as sponsors and shall
not, at any point in time, exceed the
minimum holding of units and tenor
prescribed in this regard by SEBI
(Infrastructure Investment Trusts)
Regulations, 2014, as amended from
time to time.
(iii) it does not trade in its investments
in shares, bonds, debentures,
debt or loans in group companies
except through block sale for the
purpose of dilution or
disinvestment;
(iv) it does not carry on any other
financial activity referred to in
Section 45I(c) and 45I(f) of the
Reserve Bank of India Act, 1934
except
(a) investment in
(i) bank deposits,
(ii) money market
instruments, including money
market mutual funds and
liquid mutual funds
187
(iii) government securities,
and
(iv) bonds or debentures
issued by group companies,
(b) granting of loans to group
companies and
(c) issuing guarantees on behalf
of group companies.
43 Financial As per Indian Accounting Standards (Ind Clause (xix)
Assets AS) 32 - Financial Instruments,
"Financial asset" is any asset that is:
(i) cash
(ii) an equity instrument of
another entity
(iii) a contractual right
(a) to receive cash or another
financial asset from another
entity; or
(b) to exchange financial
assets or financial liabilities
with another entity under
conditions that are potentially
favourable to the entity; or
(iv) a contract that will or may be
settled in the entity's own
equity instruments and is:
(a) a non-derivative for which the
entity is or may be obliged to
receive a variable number of the
entity's own equity instruments.
(b) a derivative that will or may
be settled other than by the
exchange of a fixed amount of
cash or another financial asset
for a fixed number of the
entity's own equity instruments.
(c) For this purpose the
entity's own equity instruments
do not include instruments that
are themselves contracts for
188
the future receipt or delivery of
the entity's own equity
instruments.
(d) puttable instruments
classified as equity or certain
liabilities arising on liquidation
classified by IAS 32 as equity
instruments.
44 Financial As per Indian Accounting Standards (Ind Clause (xix)
Liabilities AS) 32 - Financial Instruments,
"Financial liability" is any liability that is:
(i) a contractual obligation:
(a) to deliver cash or another
financial asset to another entity;
or
(b) to exchange financial assets
or financial liabilities with
another entity under conditions
that are potentially unfavourable
to the entity; or
(ii) a contract that will or may be
settled in the entity's own equity
instruments and is
(a) a non-derivative for which the
entity is or may be obliged to
deliver a variable number of the
entity's own equity instruments
or
(b) a derivative that will or may
be settled other than by the
exchange of a fixed amount of
cash or another financial asset
for a fixed number of the
entity's own equity instruments.
For this purpose, the entity's
own equity instruments do not
include: instruments that are
themselves contracts for
the future receipt or delivery of
the entity's own equity
instruments; puttable
instruments classified as equity
189
or certain liabilities arising
on liquidation classified by IAS
32 as equity instruments
45 Material Standard on Auditing (SA) 570 Clause (xix)
Uncertainty (Revised) Going Concern defines the
phrase "material uncertainty" as the
uncertainties related to events or
conditions which may cast significant
doubt on the entity's ability to continue
as a going concern. (Clause A21, Ref
paragraphs 18-19)
46 Book and Book and Paper as defined under
Paper clause (12) of section 2 of the Act:
"Book and paper" and "book or paper"
include books of account, deeds,
vouchers, writings, documents, minutes
and registers maintained on paper or in
electronic form.
47 Electronic The term "electronic mode" includes
mode "electronic form" as defined in section
2(1)(r) of the Information Technology
Act, 2000 and also includes an
electronic record as defined in section
2(1)(t) of the Information Technology
Act, 2000 (as amended by the
Amendment Act of 2008).
48 Electronic form Section 2(1)(r) of the Information
Technology Act, 2000 defines
"electronic form" as follows:
"Electronic form" with reference to
information means any information
generated, sent, received or stored in
media, magnetic, optical, computer
memory, micro film, computer generated
micro fiche or similar device".
49 Electronic Section 2(1)(t) of the information
record Technology Act, 2000 defines
"electronic records" as follows:
"Electronic record" means data, record
or data generated, image or sound
stored, received or sent in an electronic
form or micro film or computer
190
generated micro fiche".
50 Default The word "default" would mean non-
payment of dues to banks, Government,
financial institutions or debenture
holders on the last dates specified in
loan documents or debentures trust
deed, as the case may be.
51 Government The term "Government" means the
department of the Central Government,
a State Government and its department
and a Union Territory and its
department, but shall not include any
entity, whether created by a statute or
otherwise, the accounts of which are not
required to be kept in accordance with
article 150 of the constitution or the rules
made there under. (As defined u/s 65B
(26A) of the Finance Act 1994).
Accordingly, the term "Government"
does not include Government Company
/ Public Sector Undertaking / Boards /
Authority / Corporation and Foreign
Government.
52 Doubtful Asset "Doubtful Asset" means a borrowal
account which has remained a Non-
performing asset for more than two
years but less than three years;
53 Loss Asset "Loss Asset" means a borrowal account
which has remained a Non-performing
asset for more than three years or where
in the opinion of the Board, a shortfall in
the recovery of the loan account is
expected because the documents
executed may become invalid if
subjected to legal process or for any
other reason;
54 Non- "Non-Performing Asset" means a
Performing borrowal account in respect of which
Asset interest income or instalment of loan
towards re payment of principal amount
has remained unrealised for twelve
months;
191
55 Standard "Standard Asset" means the asset in
Asset respect of which no default in re-
payment of principal or payment of
interest has occurred or is perceived and
which has neither shown signs of any
problem relating to re-payment of
principal sum or interest nor does it carry
more than normal risk attached to the
business;
56 Sub-Standard "Sub-Standard Asset" means a borrowal
Asset account which is a Non-performing
asset:
192
Appendix IV
List of Financial Institutions Covered Under
the Companies (Acceptance of Deposit) Rules, 2014
1. Sub section (39) of section 2 of Companies Act, 2013 defines the term
"financial institution" as, it includes a scheduled bank, and any other financial
institution defined or notified under the Reserve Bank of India (RBI) Act, 1934 (2 of
1934). The term financial institution has been defined under Section 45I clause (c)
of the RBI Act, 1934 as under:-
45I (c) ``financial institution'' means any non-banking institution which
carries on as its business or part of its business any of the following activities,
namely:
(i) the financing, whether by way of making loans or advances or otherwise,
of any activity other than its own;
(ii) the acquisition of shares, stock, bonds, debentures or securities issued
by a Government or local authority or other marketable securities of a
like nature;
(iii) letting or delivering of any goods to a hirer under a hire-purchase
agreement as defined in clause (c) of section 2 of the Hire-Purchase Act,
1972;
(iv) the carrying on of any class of insurance business;
(v) managing, conducting or supervising, as foreman, agent or in any other
capacity, of chits or kuries as defined in any law which is for the time
being in force in any State, or any business, which is similar thereto;
(vi) collecting, for any purpose or under any scheme or arrangement by
whatever name called, monies in lumpsum or otherwise, by way of
subscriptions or by sale of units, or other instruments or in any other
manner and awarding prizes or gifts, whether in cash or kind, or
disbursing monies in any other way, to persons from whom monies are
collected or to any other person, but does not include any institution,
which carries on as its principal business,
(a) agricultural operations; or
(aa) industrial activity; or]
(b) the purchase or sale of any goods (other than securities) or the
providing of any services; or
(c) the purchase, construction or sale of immovable property, so
however, that no portion of the income of the institution is derived
from the financing of purchases, constructions or sales of
immovable property by other persons;
Explanation For the purposes of this clause, ``industrial activity'' means
193
any activity specified in sub-clauses (i) to (xviii) of clause (c) of section 2
of the Industrial Development Bank of India Act, 1964;
Further ``non-banking institution'' has been defined under clause (e) of
Section 45-I of RBI Act 1934 as under:-
45-I (e) ``non-banking institution'' means a company, corporation or
cooperative society.
Further ``non-banking financial company'' has been defined under clause
(f) of Section 45-I of RBI Act 1934 as under:-
45-I (f) ``non-banking financial company'' means
(i) a financial institution which is a company;
(ii) a non-banking institution which is a company and which has as its
principal business the receiving of deposits, under any scheme or
arrangement or in any other manner, or lending in any manner;
(iii) such other non-banking institution or class of such institutions, as the
Bank may, with the previous approval of the Central Government and by
notification in the Official Gazette, specify;
2. Section 2(72) of the Companies Act, 2013 defines "public financial
institutions "as follows:
(i) the Life Insurance Corporation of India, established under section 3 of
the Life Insurance Corporation Act, 1956 (31 of 1956);
(ii) the Infrastructure Development Finance Company Limited, referred to in
clause (vi) of sub-section (1) of section 4A of the Companies Act, 1956
(1 of 1956) so repealed under section 465 of this Act;
(iii) specified company referred to in the Unit Trust of India (Transfer of
Undertaking and Repeal) Act, 2002 (58 of 2002);
(iv) institutions notified by the Central Government under sub-section (2) of
section 4A of the Companies Act, 1956 (1 of 1956) so repealed under
section 465 of this Act;
(v) such other institution as may be notified by the Central Government in
consultation with the Reserve Bank of India:
Provided that no institution shall be so notified unless--
(A) it has been established or constituted by or under any Central or
State Act other than this Act or the previous company law; or
(B) not less than fifty-one per cent of the paid-up share capital is held
or controlled by the Central Government or by any State
Government or Governments or partly by the Central Government
and partly by one or more State Governments;
3. Sub-section (72) of section 2 of the Act, empowers the Central Government
to notify in the Official gazette such other institution as it may think fit to be a public
194
financial institution. The Central Government has so far notified the following 58
public financial institutions:
1. The Industrial Reconstruction Bank of India established under the Industrial
Reconstruction Bank of India Act, 1984.
