(G.S.R. No 480(E); Notification No. 2/28/2002 – CL. V dated 12th June, 2003 and G.S.R. No. 766(E) dated 25th November, 2004).
1. Short title, application and commencement
(1) This order may be called the Companies (Auditor’s Report) Order, 2003.
(2) It shall apply to every company including a foreign company as defined in section 591 of the Act, except the following :-
(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 in clause (21) of section 2 of the Act;
(iii) a company licensed to operate under section 25 of the Act; and
(iv) a private limited company with a paid-up capital and reserves not more than fifty lakh 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, at any time during the financial year.
(3) It shall come into force on the 1st day of July, 2003.
In this Order, unless the context otherwise requires, –
(a) “Act” means the Companies Act, 1956 (1 of 1956);
(b) “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 enters 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.
3. 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 accounts 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.
4. 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) (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 of 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;
(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.
(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;
(c) whether receipt of the principal amount and interest are also regular;
(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 transaction;
(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;
(g) 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 continuing failure to correct major weaknesses in internal control system;
(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 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 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, 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.
(b) in case dues of Income tax/Sales tax/Wealth tax/Service tax/Custom 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 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/doubtful/loss
(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;
(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 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; 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 security or charge has 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.
5. Reasons to be stated for unfavorable or qualified answers
Where, in the auditor’s report, the answer to any of the questions referred to in paragraph 4 is unfavorable or qualified, the auditor’s report shall also state the reasons for such unfavorable 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.