TRUE AND FAIR : Financial statements are reported to be as true and fair when all of the following hold good -
Reasonable evidence is obtained in support of the transactions recorded in the books of account;
Accounting entries passed in the books of account are in conformity with the applicable accounting principles and standards followed consistently;
The financial statements prepared represent a true summary of transactions that took place during the year;
The process of classification and aggregation followed in preparation of the financial statements is fair and does not hide a material fact nor does it highlight something which may distort the real state of affairs. The form of accounting statement is in the required form, if any;
The accounting statements do not contain any misstatement;
The material transactions recorded in the books are neither illegal nor beyond the legal powers of the client; and
All statutory and relevant disclosures have been made.
AUDIT REPORTS UNDER COMPANIES ACT, 1956
• Report under section 227 (1A)
Section 227 (1 A) requires the auditor to make specific enquiries during the conduct of his audit. He is, however, not required to report on these matters unless he has any special comments to make. It should be understood that the auditor should only enquire on the specified matters and is not to investigate into them. The matters required to be enquired into are ¬
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 not prejudicial to the interests.
Whether transactions of the company, which are represented merely by book entries, are not prejudicial to the interests of the company.
Whether the company is not an investment company within the meaning of section 372 or a banking company, whether so much of the assets of the company as consists of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company.
Whether loans and advances made by the company have been shown as deposits.
Whether personal expenses have been charged to revenue account.
Where it is stated in the books and papers of the company that any shares have been allotted for cash, whether cash has actually been so received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in account books and balance sheet is correct, regular and not misleading.
• Report under Section 227(2)
The auditor has to state whether, in his opinion the said accounts give the information required by this act in the specified manner and give a true and fair view¬.
in the case of the balance sheet, of the state of the company’s affairs as at the end of its financial year; and
in the case of the profit and loss account, of the profit or loss for its financial year.
• Report under section 227(3)
The auditor’s report should state ¬
Whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit;
Whether in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books, and proper returns for the purposes of his audit have been received from branches not visited by him;
Whether the report on the accounts of any branch office audited under section 228 by a person- other than the company’s auditor has been forwarded to him as required by clause (C) and how he has dealt with the same in preparing his report;
Whether the company’s Balance Sheet and Profit and Loss Account dealt with by the report are in agreement with the books of accounts and returns;
Whether, in his opinion, the Profit and Loss Account and balance sheet complied with the accounting standards referred to in section 211 (3c);
Whether any director is disqualified from being appointed as a director under section 274(1).
Whether any cess payable by the company has been so paid and if not the amount not so paid.
The companies (Second Amendment) Act, 2002 provides for section 441A which states as follows:
(i) A cess on companies will be levied for purpose of rehabilitation or revival of sick industrial Co.
(ii) These provisions are made in sections 441A to 441F.
(iii) The amount to be collected must be in a range of .005% to .1% on value of annual turnover annual gross receipts more as the Central Government may notify from time to time in official gazette.
(iv) The company shall pay the amount to Central Government within 3 months from close of every financial year.
• Report under section 227 (4A)
COMPANIES (AUDITOR’S REPORT) ORDER, 2005
Short title, application and commencement ¬
• This order may be called the Companies (Auditor’s Report) Order; 2005.
• It shall apply to every company including a foreign company as defined in section 591 of the Act, except the following ¬–
a Banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
an insurance company as defined in clause (21) of section 2 of the Act;
a company licensed to operate under section 25 of the Act; and
a private limited company with a paid up capital and reserves not more than fifty lakh rupees and does not have loan outstanding twenty five lakh rupees or more from any bank or financial institution and does not have a turnover exceeding five crore rupees.
Definitions - In this Order, unless the context otherwise requires ¬
• “Act” means the Companies Act, 1956 (1 of 1956);
• “chit fund company”, “nidhi company” or “mutual benefit company” means a company engaged in the business of managing, conducting or supervising as a foreman or agent of any transaction or arrangement by which it in into an agreement with a number of subscribers that every one of them shall subscribe to a certain sum of instalments for a definite period and that each subscriber, in his turn, as determined by lot or by auction or by tender or in such other manner as may be provided for in the agreement, shall be entitled to a prize amount, and includes companies whose principal business is accepting fixed deposits from, and lending money to, members;
• “finance company” means a company engaged in the business of financing, whether by making loans or advances or otherwise, of any industry, commerce or agriculture and includes any company engaged in the business of hire-purchase, lease financing and financing of housing;
• “investment company” means a company engaged in the business of acquisition and holding of, or dealing in, shares, stocks, bonds, debentures, debenture stocks, including securities issued by the Central Government or by any local authority, or in other marketable securities of a like nature.
• “Manufacturing company” means a company engaged in any manufacturing process as defined in the Factories Act, 1948 (63 of 1948);
• “Mining company” means a company owing a machine, and includes a company which carries a the business of a mine either as a lessee or occupier thereof;
• “Processing company” means a company engaged in the business of processing materials with view to their use, a sale, delivery or disposal;
• “Service company” means a company engaged in the business of supplying, providing, maintaining and operating any services, facilities, conveniences, bureaux and the like for the benefit of others;
• “Trading company” means a company engaged in the business of buying and selling goods.