2. The General Insurance Corporation of India, formed and registered under the
General Insurance Business (Nationalisation) Act, 1984.
3. The National Insurance Company Limited, formed and registered under the
Companies Act, 1956.
4. The New India Assurance Company Limited, formed and registered under the
Companies Act, 1956.
5. The Oriental Fire and General Insurance Company Limited, formed and
registered under the Companies Act, 1956.
6. The United Fire and General Insurance Company Limited, formed and
registered under the Companies Act, 1956.
7. The Shipping Company and Investment Company of India Limited.
8. Tourism Finance Corporation of India Limited, formed and registered under
the Companies Act, 1956.
9. IFCI Venture Capital Funds Limited formed and registered under the
Companies Act, 1956.
10. Technology Development and Informations Company of India Limited, formed
and registered under the Companies Act, 1956.
11. Power Finance Corporation Limited, formed and registered under the
Companies Act, 1956.
12. National Housing Bank, established under the NHB Act, 1987.
13. Small Industries Development Bank of India Limited established under the
Small Industries Development Bank of India Act, 1989.
14. Rural Electrification Corporation Limited formed and registered under the
Companies Act, 1956.
15. Indian Railway Finance Corporation Limited, formed and registered under the
Companies Act, 1956.
16. Industrial Finance Corporation of India Limited, formed and registered under
the Companies Act, 1956.
17. Andhra Pradesh State Financial Corporation.
18. Assam Financial Corporation.
19. Bihar State Financial Corporation.
20. Delhi Financial Corporation.
21. Gujarat Financial Corporation.
195
22. Haryana Financial Corporation.
23. Himachal Pradesh Financial Corporation.
24. Jammu and Kashmir State Financial Corporation.
25. Karnataka State Financial Corporation.
26. Kerala Financial Corporation.
27. Madhya Pradesh Financial Corporation.
28. Maharashtra State Financial Corporation.
29. Orissa State Financial Corporation.
30. Punjab Financial Corporation.
31. Rajasthan Financial Corporation.
32. Tamil Nadu Industrial Investment Corporation Limited.
33. Uttar Pradesh Financial Corporation.
34. West Bengal Financial Corporation.
35. Indian Renewable Energy Development Agency Limited.
36. North Eastern Development Finance Corporation Limited.
37. Housing and Urban Development Corporation Limited.
38. Export and Import Bank of India.
39. National Bank for Agriculture and Rural Development (NABARD).
40. National Co-operative Department Corporation (NCDC).
41. National Dairy Development Bank (NDDB)
42. The Pradeshiya Industrial Development and Investment Corporation Limited.
43. Rajasthan State Industrial Development and Investment Corporation Limited.
44. The State Industrial and Investment Corporation of Maharashtra Limited.
45. West Bengal Industrial Development Corporation Limited.
46. Tamil Nadu Industrial Development Corporation Limited.
47. The Punjab State Industrial Development Corporation Limited (PSIDC).
48. Edc Limited
49. Tamil Nadu Power Finance And Infrastructure Development Corporation
Limited
50. Tamilnadu Urban Finance And Infrastructure Development Corporation
Limited
51. Kerala State Power And Infrastructure Finance Corporation Limited
52. Jammu And Kashmir Development Financial Corporation Limited
196
53. Kerala State Industrial Development Corporation Limited
54. India Infrastructure Finance Company Limited
55. Gujarat Industrial Investment Corporation Limited.
56. Andhra Pradesh Industrial Development Corporation Limited.
57. Karnataka Urban Infrastructure Development and Finance Corporation
Limited
58. L&T Infrastructure Finance Company Limited.
197
Appendix V
An Illustrative Checklist
on Companies (Auditor's Report) Order, 2020
Working
Clause
Particulars Remarks Paper
no.
Reference
3(i)(a)(A) Whether the company is maintaining proper records showing full
particulars, including quantitative details and situation of Property, Plant
and Equipment;
(a) Whether records of Property, Plant and Equipment
(tangible and leased assets) are maintained showing
the following particulars:
(i) Sufficient description (distinctive numbers,
purchase agreement, documents, records and
registration references, etc.) of the asset to make
identification possible.
(ii) Classification, that is, the head under which it is
shown in the accounts, e.g., plant and
machinery, office equipment, etc. component-
wise, as applicable
(iii) Location/situation.
(iv) Quantity, i.e., number of units.
(v) Original cost.
(vi) Year of purchase.
(vii) Adjustment for revaluation or for any increase or
decrease in cost, e.g., on revaluation of foreign
exchange liabilities.
(viii) Date of revaluation, if any.
(ix) Rate and basis of depreciation, useful life,
particulars regarding impairment
(x) Depreciation, and impairment for the current
year.
(xi) Accumulated depreciation and impairment loss.
(xii) Particulars regarding sale, discarding, demolition,
destruction etc.
(xiii) Particulars of Property, Plant and Equipment that
198
have been retired from active use and held for
disposal.
(xiv) Particulars of Property, Plant and Equipment that
have been fully depreciated or impaired.
(b) Whether aggregate original cost, depreciation to date
and impairment loss, if any, as per the register/records
agrees with General Ledger balances? If not, note the
disagreements in respect of each class of assets
3(i)(a)(B) Whether the company is maintaining proper records showing full
particulars of intangible assets;
(a) Whether records of Intangible assets are maintained
showing the following particulars:
(i) Sufficient description (distinctive numbers,
purchase agreement, documents, records and
registration references, etc.) of the intangible
asset to make identification possible along with
bifurcation as per :
Self-generated intangible assets
Acquired intangible assets
(ii) Classification, that is, the head under which it is
shown in the accounts, e.g.,
Customer-based intangible assets ,
marketing-based intangible asset,
contract based intangible asset,
artistic based intangible assets ,
technology-based intangible assets etc. as
applicable
(iii) Location/situation.
(iv) Quantity, i.e., number of units.
(v) Original cost.
(vi) Year of purchase.
(vii) Adjustment for revaluation or for any increase or
decrease in cost, e.g., on revaluation of foreign
exchange liabilities.
(viii) Whether Valuation carried out by Registered
Value (as set out in section 247 of the
Companies Act 2013 read with Registered
199
Valuers and Valuation Rules 2017) and Date of
revaluation, if any.
(ix) Rate and basis of amortization, useful life,
particulars regarding amortisation and
impairment of intangible assets
(x) Amortisation and impairment for the current year.
(xi) Accumulated amortisation and impairment loss
and / or reversal of impairment loss.
(xii) Particulars regarding retirement, sale, disposal,
decommissioning, cessation etc. (e.g.,
termination of a license / permit or scrapping of a
software)
(xiii) Particulars of intangible assets that have been
retired / derecognized from active use and held
for disposal.
(xiv) Particulars of intangible assets that have been
fully amortised or impaired.
(xv) Particulars of any specific legislation which is
applicable to intangible assets ( for eg Copyright
Act 1957, Patents Act 1970, IT Act 2000,
Designs Act 2000 etc.)
(xvi) Whether aggregate original cost, amortisation to
date and impairment loss, if any, as per the
register/records agrees with General Ledger
balances? If not, note the disagreements in
respect of each class of intangible assets.
(xvii) Whether entity maintains an updated Business
Continuity Plan (BCP) and Disaster Recovery
Plan (DRP) with respect to specially Technology
based intangible asset, auditor to examine such
documentation / registers maintained.
(xviii) Whether entity maintains any register relating to
litigations / disputed with respect to intangible
assets.
3(i)(b) Whether these Property, Plant and Equipment have been physically
verified by the management at reasonable intervals; whether any material
discrepancies were noticed on such verification and if so, whether the
same have been properly dealt with in the books of account;
(a) (i) Whether Property Plant and Equipment (PPE)
were physically verified at any time during the year
200
or earlier years according to a phased program?
(ii) What is the periodicity of physical verification of
PPE and whether the same is reasonable?
(iii) Whether assets pertaining to PPE have been
physically verified agreed/ reconciled with book
figures?
If not, auditor is to note the discrepancies against
each class of assets in terms of value, and state
how the discrepancies have been dealt with.
(iv) Instructions to officials for carrying out physical
verification to include procedures, timing,
competency of team members, countsheets/tags,
formats etc.
(b) The auditor may physically verify few items from the
PPE / fixed asset register & vice versa.
(c) Whether management representation is obtained
confirming that:
items of PPE are physically verified by the
company in accordance with the policy of the
company.
periodicity of the physical verification of PPE.
details of the material discrepancies noticed during
the physical verification of the PPE.
If no discrepancies were noted during physical
verification, the same should be clearly mentioned.
3(i)(c) whether the title deeds of all the immovable properties (other than
properties where the company is the lessee and the lease agreements
are duly executed in favour of the lessee) disclosed in the financial
statements are held in the name of the company, if not, provide the
details thereof in the format below:-
Descripti Gross Held in Whether Period held Reason for
on of carrying name promoter, indicate not being
property value of director or range, held in
their relative where name of
or employee appropriate company*
- -- - - - *also
indicate if in
dispute
(a) Does the company have any immovable properties
201
(land and buildings)?
Has the Company identified the land and building on
the basis of Property, Plant and Equipment/ Fixed
Asset Register.
(b) Whether the title deeds of these immovable properties
(other than properties where the company is the lessee
and the lease agreements are duly executed in favour
of the lessee) are in the name of the company?
Whether the details as per title deeds reconcile with the
details in Fixed assets register, if not, is there any
material difference to be reported here
(c) Has the management provided details of immovable
properties not held in company's name (for example,
location, description, and reasons for not being held in
the company's name?
