Directions under Section 619(3) (a) of the Companies Act, 1956.
(Applicable from the accounts of 2010-11)
Authority: CAG office circular No.134-CA-IV/42-2001(III) dated 15th April 2010.
Annexure – 1
(List of indicative questions under these heads is given as Annexure-1, which may be retained by the auditor as working papers.)
Based on your audit of the enterprise please give your impression/comments on following areas:
(i) Corporate Governance and Audit Committee
(ii) Business Risk
(iii) Disinvestment (if applicable)
(iv) System of Accounts & Financial Control
(vi) Assets (Including Inventory)
(viii) Liabilities and Loans
(ix) Award & Execution of Contracts
(x) Costing Systems
(xi) Internal Audit System
(xii) Legal/Arbitration Cases
(xiii) EDP Audit
(xiv) Environmental Management
(xv) Corporate Social Responsibility
Annexure – II
Company or Sector specific directions (To be finalized by the respective MABs and issued as sub-directions to Auditors along with general directions as in Annexure I)
Annexure – I
(I) Corporate Governance and Audit Committee
(1) Whether the Company has been listed on the stock exchanges? If yes, the names of the stock exchanges may please be indicated? If so, whether the provisions of listing agreement of SEBI are being followed by the Company?
(2) Whether the Company has 50% independent directors on their Board as required under SEBI guidelines?
(3) Whether the Company has formed an Audit Committee in compliance with Section 292A of the Companies Act, 1956. If not, indicate the extent of non-compliance?
(4) Whether Audit Committee has discussed the qualifications made in the Auditor’s report as well as important comments, audit paras of Government Audit and has given recommendations for taking appropriate corrective action in the next year’s accounts?
(5) Whether the Audit Committee has examined the replies to paragraphs, mini reviews, sectoral reviews, comprehensive appraisals, etc included in various Audit reports of the C&AG before their submission to Government Audit / Committee on Public Undertakings?
(6) Whether the Audit Committee has reviewed and discussed with the Management, and the internal and external auditors, the adequacy and effectiveness of the accounting and financial controls, including the Company’s financial and risk management policies?
(7) Whether the Board of Directors (BOD) has reported in the Director’s Report to the shareholders compliance to their responsibility statement under section 217(2AA) of the Companies Act, 1956?
(8) Whether CEO/CFO certificate has been obtained in terms of listing agreement?
(II) Business Risk.
(1) Any new Statutory or Regulatory requirement or change in Government policy that could impair the financial stability or profitability of the entity.
(2) Unusually rapid growth if any, especially compared with that of other companies in the same Industry.
(3) The process used for identification of business risks and steps taken to mitigate it by the Management
(4) Unrealistically aggressive sales or profitability incentive programs, if any.
(5) The system of making a business plan, short term/long term & reviews of the same vis-à-vis the actual?
(6) The capital expenditure/capital invested not put to use.
(7) The cost benefits analysis of major capital expenditure/ expansion including IRR and pay back period.
(8) The existence of Macro, Sector and Operation threats that could drive fundamental changes in business model. Indicate in brief.
(III) Disinvestment (if applicable)
(1) What is the mode of disinvestment (i.e. Trade sale, Management & Employees Buy Out, Mass privatization, Public auction, Flotation, Liquidation, Private placement).
(2) What is the present stage of disinvestment process?
(3) If the company has been selected for disinvestment, please report:
(a) Has the company accounted for all its assets (including intangible assets), liabilities, income, and expenditure as per the requirement of relevant Accounting Standards and nothing is left out of books?
(b) Whether the assets of the company, especially land, valued at nominal cost has been revalued keeping in view the fair market rate for consideration of the net worth of the Company for the purpose of sale?
(c) Whether the committed reserves and general reserves created over the years are disclosed distinctly? If utilization of general reserves is substantial, specify the conditions of utilization and whether these conditions are covered under the byelaws/articles of the Company and provisions of the Companies Act, 1956?
(d) Whether any investment was made by the Company during the process of Disinvestment? If so, whether such investments were in the interests of the company or did they have the effect of extending undue advantage to the Bidders?
(IV) System of Accounts & Financial Control
(1) Whether the allocation of duties and responsibilities including the delegation of powers at various levels of management is fair/proper/justifiable and the same have been adequately defined?
(2) Examine the systems of accounts & Financial Control being followed by the company and give your views as regards their deficiencies along with suggestions for remedial measures?