Auditor’s report to contain matters specified in paragraphs 4 and 5 - Every report made by the auditor under section 227 of Act, on the accountants of every company examined by him to which this Order applies for every financial year ending on any day on or after the commencement of this Order, shall contain the matters specified in paragraphs 4 and 5.
Matters to be included in the auditor’s report - The auditor’s report on the account of a company to which this Order applies shall include a statement on the following matters, namely–¬
(i) Whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets;
Whether these fixed assets 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;
If a substantial part of fixed assets have been disposed off during the year; whether it has affected the going concern;
(ii) Whether physical verification of inventory has been conducted at reasonable intervals by the management; .
Are the procedures of physical verification of inventory followed by the management reasonable and adequate in relation to the size of the company and the nature of its business. If not, the inadequacies in such procedures should be reported;
Whether the company is maintaining proper records of inventory and whether any material discrepancies were noticed on physical verification and if so, whether the same have been properly dealt with in the books of accounts;
(iii) has the company granted any loans, secured or unsecured to companies, firms or other parties covered in the register maintained under section 301 of the Act. If so, give the number of parties and amount involved in the transactions.
Whether the rate of interest and other terms and conditions of loans given by the company, secured or unsecured, are prima facie prejudicial to the interest of the company;
Whether receipt of the principal amount and interest are also regular;
If overdue amount is more than one lakh, whether reasonable steps have been taken by the company for recovery of the principal and interest;
Has the company taken any loans, secured or unsecured from companies, firms or other parties covered in the register maintained u/s. 301 of the Act. If so, give the number of parties and the amount involved in the transactions.
Whether the rate of interest and other terms and conditions of loans taken by the company, secured or unsecured, are prima facie prejudicial to the interest of the company.
Whether payment of the principal amount and interest are also regular.
(iv) is there an adequate internal control system commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods and services. Whether there is a counting failure to correct major weaknesses in internal control system.
(v) Whether the particulars of contract or arrangements referred to in section 301 of the Act have been entered in the register required to be maintained under the section.
Whether the transactions made in pursuance of such contracts or arrangements have been made at prices which are reasonable having regard to the prevailing market prices at the relevant time;
(This information is required only in case of transactions exceeding the value of five lakh rupees in respect of any party and in anyone financial year).
(vi) in case the company has accepted deposits from the public, whether the directives issued by the Reserve Bank of India and the provisions of sections 58 A and 58AA or any other relevant provision of the Act and the rules framed there under, where applicable, have been complied with. If not, the nature of contraventions should be stated; If an order has been passed by Company Law Board or National Company Law Tribunal or RBI or any Court or any other Tribunal whether the same has been complied with or not?
(vii) in the case of listed companies and / or other companies having’ a paid-up capital and reserves exceeding Rs.50 lakhs as at the commencement of the financial year concerned, or having an average annual turnover exceeding five crore rupees for a period of three consecutive financial years immediately preceding the financial year concerned, whether the company has an internal audit system commensurate with its size and nature of its business;
(viii) where maintenance of cost records has been prescribed by the Central Government under clause (d) of sub-section (1) of section 209 of the Act, whether such accounts and records his been made and maintained;
(ix) is the company regular in depositing undisputed statutory dues including Provident Fill Investor Education and Protection Fund, Employees’ State Insurance, Income-tax, Sales-tax, Wealth Tax, Service Tax, Custom’ Duty, Excise Duty, cess and any other statutory dues with the appropriate authorities and if not, 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, shall De indicated by the auditor.
In case dues of sales tax 1 income tax 1 custom tax 1 wealth tax 1 excise duty 1 cess have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending may please be mentioned.
(A mere representation to the Department shall not constitute the dispute).
(ix) Whether in case of a company which has been registered for a period not less than five years, its accumulated losses at the end of the financial year are not less than fifty percent of its net worth and whether it ha incurred cash losses in such financial year and in the immediately preceding financial year.
(xi) Whether the company has defaulted in repayment of dues to a financial institution or bank or debenture holders? If yes, the period and amount of default to be reported;
(xii) Whether adequate documents and records are maintained in cases where the company has granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities; If not, the deficiencies to be pointed out.
(xiii) Whether the provisions of any special statute applicable to chit fund have been duly complied with? In respect of nidhi / mutual benefit fund / societies;
Whether the net-owned funds to deposit liability ratio is more than 1 : 20 as on the date of balance sheet;
Whether the company has complied with the prudential norms on income recognition and provisioning against substandard 1 doubtful / loss assets;
Whether the company has adequate procedures for appraisal of credit proposals 1 requests, assessment of credit needs and repayment capacity of the borrowers;
Whether the repayment schedule of various loans granted by the night is based on the repayment capacity of the borrower.