(i) In case the title deeds are lost, assess whether the
certified copies of such documents are available
with the company and what actions have been
taken by the management in this regard?
(ii) In case the title deeds are mortgaged with the
lenders, assess if the confirmation from the
lenders is obtained for the same.
(iii) In case any litigations / dispute is pending with
respect to title of the immovable properties, the
auditor is to document and report the details of
such litigations and the forum where they are
pending.
(iv) The discrepancies observed should be reported in
the CARO report as under :
In case the immovable properties (other than
properties where the company is the lessee and the
lease agreements are duly executed in favour of the
lessee)are not held in the name of the company, the
auditor has to obtain information and details on the
following :
Description of the property ( with details of
location , area, details of land records /
municipal records)
Gross carrying value as in the financial
statements
202
Held in the name of whom ( name of party)
Whether such properties are held in the name of
promoter, director or their relative or employee
The period for which such properties are held in
the name of promoter, director or their relative
or employee
Reason for not being held in the name of the
company
Details of dispute, if any
Auditor may carry out suitable substantive test,
external confirmation, and obtain necessary
management representation for the purpose of
reporting under this clause.
3(i)(d) whether the company has revalued its Property, Plant and Equipment
(including Right of Use assets) or intangible assets or both during the
year and, if so, whether the revaluation is based on the valuation by a
Registered Valuer; specify the amount of change, if change is 10% or
more in the aggregate of the net carrying value of each class of Property,
Plant and Equipment or intangible assets;
(a) Whether Revaluation of fixed assets(Property, Plant
and Equipment or Intangible Assets) is adjusted
upwards or downwards in response to major changes
in its fair market value.
(b) What is the frequency of revaluation usually carried
out by the company.
(c) In case the company during the year has revalued its
PPE or intangible assets or both, then whether the
revaluation is based on the valuation by a Registered
Valuer, or Valuers as set out in Section 247 of the
Companies Act 2013 read with the Registered Valuers
and Valuation Rules 2017.
(d) In case a single item of Property Plant & Equipment
(PPE) is revalued, whether the entire class of PPE to
which that item belongs has been revalued based on
the valuation carried out by the same Registered
Valuer or valuers.
(e) Date of revaluation carried out by the company.
(f) Name of the Registered Valuer or Valuers or firm
name who carried out the Valuation exercise, place
and date of Valuation Report (The auditor may also
203
retain a Copy of the Valuation Report carried out by
such Registered Valuer)
(g) Membership / Licence Number of the Registered
Valuer (Registered Valuer are to be registered with
Insolvency & Bankruptcy Board of India)
(h) If change is 10% or more in the aggregate of the
amount of carrying value of each class of PPE or
intangible assets , auditor to specify the amount of
change and whether this change is a result of upward
or downward revaluation. % limit has to be complied
with by the auditor for the purpose of this clause.
3(i)(e) whether any proceedings have been initiated or are pending against the
company for holding any benami property under the Benami
Transactions (Prohibition) Act, 1988 (45 of 1988) and rules made
thereunder, if so, whether the company has appropriately disclosed the
details in its financial statements;
For the purpose of reporting under this Clause, the
term `Property' shall cover the Definition as per the
Benami Transaction (Prohibition) Act, 1988.
(a) Whether proceedings have been initiated under
Section 24(1) of the Benami Law by the Initiating
Officer (IO) and/ or any proceedings being pending
against the Company before the Initiating Officer/
Adjudicating Authority/ Appellate Tribunal/ High Court/
Supreme Court during any of the preceding financial
years.
(b) Whether, in case of any proceedings initiated or
pending against the company, appropriate disclosures
are made in the financial statements. The term
`Appropriate disclosures' shall , inter alia include :
nature of property,
carrying value of the property in the books of
accounts,
status of proceedings before the relevant forum /
authority,
liability that may arise in case the proceedings
are decided against the Company.
(c) Whether the liability is required to be disclosed as
"Contingent liabilities" as off-balance sheet item or
whether provisions are required to be made in the
204
financial statements.
For the purpose of ascertaining whether any
proceedings are initiated or are pending:
(d) Whether Management Representation letters are
obtained by the auditor under SA 580 in respect of
necessary inquiries made
(e) Whether review is carried out by the auditor regarding
`legal fees / expenses' in the profit and loss Account to
ascertain whether any expenses have been actually
incurred by the Company in respect of a proceeding
under Benami Law.
3(ii)(a) Whether physical verification of inventory has been conducted at
reasonable intervals by the management and whether, in the opinion of
the auditor, the coverage and procedure of such verification by the
management is appropriate; whether any discrepancies of 10% or more
in the aggregate for each class of inventory were noticed and if so,
whether they have been properly dealt with in the books of account;
(a) Has the management physically verified the inventory,
as defined in AS 2/Ind AS 2? Inventory normally
includes-
Raw materials and Components
Packing materials
Maintenance supplies
Work in progress
Finished Goods
Stores and Spares
Consumables and Loose tools
(b) Whether evidence of physical verification has been
seen and reasonableness of periodicity of physical
verification evaluated? If yes, verify:
written instructions issued by the management.
duly authenticated physical verification sheets.
duly authenticated summary sheets/ consolidation
sheet.
internal memo, etc., regarding issues arising on
physical verification.
any other documents evidencing physical
205
verification.
(c) Whether the original physical verification sheets have
been reviewed and selected items traced into the final
inventories? (including the more valuable ones as per
ABC classification)
(d) Whether the comparison of final inventories with stock
has been done? Whether records and other
corroborative evidence, e.g. inventory statements
submitted to banks?
(e) In case of continuous stock taking method, whether
management:
(i) maintains adequate and up-to-date stock
records;
(ii) has established adequate procedures for
physical verification of inventories, so that in the normal
circumstances, the programme of physical verification
will cover all material items of inventory at least once
during the year; and
(iii) check/examine thoroughly and corrects all
material differences between the book records and the
physical counts.
(f) Whether stock register is updated and value of
inventory extracted from it tally with the books of
account.
(g) Whether any discrepancies of 10% or more in
aggregate for each class of inventory were noticed (in
terms of value) in the stock records/ register as
compared to books of accounts?
If yes, how the same have been dealt with in the books
of account as well as in the stock records?
In case discrepancy cannot be determined, state this
fact.
Conclusion:
3(ii)(b) Whether during any point of time of the year, the company has been
sanctioned working capital limits in excess of five crore rupees, in
aggregate, from bank or financial institutions on the basis of security of
current assets; whether the quarterly returns or statements filed by the
company with such banks or financial institutions are in agreement with
the books of account of the company, if not, give details;
206
(a) Whether the company has availed/taken working
capital limits from banks/financial institutions during the
year on the basis of security of current assets
(b) Whether the sanctioned working capital limits have
been checked from the sanction letter issued to the
company by banks/financial institutions
(c) Whether at any point of time during the year, the
sanction limit (including fresh sanction, limits renewed
and due for renewal) exceeds Rs. 5 crores
(d) Whether fund based and non fund based working
capital limits have been examined by the auditor for
determining the limit of Rs. 5 crores
(e) Whether the register of charges and relevant
documents have been examined for charge created on
the current assets
(f) Whether the Company files returns/statements with the
banks/financial institutions; if so, whether a list of the
same has been taken on record by the auditor
An illustrative list of documents which should be
examined by the auditor in this regard are -
i. stock statements
ii. book debt statements
iii. credit monitoring arrangement reports
iv. statement on ageing analysis of
debtors/creditors/other receivables
v. report/statement of other financial information
(g) Whether the terms of sanction expressed in the
agreements/other documents and other information
relevant to reporting under this clause has been taken
on record by the auditor
(h) Where the company files quarterly statements, whether
the same has been taken on record by the auditor and
compared with the books of accounts
During comparison, the following parameters may be
considered -
i. quantity and value of stocks
207
ii. amount of debtors/creditors
iii. ageing analysis of debtors/creditors, etc.
(i) Whether any discrepancy arose during such
comparison and a list of the same is made by the
auditor
(j) Whether the auditor holds discussion with the
management for the reasons and details of such
discrepancies; whether the auditor is satisfied with the
same; Obtain management representation wherever
necessary
(k) Whether the auditor using his professional judgment
and considering the impact of the same on the financial
statements has dealt with the above discrepancies in
his report; and has reported the same in such manner
that is understandable to the users of the financial
statements;
Conclusion
3(iii)(a) Whether during the year the company has made investments in ,
provided any guarantee or security or granted any loans or advances in
the nature of loans , secured or unsecured to companies, firms, Limited
Liability Partnerships or other any other parties, If so,
(a) Whether during the year the company has provided loans or provided
advances in the nature of loans, or stood guarantee, or provided security
to any other entity [not applicable to companies whose principal
business is to give loans], if so, indicate -
(A) the aggregate amount during the year, and balance outstanding at the
balance sheet date with respect to such loans or advances and
guarantees or security to subsidiaries, joint ventures and associates;
(B) the aggregate amount during the year, and balance outstanding at the
balance sheet date with respect to such loans or advances and
guarantees or security to parties other than subsidiaries, joint ventures
and associates;
(i) Has the Company made an
investment, granted any loans/advances in
nature of loans (Secured or Unsecured),
provided guarantee/security to companies,
firms, limited liability partnerships or any
other parties?
(ii) Where the company has granted any
loans/advances in nature of loan to parties
208
and squared off during the year, obtain
details of such transactions.
Whether the investments made, guarantees provided, security given and
the terms and conditions of the grant of all loans and advances in nature
3(iii)(b)
of loans and guarantees provided are not prejudicial to the company's
interest;
(i) Whether the terms of the investments,
loans/advances in nature of loan,
guarantee/security are prima facie
prejudicial, due consideration to be given to
the factors mentioned below:
terms & condition of the loan/advances
in nature of loan repayment, rate of
interest, restrictive covenants etc.,
company's financial standing, its ability
to lend, invest, guarantee/provide
security and terms thereof
borrower's financial standing
the nature of the security,
prevailing rate of interest etc.