(3) Please report which of the accounting policies adopted by the Company are not in conformity with the accounting policies applicable to the industry/companies in the same sector, particularly the Government Companies. What is the impact of such policies on the accounts?
(4) Notes to Accounts, qualifications in Auditor’s Report and comments of the C&AG may be reviewed for the last 3 years and state whether the Management has taken rectificatory action?
(5) Whether the Company has a clear credit policy, policy for providing for doubtful debts/write offs & liquidated damages? Analyse the reasons such as non-completion of performance tests, litigation, retention sale, etc. for significant sundry debtors and report thereon.
(6) Please report whether the system of giving discount to promote sales is fair? Whether the instructions for allowing discount are issued in writing and communicated properly to sales outlets?
(7) Examine and indicate whether the company has a system of monitoring the timely recovery of outstanding dues? Highlight the significant instances of failure of the system, if any.
(8) What is the system of obtaining confirmation of balances from debtors/ creditors and other parties? Indicate separately the amount of balances remained unconfirmed from Government Departments/PSUs and Private parties and their percentage to total amount under each head.
(9) Please report whether there are any cases of waiver of debts/loans/interest etc., if yes, the reasons therefor and the amount involved.
(10) Is there an adequate system of timely lodging of claims with outside parties? Whether the claims are properly monitored?
(11) Whether the credit obtained (including overdrafts) is monitored regularly and the terms of loans are not such that they have a negative impact on the earnings of the company. Examine the system of effective utilization of loans & the system of obtaining statutory benefits.
(12) Whether any incidence involving improper use or wastage of funds was noticed
(13) Examine and comment upon the reasonableness of assumptions made by the Actuary in providing for employee benefits as per Accounting Standard 15.
(14) Whether work flow and document flow is in place to ensure proper controls and systems commensurate with the delegation of work?
(1) Whether the company has an effective and delineated fraud policy consistent with regulatory requirements as well as the entity’s business needs?
(2) Whether the Company has formulated ‘code of conduct’ for senior management?
(3) How the company has dealt with reported frauds and what are the remedial measures taken for preventing recurrence?
(4) Are there any cases of violation of delegated Financial Powers during the period under report, which warrants “in-depth audit”? If yes please give a list of such cases.
(5) Does the Company have separate Vigilance Department/Wing? To what extent is it effective in its duty and whether its reports are submitted to the Board?
(6) Whether the Management has designed and put in place an adequate Prevention and Detection Controls to prevent, reduce and discover the fraud and other irregularities?
(7) Whether the Company has ‘whistle blowing’ policy?
(8) Whether the fraud policy has been periodically reviewed and evaluated to determine whether it was designed and implemented to achieve optimal effectiveness?
(VI) Assets (including Inventory)
(1) What is the position regarding maintenance of records such as fixed assets register, etc.?
(2) Whether the company has prescribed the following in regard to the management of stores:
(a) Maximum and minimum limits of stores and spares etc.
(b) Economic order quantity for procurement of stores.
(3) Whether ABC analysis has been adopted to control the inventory? If not, impact on inventory may be analysed.
(4) Whether regulations made for the purposes of control over stores, including stock taking and valuation of stock, stores, & work-in progress at the end of the financial year are adequate and duly enforced?
(5) Whether the work in progress contains any item, which has remained under work in progress, for an unduly long time? Attach a list of such items indicating amount, period of pendency and reasons.
(6) Examine and comment on the system of physical verification, valuation, treatment of non-moving & slow moving items, their disposal & abnormal excess & shortages in respect of closing stock items.
(7) Examine and comment on the system of valuation of fixed assets, survey-off procedure & provision for assets & specific capital spares surveyed-off.
(8) List out the surplus/obsolete/ non-moving items of stores, raw material, finished goods lying unused at the end of last 3 years.
(9) Whether proper records are maintained for inventories lying with third parties & assets received as gift from Govt. or other authorities?
(10) Are there any lapses in the internal control system right from ordering till the consumption of stores? If yes, the same may be highlighted.
(11) List out the assets and Plant & Machinery items, which have not been in use over a considerable period of time (say 5 years) and the reasons thereof.
(12) Whether there are instances of huge losses incurred due to sale of goods at prices lower than the prevailing market prices, citing poor quality as a reason, immediately subsequent to the balance sheet date?
