Order 4 - Matters to be included in the auditor's report. - Companies (Auditor’s Report) Order, 2003

Matters to be included in the auditor's report. 04. 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) (a) whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets; (b) 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; (c) if a substantial part of fixed assets have been disposed off during the year, whether it has affected the going concern; (ii) (a) whether physical verification of inventory has been conducted at reasonable intervals by the management; (b) 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; (c) 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 account; [1] [(iii) (a) 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; and (b) 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; and (c) whether receipt of the principal amount and interest are also regular; and (d) if overdue amount is more than rupees one lakh, whether reasonable steps have been taken by the company for recovery of the principal and interest; (e) has the company taken any loans, secured or unsecured from companies, firms or other parties covered in the register maintained under section 301 of the Act. If so, give the number of parties and the amount involved in the transactions; and (f) 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; and (g) whether payment of the principal amount and interest are also regular;] [2] [(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 service. Whether there is a continuing failure to correct major weaknesses in internal control system;] [3] [(v) (a) whether the particulars of contracts or arrangements referred to in section 301 of the Act have been entered in the register required to be maintained under that section; and (b) whether 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 any one 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 [4] [sections 58A, 58AA or any other relevant provisions of the Act] and the rules framed thereunder, 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 [5] [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? (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 have been made and maintained; (ix) (a) is the company regular in depositing undisputed statutory dues including Provident Fund, Investor Education and Protection Fund, Employees' State Insurance, Income-tax, Sales-tax, Wealth Tax, [6] [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 be indicated by the auditor. [7] [(b) in case dues of Income-tax/Sales-tax/Wealth-tax/Service tax/Customs duty/ Excise duty/cess 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 Department shall not constitute the dispute). (x) 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 per cent of its net worth and whether it has incurred cash losses in such financial year and [8] [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: (a) whether the net-owned funds to deposit liability ratio is more than 1:20 as on the date of balance sheet; (b) whether the company has complied with the prudential norms on income recognition and provisioning against sub-standard/ [9] [doubtful]/loss assets; (c) whether the company has adequate procedures for appraisal of credit proposals/requests, assessment of credit needs and repayment capacity of the borrowers; (d) whether the repayment schedule of various loans granted by the nidhi is based on the repayment capacity of the borrower [10] [* * *]; (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 [11] [investments] 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 [12] [* * *]; 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 [13] [security or charge has] been created in respect of debentures issued? ------------------------------------- Notes:- [1] Substituted by the Companies (Auditor's Report) (Amendment) Order, 2004, w.e.f. 25-11-2004 for the following: "(iii) (a) has the company either granted or taken any loans, secured or unsecured to/from 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; (b) whether the rate of interest and other terms and conditions of loans given or taken by the company, secured or unsecured, are prima facie prejudicial to the interest of the company; (c) whether payment of the principal amount and interest are also regular; (d) if overdue amount is more than one lakh, whether reasonable steps have been taken by the company for recovery/payment of the principal and interest;" [2] Substituted by the Companies (Auditor's Report) (Amendment) Order, 2004, w.e.f. 25-11-2004 for the following: "(iv) is there an adequate internal control procedure 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. Whether there is a continuing failure to correct major weaknesses in internal control;" [3] Substituted by the Companies (Auditor's Report) (Amendment) Order, 2004, w.e.f. 25-11-2004 for the following: "(a) whether transactions that need to be entered into a register in pursuance of section 301 of the Act have been so entered; (b) whether each of these transactions have been made at prices which are reasonable having regard to the prevailing market prices at the relevant time;" [4] Substituted for the words "sections 58A and 58AA of the Act" by the Companies (Auditor's Report) (Amendment) Order, 2004, w.e.f. 25-11-2004. [5] Inserted by the Companies (Auditor's Report) (Amendment) Order, 2004, w.e.f. 25-11-2004. [6] Inserted by the Companies (Auditor's Report) (Amendment) Order, 2004, w.e.f. 25-11-2004. [7] Substituted by the Companies (Auditor's Report) (Amendment) Order, 2004, w.e.f. 25-11-2004 for the following: "(b) in case dues of sales tax/income-tax/custom tax/wealth-tax/excise duty/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." [8] Substituted for "in the financial year immediately preceding such financial year also" by the Companies (Auditor's Report) (Amendment) Order, 2004, w.e.f. 25-11-2004. [9] Substituted for "default" by the Companies (Auditor's Report) (Amendment) Order, 2004, w.e.f. 25-11-2004. [10] The words "and would be conducive to recovery of the loan amount" omitted by the Companies (Auditor's Report) (Amendment) Order, 2004, w.e.f. 25-11-2004. [11] Substituted for "securities" by the Companies (Auditor's Report) (Amendment) Order, 2004, w.e.f. 25-11-2004. [12] The words "and vice versa" omitted by the Companies (Auditor's Report) (Amendment) Order, 2004, w.e.f. 25-11-2004. [13] Substituted for "securities have" by the Companies (Auditor's Report) (Amendment) Order, 2004, w.e.f. 25-11-2004.