(xiv) If the company is dealing or trading in shares, securities, debentures and other investments, whether proper records have been maintained of the transactions and contracts and whether timely entries have been made therein; also whether the shares, securities, debentures and other securities have been held by the company, in its own name except to the extent of the exemption, if any, granted under section 49 of the Act;
(xv) Whether the company’ has given any guarantee for loans taken by others from bank or financial institutions; the terms and conditions whereof are prejudicial to the interest of the company;
(xvi) Whether term loans were applied for the purpose for which the loans were obtained;
(xvii) Whether the funds raised on short-term basis have been used for long term investment; if yes, the nature and amount is to be indicated;
(xviii) Whether the company has made any preferential allotment of shares to parties and companies covered in the Register maintained under section 301 of the Act and if so whether the price at which shares have been issued is prejudicial to the interest of the company;
(xix) Whether securities or charge have been created in respect of debentures Issued?
(xx) Whether the management has disclosed on the end use of money raised by public issues and the same has been verified;
(xxi) Whether any fraud on or by the company has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated.
a. Reasons to be stated for unfavourable or qualified answers - Where, the auditor’s report, the answer to any of the questions referred to in paragraph 4 is unfavourable or qualified, the auditor’s report shall also state the reasons for such unfavourable or qualified answer, as the case may be. Where the auditor is unable to express any opinion in answer to a particular question, his report shall indicate such fact together with the reasons why it is not possible for him to give an answer to such question.
b. Auditor should consider following while rendering modified report
i. The auditor should identify the statements of facts and opinions, which require qualification.
ii. Where the auditor is in active disagreement with something, which the management had done he would either give an adverse report or disclaim his opinion.
iii. Where the disagreement with the management is only in respect of a particular item, he may qualify his report.
iv. Where the item is material enough to distort the true and fair view of state of affairs of the company, he may give an adverse opinion in respect of such item.
v. Where the item concerned is not material, he may even ignore the aspect and issue a clean report.
AUDITOR’S SEPARATE REPORT TO DIRECTORS
1. The management of the company may require from the auditor a separate report in addition to his report under section 227 of the Act.
2. The objective of such reports is to provide the management with detailed information regarding procedures, systems, weaknesses in internal controls etc.
3. Such reports should be detailed enough to highlight the weakness and suggestions to improve.
4. However, the auditor should take care that matters, which are material enough to be reported to the shareholders are not contained in his report to the directors.
5. Thus, auditor’s separate report to director can not be substituted for an otherwise modified report.
AUDIT CERTIFICATES AND AUDIT REPORT
1. A certificate is a written confirmation of the accuracy of the facts stated therein and does not involve any estimate or opinion.
2. The auditors certificate represents that he has verified certain figures and is satisfied about their accuracy.
3. However, a report, is a formal statement made after an enquiry or examination of the specified .matters under the report and the auditors opinion thereon.
4. Thus the opinion may differ from one auditor to another as it involves personal judgement.
AUDIT OF COMPANY PROSPECTUSES
According to section 2 (36) of the Companies Act, 1956 ‘Prospectus’ means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of a body corporate.
In order to protect the investors from deceiving offers, the Companies Act has specified certain information to be furnished in detail in the prospectuses.
Reports to supplement the prospectus
Two reports on financial aspects to be included in a prospectus are
• Reports of the statutory auditor or joint auditors of the company; and
• Report of the accountant.
A person who is eligible to be appointed, as an auditor shall be qualified to act as an accountant.
Aspects Concerning the Auditor
• Signing of the Report - The requirements of signing of these reports are same as in case of signing of audit report under the Companies Act, 1956.
• Fees for issue of reports - The fees for making a report to be attached to the prospectus would be determined on the basis of agreement between the auditor and the directors of the company.
• Consent Letters - According to section 60 (3) of the Act, the auditor should give in writing his consent to act in such capacity. The letter should accompany the prospectus when submitted for registration.
• Liability for misstatements in prospectus - According to section 62 of the Companies Act, 1956 every person who _as authorized the issue of prospectus will be liable to compensate every person who has incurred any loss or damage due to untrue statement in the prospectus. Section 60 (3) provides that Chartered! Accountants will be liable only for untrue statements made by them in the capacity of expert. Where the auditor is made to compensate for any loss, he may claim contribution from other persons.
However, a professional accountant will not be so liable if he can prove that
the prospectus was issued without his knowledge or consent and that on becoming aware of its issue, he forthwith gave reasonable public notice that it was issued without his consent; or
he withdrew his consent in writing before delivery of the prospectus for registration; or
after the delivery of prospectus for registration but before allotment of shares, on becoming aware of the untrue statement, he withdrew his consent in writing and gave reasonable public notice of the withdrawal and of the reasons therefore; or
he was competent to make the statement and that he had reasonable ground to believe and did upto the time of allotment of shares or debentures believe that the statement was true.
• Rights of the auditors - The auditors have right to access the books of account, other records and call for any necessary information from the company.
• Communication of the report – The reports of auditors are addressed to the Board of Directors of the company.
Read more...