(13) Whether the norms for storage losses have been fixed? What is the basis on which storage losses are regularized? Indicate the abnormal storage losses suffered during the year under audit and amount realized there against.
(14) Demurrage/Wharf age incurred during the year and reasons thereof.
(15) Whether the company has conducted physical verification of Fixed Assets during the year and a formal report is being prepared for the same?
(16) Whether there is a policy to review and implement impairment of assets?
(1) Whether the company has laid down an investment policy duly approved by the competent Authority? If yes, please indicate the following:
(a) Is it in accordance with the provisions of Section 292 of the Companies Act, 1956 and other laws, rules and regulations, Government directives applicable to the company?
(b) Whether the investments made were judicious and in accordance with the investment policy?
(c) Is the shortfall in market value of the current investment and permanent diminution in the value of long-term investments reflected in the books? If not, describe the failure.
(2) Whether the deposits with banks/financial institutions and others have been in accordance with laws, rules, regulations, Government directives, etc., as applicable.
(3) Whether there has been grant of large loans to or placement of deposits with other PSUs or enterprises not related with the business of the Company.
(4) Whether the company has significant investment in an industry or product line noted for rapid change?
(5) Whether the investments made in the subsidiaries have been valued properly keeping in view the financial position of the subsidiary? If not, extent of diminution in the value of investments.
(6) Whether any surplus funds are invested? Is there any effect on availability of funds for working capital because of investments leading to borrowings at higher rates?
(7) How often market value is reviewed and whether profits are made on sale of investments?
(VIII) Liabilities and Loans
(1) Give the total amount of loans (including interest, penal interest, & commitment charges separately) where defaults were made in repayment as at the end of the accounting period.
(2) Whether guarantee fee payable to the Government of India as per terms of loan agreement had been accounted for properly?
(3) Whether any part or whole of the Loans from Government and/or interest accrued thereon have been either converted into equity or waived by the Government; if so, its impact on the financial position of the Company.
(4) Are the terms of the loan agreements such that they make the entity especially vulnerable to changes in the interest rates?
(5) Check the loan profile of the Company to find out whether the high cost debts were swapped with low cost market borrowings.
(6) Whether there have been receipts of large loans from other PSUs or enterprises not related with the business of the Company.
(7) Whether any study was conducted to avail any other instruments or derivatives instead of high cost loans?
(IX) Award & Execution of Contracts
(1) Whether company has devised a proper system of tendering for awarding of various contracts?
(2) Whether the company has an efficient system for monitoring and adjusting advances to contractors/suppliers.
(3) Whether the Company has settled all the issues viz. Performance Guarantee (PG) Tests, recovery of Liquidity Damages (LDs) and final payments etc. soon after the commissioning of the Project? Are there any cases of inordinate delay without sufficient justification?
(4) Whether there are any disputes/claims unsettled for a long time?
(5) What is the procedure followed by the Company for purchasing proprietary items? What is the procedure for ascertaining the authenticity of the propriety items certificate given by an official based on which tendering is not resorted to and goods are purchased from a particular supplier?
(X) Costing Systems
(1) Whether the Company has any cost policy?
(2) Are the cost accounts being reconciled with financial accounts?
(3) Whether the company is computing the cost of major operations, jobs, products, processes and services regularly? If not, describe the failures.
(4) Whether the company has an effective system for identification of idle labour-hours and idle machine-hours?
(5) Was cost audit ordered in the case of the company? If so, highlight the major deficiencies pointed out in the latest cost audit report.
(6) Examine the accounting treatment of rejects & scraps for determination of cost of production. State the impact of bye products and joint products in determining costs.
(7) Whether there is any system to evaluate the abnormal losses and taking remedial measures to control such losses?
(8) What is the method being followed by the company to charge overheads? How is the overhead rate being arrived at? In case of cost plus contracts, are the overheads being recovered completely or not?
(XI) Internal Audit System
(1) Whether the Company is having Internal Audit section manned by staff of their own or whether the Company has hired the services of CAs as Internal Auditors? Give your comments on the Internal Audit System stating whether its reporting status, scope of work, level of competence, etc, are adequate? If not, describe the shortcomings thereof. Is there an adequate compliance mechanism on internal audit observations?
(2) Whether internal audit standards/manual/ guidelines have been prescribed and they are in practice?
(3) Whether Internal Audit Reports were discussed by Audit Committee?
(4) Whether internal audit is independent and reports directly to the Chairman/Head of the Company?