(ii) Whether compliance with applicable law
have been ensured [this would assist in
identification of whether terms are prejudicial
to the interest of the company]
Conclusion:
3(iii)(c) in respect of loans and advances in the nature of loans, whether the
schedule of repayment of principal and payment of interest has been
stipulated and whether the repayments or receipts are regular;
(a) Whether the schedule of repayment of
principal and payment of interest has been
stipulated in the loan/advances in nature of
loan agreements / mutually agreed letter of
arrangement at the time of sanction?
(b) Whether repayment of principal amount and
interest thereon are received regularly on
the due date or immediately thereafter?
(c) If not, the fact and details should be
obtained.
Conclusion:
209
3(iii)(d) If the amount is overdue, state the total amount overdue for more than
ninety days, and whether reasonable steps have been taken by the
company for recovery of the principal and interest;
(a) Whether list of overdue amount has been
prepared & recorded and reasonable steps
taken for recovery of amount of loan which is
overdue more than ninety days?
(b) Following documents may be seen for
verification of reasonableness of steps taken
by the company for recovery of principal and
accrued interest on loan granted:
Facts of each case including amounts
involved
Issue of reminder
Sending of advocates or solicitor's notice
In absence of legal steps whether auditor is
satisfied that reasonable steps have been
taken
(c) Obtain management's representation
regarding steps that have been taken for
recovery of total amount overdue more than
ninety days.
Conclusion:
3(iii)(e) whether any loan or advance in the nature of loan granted which has
fallen due during the year, has been renewed or extended or fresh loans
granted to settle the overdues of existing loans given to the same
parties, if so, specify the aggregate amount of such dues renewed or
extended or settled by fresh loans and the percentage of the aggregate
to the total loans or advances in the nature of loans granted during the
year [not applicable to companies whose principal business is to give
loans]
Examine whether in respect of loans overdue
fresh loans were granted/extension
made/renewal done
3(iii)(f) whether the company has granted any loans or advances in the nature of
loans either repayable on demand or without specifying any terms or
period of repayment, if so, specify the aggregate amount, percentage
thereof to the total loans granted, aggregate amount of loans granted to
Promoters, related parties as defined in clause (76) of section 2 of the
Companies Act, 2013
210
Examine whether there are instances of
loans/advances in nature of loan vis-a-vis
total loan/advances in nature of loan. Further,
consider portion of such loans/advances in
nature of loan granted to promoters u/s 2(69)
and related parties u/s 2(76) of the
Companies Act 2013. Check the
mathematical accuracy of aggregate amount
and percentage that needs to be reported
upon
3(iv) In respect of loans, investments, guarantees, and security whether
provisions of section 185 and 186 of the Companies Act have been
complied with. If not, provide the details thereof.
(a) Where Companies has given loans to
directors etc.:
(i) Whether any loans given directly or
indirectly to directors or any other person in
whom the director is interested, or given any
guarantee or provided any security in
connection with any loan taken by directors
or such other person?
(ii) Whether any of the transaction is
attracting the provisions of section 185?
(iii) Whether any of such transactions are
covered under the exceptions provided under
section 185? If so, obtain the relevant
evidences ensuring such exemption.
(v) Whether approval by means of special
resolutions has been obtained in General
Meeting of the Company in respect of such
transactions?
(b) Where company has made loan/ investment
(i) Obtain the details of loans given and
investment made by the Company including
opening balances. Also obtain the details
regarding guarantee given or security
provided by the Company.
(ii) Whether company has made
investment through more than two layers of
investment companies?
211
(iii) Whether the company has exceeded
the limit of sixty per cent of its paid-up share
capital, free reserves and securities premium
account or one hundred per cent of its free
reserves and securities premium account,
whichever is more?
(iv) If the limit exceeded, whether prior
approval by means of a special resolution
passed at a general meeting has been
obtained?
(v) Whether the company has disclosed to
the members in the financial statement the
full particulars of the loans given, investment
made or guarantee given or security provided
and the purpose for which the loan or
guarantee or security is proposed to be
utilised by the recipient of the loan or
guarantee or security.
(vi) Whether the loan has been given to
company registered under section 12 of the
Securities and Exchange Board of India Act,
1992.
If so, whether the inter-corporate loan or
deposits taken by such company are within
the limits prescribed.
(vii) Whether the rate of interest charges is
more or at par to the rates specified in
subsection (7) of section 186 of the Act, if
not, the reasons thereof,
(viii) Whether company has defaulted in the
repayment of any deposits accepted or in
payment of interest thereon?
If yes, the company is not allowed to give any
loan or guarantee or any security or an
acquisition till such default is subsisting.
(ix) Whether the company has maintained
a register containing the details about such
transactions in the manner as prescribed in
212
Companies Act, 2013.
Conclusion:
3(v) In respect of deposits accepted by the Company or amounts which are
deemed to be deposits, whether the directives issued by the Reserve
Bank of India and the provisions of sections 73 to 76 or any other
relevant provisions of the Companies Act and the rules made thereunder,
where applicable, have been complied with, if not, the nature of such
contraventions be stated; If an order has been passed by Company Law
Board or National Company Law Tribunal or Reserve Bank of India or
any court or any other tribunal, whether the same has been complied
with or not?
(a) If the Company has accepted deposits or
amounts which are deemed to be deposits
from the public state whether:
(i) The directives issued by the Reserve
Bank of India have been complied with and
also that:
(ii) The provisions of Section 73 to 76 of
the Companies Act, 2013 and the rules
framed there under have been complied with.
(iii) List out contraventions, if any.
(b) Where an order has been passed by the
Company Law Board or National Company
Law Tribunal or Reserve Bank of India or any
Court or any other Tribunal in respect of
above, examine the steps taken by the
company to comply with the order, and if not,
report briefly stating there in the nature of
contravention and the fact that Company has
not complied with the order.
Conclusion:
3(vi) Whether maintenance of cost records has been specified by the Central
Government under sub-section (1) of section 148 of the Companies Act,
and whether such accounts and records have been so made and
maintained.
(a) Whether cost accounting records have been
prescribed for the company under section
148(1) of the Companies Act, 2013? If so
verify whether proper cost accounts and
records are made and maintained by the
213
Company as specified.
Conclusion:
3(vii)(a) Whether the company is regular in depositing undisputed statutory dues
including Goods and Services tax, provident fund, employees' state
insurance, income-tax, sales-tax, service tax, duty of customs, duty of
excise, value added tax, cess and any other statutory dues to the
appropriate authorities and if not, the extent of the arrears of outstanding
statutory dues as on the last day of the financial year concerned for a
period of more than six months from the date they became payable, shall
be indicated;
(a) Whether a list of statutory dues which
company is required to deposit regularly has
been obtained.
Note: Any sum, which is to be regularly paid
to an appropriate authority under a statute
(whether Central, State or Local or Foreign)
applicable to the company, should be
considered as a "statutory due"
(b) In case where there are no arrears on the
balance sheet date but the company has
been irregular during the year in depositing
the statutory dues, the fact should be stated.
(c) Whether the Company has been generally
regular in depositing statutory dues or
otherwise, indicates the same.
Note: A matter is disputed where there is a
positive evidence or action on the part of the
company to show that it has not accepted the
demand for payment of tax or duty, e.g.,
where it has gone into appeal.
(d) Whether penalty and/or interest levied under
the respective law is included under amounts
payable.
(e) Ensure that disclosure is restricted to the
actual arrears and should not include the
amounts which have not fallen due for
deposit and have been shown as arrears at
the balance sheet date.
(f) Whether the information about arrears of
outstanding statutory dues is provided in the
format:
214
Name of the Statute
Nature of the dues
Amount (Rs.)
Period to which amount relates
Due date
Date of Payment
(g) Whether a written representation with
reference to the date of the balance sheet
from the management obtained:
specifying the cases and the amounts
considered disputed;
containing a list of the cases and the
amounts in respect of the statutory dues
which are undisputed and have remained
outstanding for a period of more than six
months from the date they became payable;
containing a statement as to the
completeness of the information provided by
the management.
(h) Whether any register of significant laws with
which the entity has to comply within its
particular industry and a record of complaints
in respect of non-compliance been
maintained
Conclusion:
3(vii)(b) Where statutory dues referred to in sub-clause (a) have not been
deposited on account of any dispute, then the amounts involved and the
forum where dispute is pending shall be mentioned. (A mere
representation to the concerned department shall not be treated as a
dispute.)
(a) Review internal audit report, minutes of the
meeting of the board of Directors and audit
committee
(b) Ensure that information about arrears of
disputed statutory dues is provided in the
format:
Name of the Statute
Nature of the dues
Amount (Rs.)
215
Period to which amount relates
Forum where dispute is pending
(c) Ensure that disclosure is restricted to the
amounts which have not been deposited on
account of any dispute, irrespective of the
treatment of such disputed amount in
accounts.
(d) In case, the company has made the deposit
under protest, the fact of such deposit
having been made under protest should be
stated under this clause.
Conclusion:
3(viii) whether any transactions not recorded in the books of account have
been surrendered or disclosed as income during the year in the tax
assessments under the Income Tax Act, 1961 (43 of 1961), if so, whether
the previously unrecorded income has been properly recorded in the
books of account during the year;
(a) Whether financial statements has been
collected and listing of income sources been
obtained.
(b) Whether details of any proceedings/
assessment made during the financial year
under audit.
