Reporting is an integral part of any audit through which an Auditor expresses his opinion. In case of Companies, the auditor of the company is required to report on the 21 clauses as given in the Companies (Auditor’s Report) Order (CARO), 2003 issued by Central Government u/s227 (4A) of the Companies Act, 1956.
In this article an effort has been made to discuss some of the issues relating to the paragraph 4(i) of the Order. Under this Clause the Auditor is required to report on maintenance of proper records, physical verification, and substantial disposal of Fixed Assets.
Under the First part of the above clause an Auditor is required to report/comment on whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets.
Now the question arises as to what are proper records? Neither The Companies Act nor the Order prescribes as to what are “proper records” in this regard. However in general terms, proper records should make available the following information namely,
- Sufficient description of the asset for identification purposes.
- Categorization, Situation/Location.
- Purchase Details.
- Depreciation Details.
- Revaluation /Impairment details.
- Details relating to sale, discarding, destruction etc.
Even though the above list seems to be illustrative in nature, it need not in particular be subjected on the auditor, who is at his discretion as to ascertain the nature of proper records based on his Professional judgment, after considering the complexity and nature of the business.
Under the Second part of the above clause an Auditor is required to report/comment 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 within the books of account.
The physical verification has to be made by the management and not by the auditor. The auditor should satisfy himself that such verification was done and the method of verification was reasonable in the circumstances of each asset. He should satisfy that there is adequate evidence on the basis of which he can arrive at such conclusion.
Now the question arises, what can be construed as a reasonable interval? Reasonable interval has not been defined either in the Companies Act or under the Order. This again varies from company to company as well as the nature of the underlining asset like number of assets, difficulty in verification, situation and spread of the asset.
Reasonable Interval again revolves around the Professional judgment of the auditor taking into account the strength of Internal Controls and the complexity of the Industry.
Under the Third part of the said clause the Auditor is required to state whether the Going concern has been affected due to a substantial disposal of fixed assets during the year
As per AS -1, “The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations”.
It is not mentioned in the order as to what constitutes a substantial part. It again depends upon the facts and circumstances of each case. The auditor based on his professional judgment and experience has to decide and report whether the disposal of fixed asset is substantial as to affect the going concern.
In our opinion, the CARO does not offer a clear cut explanation as to what the proper records or what are the reasonable intervals or which consist of the substantial part, it is upon the auditor to apply his professional judgment and experience in addressing to the clauses as stated in the CARO, 2003. While the order on the other hand, increases the standard of Reporting and places a statutory responsibility on the Auditor.