(5) If internal audit is outsourced then whether the selection process is fair and transparent?
(6) Whether entities which are not under the jurisdiction of the professional institute are being given the work of internal audit?
(7) Does the Internal Audit report contain any serious irregularity which needs immediate attention of management/Government?
(8) What is the total impact of all shortcomings/deficiencies pointed out in the latest Internal Audit Report and pending for compliance as on date?
(9) Whether mistakes/shortcomings pointed out in the latest report is of the same kind/type as pointed out in earlier reports?
(XII) Legal/Arbitration Cases:
(1) Number of pending legal/arbitration cases indicating the age-wise analysis and reasons for their pendency.
(2) Details of new cases and cases settled during the year.
(3) Whether any norms/procedures exist/proposed to be laid down for large legal expenses (Foreign & Local) incurred/to be incurred.
(4) Is there any system to ensure proper documentation (like maintaining minutes if the meetings, foreseeing contingencies, foreign exchange fluctuations etc.) before Agreement with foreign parties as well as Indian parties?
(XIII) EDP Audit
(1)Whether the organization has an approved IT strategy or Plan?
(2)If the auditee has computerized its operations or part of it, assess and report, how much of the data in the company is in electronic format, which of the major areas such as Financial Accounting, Sales Accounting, Personnel information, Payroll, Materials / Inventory Management, etc. have been computerized.
(3)Indicate how this impacts on your work of auditing the Accounts and whether your audit is through or around the computer.
(4)Has the company evolved proper security policy for Data/Software/Hardware?
(5)Identify the areas in which the auditor is of the view that the built-in-checks and validations in the computer environment are not adequate or were not being exercised with proper authority?
(6)Comment on any problem faced in extracting information from computer files due to lack of backup of past records or due to record corruption. Is there a document retention policy?
(7)Whether any software is unutilized or underutilized due to lack of trained staff or any proper operating manual/documentation etc?
(8)Comment whether changes made in the software have the approval of Management and the same has been documented properly and the lead time given to the staff to get accustomed to it before making it fully operational?
(9)Whether the BOD is briefed regularly about the new IT Strategy, if any, proposed to be incorporated for the Company as a whole, for which large funds are sanctioned. This is particu1ar1y re1evant to organizations where the entire IT activity is to be made online in due course.
(10) Whether the systems department is responsible for both hiring/buying EDP equipment Hardware & Software and also certifying their ‘usability’ before final payment (both functions should be separate with the user departments involved in the latter).
(11) Whether the company has detailed/comprehensive list of all reports/statements which can be generated by the system in use?
(12) Whether there is an effective IT Steering Committee?
(13) Whether there exists effective disaster recovery plan for EDP Department which is periodically reviewed and evaluated?
(14) Whether any of the findings and recommendations noted in the EDP Audit Report was considered significant and whether the issues were satisfactorily resolved?
(XIV) Environmental Management
Compliance of the various Pollution Control Acts and the impact thereof and policy of the company in this regard may be checked and commented upon.
(XV) Corporate Social Responsibility
(1) How is the company discharging its Corporate Social Responsibility?
(2) Whether any Board approved policy is in place and is being properly followed?
(3) Whether there is a system of fixation of targets for CSR activities?
(4) Whether adequate mentoring mechanism exits for implementation of CSR activities?
(1) Indicate whether the company has entered into a Memorandum of Understanding with its administrative ministry? If yes, have the targets in MOU been split unit-wise? If so, attach a unit-wise statement of targets and achievements against the parameters in MOU.
(2) Whether contribution of employer and employee to Provident Fund is kept separately out of business and proper safeguard of the same is taken care of?
(3) Does the company present a case for energy audit? If yes, has the audit been conducted by a specialised agency?
(4) Where land acquisitions is involved in setting up new projects an enquiry as to whether settlement of dues and rehabilitation of those affected are being done expeditiously and in a transparent manner to ensure that the benefits go to the really affected people and is not diverted to agents and intermediaries including political parties
(5) Whether the Company has done any mergers and acquisitions during the year? Whether a thorough need analysis was done before Merger or acquisition? Whether shareholders acceptance was taken before decision on merger/acquisition was arrived at? What was the impact thereof on the profitability of the Company?
If test checking was applied by statutory auditors, the manner in which areas of checking have been identified may be specified. Extent of sample selected and methodology of sampling adopted may also be specified.