(c) Whether written representation with
reference to the year under audit from the
management obtained:
specifying the income which are not
recorded in the books of accounts and
have been disclosed/surrendered by the
assesse during the year.
containing a year wise listing of amount
disclosed/ surrendered.
containing reasons for non-disclosure
earlier and source of income.
containing impact of such unrecorded
transactions on the financial statements.
containing statement as to completeness
216
of the information provided by the
management.
Conclusion:
3(ix)(a) Whether the company has defaulted in repayment of loans or other
borrowings or in the payment of interest thereon to any lender, if yes, the
period and the amount of default to be reported as per the format below:
Nature of Name of Amoun Whether No. of Remarks, if
borrowing lender* t not principal days any
including paid on or delay or
debt due interest unpaid
securities date
* lender
wise details
to be
provided in
case of
defaults to
banks,
financial
institutions
and
Governmen
t
(a) Whether all defaults committed during the
year and number of days of default are
reported irrespective of that these defaults
have been rectified at the balance sheet
date?
(b) Whether all defaults existing at the balance
sheet date are reported irrespective of when
those defaults have occurred.
(c) In case of defaults to banks, financial
institutions, and government, whether lender
wise details reported?
(d) If application of re-schedulement of loan has
been made whether the fact has been
stated.
(e) Whether the disputes between the company
and the lender on various issues give rise to
disclaimer stating the fact there is a dispute
between the company and the lender and
accordingly the auditor is unable to
217
determine whether there is a default in
repayment of dues to the lender concerned.
Conclusion:
3(ix)(b) Whether the company is declared a willful defaulter by any bank or
financial institution or other lender.
(a) Whether the company has defaulted in
repayment of loans and/ or payment of
interest?
(b) Does the auditor's procedures- confirmation
from bank or research of information in
public domain indicate that the company has
been declared a willful defaulter?
(c) Enquire from the management if the
company has been declared a willful
defaulter by any lender as at the date of the
balance sheet or on the date of signing of
audit report.
(d) Has the company received any show-cause
notice in accordance with RBI Circular?
Conclusion:
3(ix)(c) Whether term loans were applied for the purposes for which the loans
were obtained. If not, the amount of loan so diverted and the purpose for
which it is used, may be reported.
(a) Whether the company has taken any term
loan?
(b) Examine the terms and conditions subject to
which the company has obtained the term
loans including purpose for which term loans
were sanctioned?
(c) Compare the purpose for which term loans
were sanctioned with the actual utilisation of
the loans and obtain sufficient appropriate
audit evidence regarding the utilisation of the
amounts raised.
(d) In case during a construction phase surplus
funds were temporarily invested, however,
subsequently the same are utilised for the
stated objectives, mention the fact that the
funds were temporarily used for the purpose
other than for which the loan was sanctioned
but were ultimately utilised for the stated
218
end-use.
(e) Whether term loans taken were not applied
for stated purpose during the year for any
reason? If yes, mention the facts and
amount. Also disclose the fact about
utilization of term loan of earlier year in
current year.
(f) Whether the fund flow statement has been
reviewed where one to one correlation was
not possible.
Conclusion:
3(ix)(d) Whether funds raised on short-term basis have been used for long term
investment. If yes, the nature and amount is to be indicated.
(a) Whether movement of funds of company
can be examined and verified and such
movement also be supported by relevant
documentation, direct relationship between
particular funds and an asset from the
balance sheet can be ascertained.
(b) Whether trail is available to show that
movement of source and application of
funds and a direct relationship between
them? If not, determine movement and
application of funds on an overall basis.
(c) Whether funds raised for short term have
been applied for long-term requirements of
the company?
Conclusion:
3(ix)(e) Whether the company has taken any funds from any entity or person on
account of or to meet the obligations of its subsidiaries, associates or
joint ventures, if so, details thereof with nature of transactions and the
amount in each case
(a) Whether the company has incurred
expenses on behalf of its subsidiaries, joint
ventures or associates or has paid amounts
to others on behalf of its subsidiaries, joint
ventures or associates?
(b) Has the company granted loans or advances
to subsidiaries, joint ventures or associates?
(c) Whether there is prima facie any evidence of
diversion of borrowed funds to subsidiaries,
joint ventures, associates based on
examination of terms and conditions of
219
borrowed funds?
(d) Based on review of the cash flow statement,
whether the company has net positive cash
flows in excess of amounts granted as
loans/ advances or amounts spent to meet
the obligations of its subsidiaries, joint
ventures or associates?
Conclusion:
3(ix)(f) Whether the company has raised loans during the year on the pledge of
securities held in its subsidiaries, joint ventures or associate companies,
if so, give details thereof and also report if the company has defaulted in
repayment of such loans raised?
(a) Whether the company has raised any loans
during the year from any lender?
(b) Whether the terms and conditions of loan
agreement specify the security against loans
raised during the year?
(c) Whether any charge has been created in
respect of any investment of the company in
subsidiaries, joint ventures or associate
companies?
(d) Based on (b) and (c) above, whether any
loan raised during the year has been so
raised on the pledge of securities held in
subsidiaries, joint ventures or associate
companies?
(e) Whether the company has defaulted in
repayment of such loans?
Conclusion:
3(x)(a) Whether moneys raised by way of initial public offer or further public
offer (including debt instruments) during the year were applied for the
purposes for which those are raised. If not, the details together with
delays or default and subsequent rectification, if any, as may be
applicable, be reported;
(a) Whether the company raised money by way
of initial public offer or further public offer of
equity shares, convertible securities and
debt securities?
(b) Examine the terms and conditions stated in
220
the offer document subject to which the
company has raised the above mentioned
money.
(c) Whether the end use of the money raised
(as mentioned above) is capable of being
determined? If not state the fact.
(d) Whether the said end-use of money
disclosed in the financial statements by way
of a Note is significantly different from the
actual end use? If so, state the fact.
(e) Examine the various documents submitted
to SEBI, offer document and also examine
the report of board of directors, if available,
to find out whether funds raised have been
utilized for the purpose for which they were
raised.
(f) Whether a representation of the
management has been obtained as to the
completeness of the disclosures with regard
to the end-use of moneys raised by initial
public offer and further public offer?
(g) Whether the fund flow statement has been
reviewed where one to one correlation is not
possible.
(h) In case the moneys raised have not been
applied during the year, mention the fact that
the moneys raised during the year has not
been utilised.
(i) In case during a construction phase surplus
funds were temporarily invested, however,
subsequently the same are utilised for the
stated objectives, mention the fact that the
funds were temporarily used for the purpose
other than for which they were raised but
were ultimately utilised for the stated end-
use.
(j) Whether funds raised/obtained were not
applied for stated purpose during the year
for any reason? If yes, mention the facts and
amount. Also disclose the fact about
utilization of funds raised during earlier year
221
in current year.
(k) If, for any reason, the auditor is not able to
verify the end-use of money raised, the fact
that he is not able to comment upon the
disclosure along with the reasons which
resulted in the inability should be stated?
(l) Consider the implications of non-
compliances above also in the auditors'
report on the financial statements.
Note: Reporting under this Clause is
required also in instances where the
amounts have been raised in earlier year(s)
and is being utilized under the year under
review.
Conclusion:
3(x)(b) Whether the company has made any preferential allotment or private
placement of shares or convertible debentures (fully, partially or
optionally convertible) during the year and if so, whether the
requirement of section 42 and section 62 of the Companies Act, 2013
have been complied with and the funds raised have been used for the
purposes for which the funds were raised, If not, provide details in
respect of amount involved and nature of non-compliance;
(a) Has the Company made any preferential allotment or
private placement of shares or fully convertible
debentures during the year?
(b) Obtain a statement containing the specific terms of offer
for private placement, including purpose for which funds
were raised, and the details of subsequent application-
amounts, dates and the purpose.
(c) Ascertain whether the offer and allotment of securities
referred in (a) above are in compliance with the
requirements mandated by section 42 and section 62 of
the Act.
(d) Based on the understanding so gained, perform a
reasonable test check of compliance with the
requirements of the Act.
(e) Whether the fund flow statement has been reviewed
where one to one correlation is not possible.
(f) In case the moneys raised have not been applied during
the year, mention the fact that the moneys raised during
222
the year has not been utilised.
(g) In case during a construction phase surplus funds were
temporarily invested, however, subsequently the same
are utilised for the stated objectives, mention the fact that
the funds were temporarily used for the purpose other
than for which they were raised but were ultimately
utilised for the stated end-use.
(h) Whether funds raised/obtained were not applied for
stated purpose during the year for any reason? If yes,
mention the facts and amount. Also disclose the fact
about utilization of funds raised during earlier year in
current year.
(i) If, for any reason, the auditor is not able to verify the end-
use of money raised, the fact that he is not able to
comment upon the disclosure along with the reasons
which resulted in the inability should be stated?
(j) Consider the implications of non-compliances above
also in the auditors' report on the financial statements.
Note: Reporting under this Clause is required also in
instances where the amounts have been raised in earlier
year(s) and is being utilized under the year under review.
3(xi) (a) Whether any fraud by the company or any fraud on
the company has been noticed or reported during the
year; If yes, the nature and the amount involved is to
be indicated.
(a) Has SA 240 been complied with? (Attach the check list for
compliance of SA 240 with this check list also).
(b) Examine the following to ascertain whether any fraud has
been reported or noticed by the management?
the reports of the internal Audit.
the auditor should enquire from the management
about any frauds by the company or any fraud on the
company that it has noticed or that have been
reported to it.
discuss the matter with other employees including
officers of the company.
examine the minutes book of the board meeting,
audit committee etc., of the company in this regard.
(c) Where any fraud by the company or any fraud on the
company has been noticed or reported, determine the
223
nature and amount of frauds and disclose the same.
Obtain management representation to this effect.
3(xi)(b) whether any report under sub-section (12) of section 143 of the
Companies Act has been filed by the auditors in Form ADT-4 as
prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014
with the Central Government;
Whether any fraud has been reported by the auditor
during the year under section 143(12) in Form ADT 4,
same should be reported against sub-clause (b) of this
clause
3(xi)(c) Whether the auditor has considered whistle-blower complaints, if any,
received during the year by the company?
Check as to whether the company have an ethics/whistle
blower hotline/process with adequate procedures to
handle anonymous complaints (received from inside and
outside the company), and to accept confidential
submission of concerns about questionable accounting,
internal accounting control, or auditing matters.
Evaluate whether whistle blower complaints are
investigated and resolved by the company in a timely
manner.
In case of a listed company, examine whether vigil
mechanism has been established in accordance with the
requirements of the Companies Act, 2013 and SEBI
Listing Obligation and Disclosure Obligation Regulations
(as amended). For other companies, examine whether
companies have established a vigil mechanism/whistle
blower mechanism on a voluntary basis.
Obtain from the management all whistle blower
complaints received through such vigil mechanism/hotline
and review the whistle blower complaints.
Enquire from the management about investigation of all
such whistle blower complaints received and the findings,
if any.
Consider when whistle-blower complaint is received or
have been identified, during the course of the, whether
fraud assessment done in accordance with Guidance
Note on Reporting on Fraud under Section 143(12) of the
Companies Act, 2013 issued by ICAI.
Obtain written representation from the Board/ Audit
Committee, management for completeness of such
whistle blower complaints
224
Conclusion:
3(xii) (a) Whether the Nidhi Company has complied with the Net Owned Funds
to Deposits in the ratio of 1: 20 to meet out the liability;
(b) Whether the Nidhi Company is maintaining ten per cent.
Unencumbered term deposits as specified in the Nidhi Rules, 2014
to meet out the liability;
(c) Whether there has been any default in payment of interest on
deposits or repayment thereof for any period and if so, the details
thereof;
(a) Is the Company a nidhi company?
Assess if the Company is registered as a Nidhi Company
as per provisions of Section 406 of the Companies Act
2013 or Section 620A of the Companies Act, 1956.
(b) To check compliance with the following:
a) Whether the net owned funds to deposits ratio is more
than 1:20 to meet out the liability as on the date of
balance sheet?
b) Examine whether the Nidhi Company is maintaining
ten per cent unencumbered term deposits as specified in
the Nidhi Rules, 2014 to meet out the liability
Whether the calculation of net owned funds is done as
per Rule 3(d) which includes equity share capital, and
free reserves as reduced by accumulated losses and
intangible assets appearing in the last audited balance
sheet:
Assess if the proceeds of issue of preference shares have
been included in the net owned funds.
Ensure that ratio is computed by using the figures of net
owned funds and deposit liability computed in accordance
with as stated under this clause.
c) Examine the terms and conditions stated in the
documents relating to taking of deposits, subject to which
the company has raised the deposits, with regard to the
amount and due dates of payments of deposits as well as
the interest thereon.
d) Whether all defaults relating to the payment of interest on
deposits or repayment of deposits, which existed at any
time during the year including those relating to any earlier
225
period and also including those which have been made
good during the accounting period, are reported
irrespective of the period when those defaults had
occurred or the fact that those defaults have been made
good subsequently during the accounting period.
e) If the default of repayment of deposit or the payment of
interest on deposits has been made good during the
accounting period, whether the fact has been stated.
f) Whether the disputes between the company and the
depositor on issues relating to repayment of deposit or
interest thereon, give rise to disclaimer stating the fact
there is a dispute between the company and the
depositor and the auditor is unable to determine whether
there is a default in repayment of the deposit or interest
thereon, to the depositor concerned.
Conclusion:
3 (xiii) Whether all transactions with the related parties are in compliance with
sections 177 and 188 of Companies Act where applicable and the details
have been disclosed in the Financial Statements etc., as required by the
applicable accounting standards;
(a) Obtain a statement containing details of transactions with
related parties
Obtain a list of companies, firms or other parties, the
particulars of which are required to be entered in the
register maintained under section 189 of the Act.
Please refer the note below
Obtain declarations made by the directors in Form MBP-1
i.e., general notice received from a director under Rule
9(1) of The Companies (Meetings of Board and Power)
Rules, 2014.
Verify the entries made in the register under section 189
with such statement from management and declarations
received from directors.
Assess the additions/ deletions to such list for
appropriateness based on relevant declarations.
(b) Obtain understanding of requirements of section 177 and
188 of the Act in relation to related party transactions.
(c) Perform reasonable check to ascertain completeness and
accuracy of details in the statement.
226
(d) Ascertain the system and procedures of the company to
ensure compliance with the provisions of section 177 and
188 of the Act Including the assessment of identification
of related parties and whether the transaction is at arm's
length and basis of such conclusion.
(e) Based on the understanding so gained, perform a
reasonable test check of compliance with the aforesaid
requirements of the Act.
(f) Examine minutes of meetings of the audit committee and
agreements underlying related party transactions to
ascertain audit committee approval for the transactions.
(g) Examine the minutes of Board meetings to ascertain
whether requisite approvals of Board is obtained for
certain related party transactions as required under
section 188 of the Act.
(h) Where shareholders' approval is required, check whether
the requisite approvals have been obtained as required
under Section 188 of the Act.
(i) Examine whether related party disclosures are made in
the financial statements as per the requirements of
Accounting Standard 18 and/ or Ind-AS 24.
(j) Examine whether disclosure related to contracts or
arrangements with related parties as mandated by section
188 are made in Board's report.
Including the assessment of identification of related
parties and whether the transaction is at arm's length and
basis of such conclusion.
(k) Consider the implications of non-compliances above also
in the auditors' opinion on the financial statements.
NOTE: There cannot be a common list in respect of
Related Party transactions. The scope of Ind-AS 24 is
wider and some persons need to be additionally identified
that those mentioned in Section 2 (76), Section 2 (77) of
Companies Act, 2013. E.g. Close members, Dependents
of a relative.
Two separate lists are required since some parties are
"related" as per Section 188 read with definitions and
Rule 4 of Companies (Specification of Definition Details)
Rules, 2014 whereas may or may not be "related party"
227
on application of Ind-AS.
Conclusion:
3(xiv)(a) Whether the company has an internal audit system commensurate with
the size and nature of its business.
Have you considered the following factors to determine
whether the internal audit system is commensurate with
the size of the company and nature of its business:
(a) Is there an internal audit system in the Company? (Mere
internal check should not be considered as internal audit).
(b) Whether the company has appointed internal auditor in
compliance with section 138 of the act and applicable
rules?
(c) Has the internal audit been conducted by a separate
internal audit department or by outside professional firm?
(d) Is the internal audit department sufficient in size and
properly manned to perform the internal audit function?
(e) Is the head of the internal audit department a member of
the Institute of Chartered Accountants of India?
(f) Is it independent of the accounting department?
(g) To whom the department is responsible?
(h) In case of listed companies, whether provisions of LODR
have been complied with and whether the head of internal
audit is present in the audit committee meeting?
(i) Whether the internal auditor has adequate technical
assistance to discharge his functions?
(j) Are the audits conducted in accordance with the generally
accepted auditing standards?
(k) Do the Internal Auditors have questionnaires or guide
manual?
(l) Whether audit work is carried out according to a plan and
programme and, if so what are the areas covered this
year?
(m) Whether adequate files and records are maintained by the
Internal Auditors?
(n) Do the Internal Auditors' Reports give:
Conclusions on the audit?
Exceptions to the Account and Records?
228
Recommendations on the internal control and
procedures?
(o) With respect to the Internal Auditors' Reports:
are they sent to an appropriate operating official?
is corrective/ remedial action initiated?
do internal auditors follow up to see that appropriate
action is taken?
do the files indicate that appropriate action was
taken?
Conclusion:
3(xiv)(b) whether the reports of the Internal Auditors for the period under audit
were considered by the statutory auditor
(a) Whether all the reports of the internal auditors covering
upto the end of the financial year under audit are made
available sufficiently in advance?
(b) Whether management has taken appropriate action to
ensure that all observations/findings in relation to control
deficiencies having financial impact are remediated?
(c) Whether to reassess the nature, timing and extent of the
audit procedures based on the observations noted by the
internal auditor?
(d) Whether the control deficiency identified is a significant
deviation or material weakness?
(e) Whether any reporting has to be made under section
143(12) of the act by the statutory auditor on review of the
internal auditor report?
(f) If, for any reason, all or some of the internal audit reports
are not available, or do not adequately address the plan
and scope required, appropriate disclosure shall be made
under this clause?
(g) Implications of control deficiencies / non compliances
above shall be considered in the auditor's report on the
financial statements.
Conclusion:
3 (xv) Whether the company has entered into any non-cash
transactions with directors or persons connected with
him and if so, whether the provisions of section 192 of
Companies Act have been complied with;
(a) Obtain a statement containing list of directors of the
company, its holding company, subsidiary and associate
companies and persons connected with the directors
229
(b) Scrutinise the following books of account, records and
documents could provide source of such audit evidence to
the auditor as to the existence of such non-cash
transactions as well as persons connected with the
Directors:
(i) Form No. MBP 1, Notice of Interest by Director, filed
pursuant to the Companies (Meetings of Board and Its
Powers) Rules, 2014
(ii) Form No. MBP 2, Register of Loans, Guarantee,
Security and Acquisition Made by the Company, filed
pursuant to the Companies (Meetings of Board and Its
Powers) Rules, 2014
(iii) Form No. MBP 4, Register of Contracts with Related
Party and Contracts and Bodies etc. in which Directors
are Interested, filed pursuant to the Companies (Meetings
of Board and Its Powers) Rules, 2014
(iv) Movements in the Property, Plant and Equipment
Register
(v) Minutes book of the General Meeting , Meetings of
Directors and Audit Committee Meetings.
(vi) Report on Annual General Meeting pursuant to
Companies (Management and Administration) Rules,
2014
(c) Obtain a statement from management containing
transactions between the Company and director(s)
referred to above
(d) Perform reasonable check to ascertain non cash
transactions
(e) Obtain understanding of requirements of section 192 of
the Act.
(f) Based on the understanding so gained, perform a
reasonable test check of compliance with the aforesaid
requirements of the Act.
(g) Consider the implications of non-compliances above also
in the auditors' opinion on the financial statements.
(h) Obtain Management Representation letter about the
nature of transactions executed by the Company with
Directors and Company's in which directors are
interested.
230
(i) Please go through business related internet sites like
Money Control.com to understand about any transactions
which are required to be considered for the reporting
under this paragraph.
(j) Please go through the BSE/ NSE websites (in case of
listed companies) for the information reported by the
company to the stock exchanges.
3(xvi) (a) whether the company is required to be registered
under section 45-IA of the Reserve Bank of India Act,
1934 (2 of 1934) and if so, whether the registration has
been obtained;
Examine whether the company is Registered with
Reserve Bank of India under Section 45-IA of the Reserve
Bank of India Act 1934.
If registered obtain a copy of the registration certificate
issued by Reserve Bank of India and verify the validity of
the certificate
(As a additional measure the RBI's website can be
referred to ascertain whether the name of the company is
included in the list of Registered companies)
If the company is not registered with Reserve Bank of
India, Examine the financial statements of the Company
and assess whether the company has Financial Activity as
the Principal Business.
Note: Financial activity as principal business is when a
company's financial assets constitute more than 50 per
cent of the total assets and income from financial assets
constitute more than 50 per cent of the gross income.
If the company has Financial Activity as the Principal
Business, examine whether the company has applied to
Reserve Bank of India for registration.
If the company has Financial Activity as the Principal
Business and has applied to RBI for registration examine
whether the company has complied with the requirements
of Net Owned Funds and other requirements of
registration.
If the company has Financial Activity as the Principal
Business and has not applied to RBI for registration
examine understand the reasons and record the same for
suitable reporting under this clause.
231
Examine the steps taken by the company to comply with
requirements of the RBI Act, 1934 with respect to
registration as a NBFC. Also examine the
correspondence and documents filed with the RBI,
minutes of the Board meeting.
Consider the implications of non-compliances above also
in the auditors' opinion on the financial statements.
3(xvi) (b) Whether the company has conducted any Non-
Banking Financial or Housing Finance activities
without a valid Certificate of Registration (CoR) from
the Reserve Bank of India as per the Reserve Bank of
India Act, 1934;
Examine the Financial Statements and other relevant
records/information to ascertain whether the Company is
conducting any Non-Banking Financial or Housing
Finance activities
If the company is conducting any Non-Banking Financial
or Housing Finance Activities, ascertain whether the
company is registered with RBI or has the company made
an application before the relevant authorities for the
Registration.
If the company has carried on the activity of Non-Banking
Financial or Housing Finance activities and has neither
obtained a registration nor applied for registration,
ascertain the reasons for the same.
If the company is required to get registered and has not
taken suitable steps to do so, ascertain the impact if any
on the opinion on the Financial Statements.
3(xvi) (c) Whether the company is a Core Investment Company
(CIC) as defined in the regulations made by the
Reserve Bank of India, if so, whether it continues to
fulfil the criteria of a CIC, and in case the company is
an exempted or unregistered CIC, whether it
continues to fulfil such criteria;
Examine the Financial Statements and other
information/records maintained by the Company to
ascertain whether the company is carrying on the
business of acquisition of shares and securities.
232
If the company is carrying on the business of acquisition
of shares and securities ascertain the following
i. it holds not less than 90% of its net assets in the
form of investment in equity shares, preference
shares, bonds, debentures, debt or loans in group
companies
ii. its investments in the equity shares (including
instruments compulsorily convertible into equity
shares within a period not exceeding 10 years from
the date of issue) in group companies and units of
Infrastructure Investment Trust only as sponsor
constitute not less than 60% of its net assets as
mentioned in clause (i) above
iii. it does not trade in its investments in shares, bonds,
debentures, debt or loans in group companies
except through block sale for the purpose of dilution
or disinvestment;
iv. it does not carry on any other financial activity
referred to in Section 45I(c) and 45I (f) of the
Reserve Bank of India Act, 1934 except as provided
(refer Master Directions)
If the company satisfies the conditions mentioned above
ascertain whether it is a Systematically Important Core
Investment Company (CIC-ND-SI)
A CIC-ND-SI is a Core Investment company which has a
total asset of more than Rs.100 Crores (either individually
or along with other CICs in the Group) and which raises or
holds public funds.
If the Company is a CIC-ND-SI ascertain whether the
company has made an application to the RBI for
registration.
If the company meets the definition of CIC and does not
have total assets exceeding Rs. 100 Crores (along with
other CICs in the Group), examine the following
(i) The Company has not access to Public Funds
(ii) Obtain a copy of the Board Resolution stating the it
will not in the future access public funds
(iii) The company or other CIC in the group does not
have overseas investment in the Financial Sector.
(iv) If the Company has provide guarantee on behalf of
233
the entities in the Group, obtain a confirmation from
the company will be able to meet the obligation
thereunder with access to public funds. (This
confirmation needs to be validated based on the
information and explanations available on record)
If the company is not in compliance with any of the
conditions mentioned in the previous point, ascertain
whether the company has taken adequate measure to
obtain Registration with RBI.
If the company has not complied with any of the
conditions of exempted CIC but continues to carry on the
business without obtaining Registration with RBI, examine
the impact of the same on the opinion to be provided on
the Financial Statements.
In the case of Core Investment Companies classified as
CIC-ND-SI examine whether
(i) The Adjusted Networth if not less than 30% of its
aggregate risk weighted assets
(ii) The outside liabilities at no point of time exceeded
2.5 times its Adjusted Networth.
In case of non-compliance with any of the Directions
issued by RBI examine whether such non-compliance
should be reported by way of an Exception Report to
Reserve Bank of India in terms of Non-Banking Financial
Companies Auditor's Report (Reserve Bank) Directions,
2016.
3(xvi) (d) Whether the Group has more than one CIC as part of
the Group, if yes, indicate the number of CICs which
are part of the Group;
(a) Obtain a list of all the entities in the Group along with the
representation from management about the CIC in the
group (including CICs exempt from registration and CICs
not registered) and completeness.
(As an additional measure the auditor can corroborate
with list of CICs from the list available in the RBI website)
(b) Obtain a copy of the registration certificates of CIC-ND-SI
in the Group
(c) Obtain a Management Representation for the CICs
exempt from the registration that it continues to be a CIC
not requiring registration and has fulfilled the conditions
thereof
234
In case the companies auditor is required to communicate
to the Component Auditors of other entities in the Group
by way of Group Audit Instructions, ensure that
compliance of the Directions of RBI with respect to Core
Investment Companies is included as part of the
Instructions.
3(xvii) Whether the Company has incurred cash losses in the
Financial Year and in the immediately preceding
Financial year? If so, state the amount of cash losses
(a) Whether the company has incurred cash losses in current
year?
(b) Whether the company has incurred cash losses in the
immediately preceding financial year?
(c) Whether effect of qualification on cash losses considered?
In case qualification is not capable of being quantified,
whether the fact is stated in the Report?
Conclusion:
3 (xviii) whether there has been any resignation of the
statutory auditors during the year, if so, whether the
auditor has taken into consideration the issues,
objections or concerns raised by the outgoing
auditors
(a) Check whether the appointment is proposed to fill a
casual vacancy in the office of statutory auditor u/s140(2)
(b) Examine the previous report (audit/review) to assess
whether any modification was included in by the outgoing
auditor
(c) Seek copy of ADT -3 form/Annexure A (in case of listed
company) and resignation copy from the
management/outgoing auditor
(d) Communicate with outgoing auditor as required under
ICAI Code of Ethics, while communicating seek necessary
clarification if required in context of audit report/review
report issued by outgoing auditor
(e) Consider the implications of non-compliances considered
by outgoing auditor in his/her audit/review report on audit
procedures
Conclusion:
3(xix) On the basis of the financial ratios, ageing and expected dates of
realisation of financial assets and payment of financial liabilities, other
information accompanying the financial statements, the auditor's
235
knowledge of the Board of Directors and management plans, whether the
auditor is of the opinion that no material uncertainty exists as on the date
of the audit report that company is capable of meeting its liabilities
existing at the date of balance sheet as and when they fall due within a
period of one year from the balance sheet date;
(a) Whether the management has made a detailed
assessment and concluded on going concern based on
such assessment?
(b) Whether any disclosure as per Accounting Standard 1(
AS-1) Disclosure of Accounting Policies, has been made
with regard to the going concern in the financial
statements ?
(c) Whether sufficient appropriate audit evidences have been
obtained wrt going concern in view of SA 570(Revised) to
conclude that no material uncertainty exists about the
entity's ability to continue as a going concern? Whether
different level of assessment as required to be made
under SA 570 (Revised) have been made?
(d) Whether main audit report contains a paragraph on
`Material uncertainty related to going concern' or `KAM on
going concern indicators'?
(e) Whether the Board's assessment in view of Schedule III of
the Companies Act, 2013 has been obtained stating that
none of the assets other than fixed assets and non-current
investments have a value on realization in the ordinary
course of business at least equal to the amount at which
these are stated particularly in view of AS13 "Accounting
for Investments" or IND-AS 109 "Financial Instruments" as
well as AS2 "Valuation of Inventories" or IND-AS 2
"Inventories"
(f) Whether allowances for bad and doubtful debts have been
made and shown as deduction from both long term loans
& advances and Other Non-Current Assets as well as
Trade Receivables and Short-term loans and advances as
per Schedule III of the Act.
(g) Whether the test of existence of material uncertainty has
been made as on a date close to audit report with respect
to the liabilities existed at the date of balance sheet
considering the subsequent period transactions between
the date of balance sheet and the date of audit report.
236
(h) Whether the audit procedures in accordance with SA 560
"Subsequent Events" have been carried out to obtain
sufficient and appropriate audit evidences in respect of
events requiring adjustment of, or disclosure in the
financial statements.
(i) Whether the necessary financial ratios along with the
detailed working, necessary to frame report under this
paragraph have been obtained as on the date of balance
sheet and also on a date near to the audit report date?
(j) Whether the ageing and expected dates of realization of
financial assets and payment of financial liabilities have
been obtained from the management along with the
necessary evidences.
(k) Whether other information accompanying the financial
statements including the Director's Report, Management
Discussion and Analysis forming part of the Annual Report
of the Company have been obtained and analyzed.
(l) Whether the plans of the Board of Directors as well as
management plans necessary to frame the audit
assessment and audit opinion have been obtained along
with relevant evidences?
(m) Whether management representation along with sufficient
details and evidences has been obtained regarding the
ageing and expected dates of realization of financial
assets including trade receivables as well as the payment
of financial liabilities including payables and statutory
liabilities etc.
(n) Whether the details of liabilities existing at the date of
balance sheet along with their expected dates of
payments as well evidences in respect thereto have been
obtained to identify those falling due within one year from
the balance sheet date.
(o) Whether the status about the subsequent payments of
liabilities those existed at the date of balance sheet as on
the date nearer to audit report, have been obtained to
capture any material deviation.
(p) For the liabilities existing as on the date of balance sheet,
which remains unpaid as on the date of audit report or
date nearer to audit report, whether the detailed cash flow
along with necessary evidences has been obtained
ensuring that the liabilities those falling due within a period
237
of one year from the balance sheet date shall be duly
discharged. The necessary evidences in the form of the
management plan supported with related documentary
evidences justifying the capability to pay off the liabilities
as and when they fall due for payment within one year
from the balance sheet date.
(q) Whether the documentation considered by the Board of
Directors related to review of liability position for those
payable within one year from the date of balance sheet
and corresponding payment plans has been obtained?
(r) Whether management representation containing all
material events and transactions post Balance sheet date
but before the date of Audit Report which could impact the
paying capacity of the company and are in the knowledge
of the Management and the Board have been obtained.
Conclusion:
3(xx)(a) whether, in respect of other than ongoing projects, the company has
transferred unspent amount to a Fund specified in Schedule VII to the
Companies Act within a period of six months of the expiry of the
financial year in compliance with second proviso to sub-section (5) of
section 135 of the said Act
(a) Whether the provisions of Section 135 of the act
applicable to the company?
Note: In case answer to the above clause is no, Clause
3(xx)(a) and 3(xx)(b) is not applicable for the company.
(b) Examine the various documents such as board approval
of CSR policy, Agenda and minutes of CSR Committee,
the workings for calculating amount required to be spent
etc. to find out the amount proposed to be spent on
projects identified as per Schedule VII of the act.
(c) Whether a representation of the management has been
obtained as to the amount spent in respect of projects
other than ongoing projects?
(d) Whether quantum of expenditure mentioned in (c) has
been verified with appropriate supporting documents?
(e) Whether the amount spent is in accordance with the
corporate social responsibility policy of the company and
in accordance with provisions of the act?
(f) Whether amount unspent in respect of other than ongoing
projects has been transferred to a fund specified in
Schedule VII to the act within a period of six months of the
expiry of the financial year?
238
(g) Whether the information about amount unspent is
provided in the format:
Relevant financial year
Amount identified for spending on CSR activities for
"other than Ongoing Projects"
Unspent amount of above
Amount Transferred to Fund specified in Sch. VII of
the act
Due date of transfer to the specified fund
Actual date of transfer to the specified fund
Number of days of delay , if any
(h) Whether the company has recorded a provision as at the
balance sheet date to the extent necessary?
Note: The reporting under this clause in respect of a
financial year will arise only when an audit report is issued
beyond the period of 6 months from the end of that
financial year
Note: The non-compliance, if any, of above clause in
respect of earlier Financial year(s), will have to be
reported under this clause
Conclusion:
3(xx)(b) whether any amount remaining unspent under section (5) of section 135
of Companies Act, pursuant to any ongoing project, has been transferred
to special account in compliance with provision of sub section (6) of
section 135 of the said Act
(a) Examine the various documents such as board approval
of CSR policy, Agenda and minutes of CSR Committee,
the workings for calculating amount required to be spent
etc. to find out the amount proposed to be spent on
projects identified as per Schedule VII of the act.
(b) Whether a representation of the management has been
obtained as to the amount spent in respect of the ongoing
projects formulated in pursuance of its Corporate Social
Responsibility Policy?
(c) Whether quantum of expenditure mentioned in (b) has
been verified with appropriate supporting documents?
(d) Whether the amount spent is in accordance with the
corporate social responsibility policy of the company and
in accordance with provisions of the act?
(e) Whether the company has any amount unspent in relation
to ongoing projects as at the end of the financial year?
239
(f) Whether any unspent amount as specified in (e) above
has been transferred by the company within thirty days
from the end of the financial year to a special account
earmarked for CSR activity to be opened for this purpose?
(g) Whether the amount transferred to such special account
has been utilised for the CSR activities as per CSR policy
within three years from the date of such transfer, failing to
which, whether the amount has been transferred to funds
specified under schedule VII?
Note: The non-compliance of (g) need not be reported
under this clause
(h) Whether the information about non transfer of amount
unspent in respect of ongoing projects is provided in the
format:
Relevant financial year
Amount identified for spending on CSR activities for
"Ongoing Projects"
Unspent amount of above
Amount Transferred to special account u/s 135(6)
Due date of transfer to the account
Actual date of transfer to the account
Number of days of delay , if any
Note: The reporting under this clause in respect of a
financial year will arise only when an audit report is issued
after the period of 30 days from the end of that financial
year
Note: The non-compliance, if any, of above clause in
respect of earlier financial year(s), will have to be reported
under this clause
Conclusion:
3(xxi) 1. Whether there have been any qualifications or
adverse remarks by the respective auditors in the
Companies (Auditor's Report) Order (CARO) reports
of the companies included in the consolidated
financial statements?
(a) Obtain the list of Companies (Holding
Company/Subsidiary/ Associate/Joint Venture) included in
the consolidated financial statements.
(b) Ascertain which Companies are scoped in for the audit of
consolidated financial statements by the principal auditor
240
and others which are scoped out.
(c) For Companies not scoped in by the principal auditor but
included in the consolidated financial statements, has the
principal auditor received CARO reports of such
Companies from the management of the Company? If no,
whether the principal auditor has mentioned appropriate
remarks under this clause mentioning the details of such
companies?
(d) For Companies scoped in by the principal auditor for the
purpose of reporting under consolidated financial
statements but not audited by the principal auditor for
statutory reporting, obtain the CARO reports from the
statutory auditors for such Companies.
(e) Examine the CARO reports obtained from the
management / statutory auditors or available with the
principal auditor for respective Companies and assess
whether the observations and comments as given in the
respective CARO reports are in the nature of qualifications
or adverse remarks.
2. Indicate the details of the companies and the
paragraph numbers of the CARO report containing the
qualifications or adverse remarks.
(a) Based on the examination of the CARO reports of
respective Companies, provide the details of the
companies and the paragraph numbers of the respective
CARO reports containing the qualifications or adverse
remarks.
241
Appendix VI
List of important Sections /Rules/ Regulations / Statutes
Sections 185 and 186 of Companies Act, 2013 and Relevant Extract of the Rules
Companies (Cost Records and Audit) Rules, 2014
Nidhi Rules, 2014 (including Amendment in 2019 and Second Amendment in
2020)
Sections 42 and 62 of the Companies Act, 2013
Rule 14 of the Companies (Prospectus & Allotment of Securities) Rules, 2014
Section 45-IA of the Reserve Bank of India Act, 1934
Sections 73 to 76 of the Companies Act, 2013
Companies (Acceptance of Deposits) Rules, 2014
Paragraph 35 of Ind AS 116 on "Leases" for Revaluation of Right of Use Assets
Registered Valuer as per Rule 2(1)(f) read with Rule 7(6) of Companies
(Registered Valuers And Valuation) Rules, 2017
Section 24 of Benami Transactions (Prohibition) Act, 1988 for initiation of
proceedings
Sections 68 and 69 of Income-tax Act, 1961 and Extract of Paragraph under Ind
AS 8
Section 143(12) of the Companies Act, 2013 and Rule 13 of the Companies (Audit
and Auditors Rules, 2014)
Section 138 of the Companies Act, 2013
Section 192 of the Companies Act, 2013
Direction 2 for applicability of Core Investment Company as per Master Direction -
Core Investment Companies (Reserve Bank) Directions, 2016 (Updated as on
November 22, 2019) -
DNBR. PD. 003/03.10.119/2016-17 issued by Reserve Bank of India
Clause 8 of Part I of First Schedule of Code of Ethics of ICAI (Old and New)
regarding No Objection Certificate from Previous Auditor
Sections 135(5) and 135(6) of the Companies Act, 2013
242
|
