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A company is said to be an artificial person created by law having a separate legal entity
distinct from its shareholders. It cannot be directly managed by its owners, i.e., shareholders,
because they are very large in number having small holding and also scattered over a wide
area. As such, the management and control of the affairs of the company is done by other
persons generally known as directors. Hence, it becomes essential for a company to appoint
an independent and qualified person, i.e., an auditor, to verily and certify the truth and
fairness of the financial statements.
Clinical Audit was introduced by Florence Nightingale (1855) during the Crimea War (1853
1855) (Bull 1992). Although the Russians were defeated at the battle of the Alma River (20
September 1854), the Times newspaper criticized the British medical facilities. Sidney
Herbert, the British Secretary for War asked Florence Nightingale a mathematician to become
nursing administrator and oversee the introduction of nurses to military hospitals (Porter N.
Regional Audit Gleanings Issue 16 May 2005). Nightingale at the end of the war was able to
show positive outcomes from quality of care. Few other clinicians at this time used audit.

1. Auditors qualifications: (REQUIRMENTS)

According to section-226 of Companies Act, person or firm having the
Following qualification can be appointed as an auditor:
(1) Person who is the member of Institute of Chartered Accountant.
(2) Any firm whose all the partners are serving as chartered accountants in India.
(3) A person holding a certificate under the restricted auditors certificate (part B.
state) rules, 1956 can be appointed as an auditor.
2. Disqualifications of an auditor :
According to section-226(3) of Companies Act, the following person
cannot be appointed as an auditor :
(1) Any registered institute. e.g. Company;
(2) Any salaried officer or employee of the company
(3) Officer of the company, partner of an employee or any person who is serving

(4) A person who is indebted to the company for an amount exceeding Rs.1,000 or
who has provided any security in connection with the indebtedness of any third
person (party) to the company for an amount exceeding Rs.1000 cannot be
appointed as an auditor.
(5) According to section-226(4) of Companies Act, if a person is disqualified with
relation to either a holding company or its sub - Sidiary Company, he shall be
disqualified for being an auditor of the first company.
If an auditor becomes the subject to any of the disqualification mentioned
above, after his appointment, he shall be deemed to have left his rank (position)
as an auditor. Besides provisions of Companies Act, according to the disqualifications shown
in section-8 of Charter Accountants Act 1949.


True and fair view : True and fair view in auditing means that the financial statements are free
from material misstatements and faithfully represent the financial performance and position
of the entity - Although the expression of true and fair view is not strictly defined in the
accounting literature, we may derive the following general conclusions as to its meaning:
True suggests that the financial statements are factually correct and have been prepared
according to applicable reporting framework such as the IFRS and they do not contain any
material misstatements that may mislead the users. Misstatements may result from material
errors or omissions of transactions & balances in the financial statements. Fair implies that
the financial statements present the information faithfully without any element of bias and
they reflect the economic substance of transactions rather than just their legal form.
-Preparation of true and fair financial statements has been expressly recognized as one of the
responsibilities of the directors of companies in the corporate law of several countries such as
in the Companies Act 2006 in the UK. Auditors must therefore consider whether directors
have fulfilled their responsibility for the preparation of true and fair financial statements
when providing an audit opinion. Company law of certain jurisdictions require the auditors to
expressly state in their audit report whether in their opinion the financial statements present a
true and fair view of the financial performance and position of the entity.

2.Accounting Policies
The specific policies and procedures used by a company to prepare its financial statements.
These include any methods, measurement systems and procedures for presenting disclosures.

Accounting policies differ from accounting principles in that the principles are the rules and
the policies are a company's way of adhering to the rules.
Accounting principles are lenient at times, so the policies of a company can be very
important. Looking into a specific company's accounting policies can signal whether
management is conservative or aggressive when reporting earnings. This should be taken into
account by investors when reviewing earnings reports. Also, outside accountants that are
hired to review a company's financial statements should check the company's policies to
ensure they conform to accounting principles.

3.Internal control
Internal control is under the Board of Director's responsibility. Internal control's function is,
for example, to ensure the efficiency and portability of operations, the reliability of
information, and adhering to rules and regulations. Internal control is a part of day-to-day
management and company administration.
An essential part of internal control is the Internal Audit, which operates as a separate unit
under the CEO and reports its observations to the Board of Directors. The Internal Audit
supports the Group's management in directing operations by inspecting and evaluating the
efficiency of business operations, risk management and internal control, and by producing
information and recommendations to enhance efficiency. Internal Audit also inspects the
processes of business operations and nancial reporting. Internal Audit's directive has been
approved by Stockmans Board of Directors. The operations of the Internal Audit are guided
by being risk-focused and emphasizing the development of business operations.

4.Audit Approach
The Audit Approach is a risk analysis methodology that focuses on the combined impact of
the environment in which a client operates, the client's management information and financial
results, and the effectiveness of the client's internal controls. It is based on a thorough, up-to-

date understanding of the client's business and industry, which is obtained through a
comprehensive analysis of the external and internal operating environments. It enables us to
design an audit programmed that includes the most effective and efficient combination of test
responsive to a client's unique circumstances. In addition, it provides a uniform method for
developing and documenting the basis for the audit programmed.
Our audit Audit Approach enables us to plan our effort to be proportionate to the risk of
material error in specific accounts and transactions. This provides the basis for planning the
minimum effort necessary to limit audit risk in each area to a low level. As a result, every
audit procedure has a specific purpose that is related to the company's particular situation
nothing is "routine" and hence potentially unnecessary. By following this approach we can
avoid over auditing and under auditing, and we can distribute work more evenly throughout
the year.


Professional standards require us to consider materiality and audit risk when planning the
nature, timing and extent of our audit procedures, and when evaluating the results of those
procedures. Materiality is determined at two levels during the initial planning stage :
An overall level as relates to the accounts taken as a whole planning materiality; and
An individual balance or class of transactions level tolerable error.
Audit risk is defined as the risk that an auditor may unknowingly fail to modify his or her
opinion on accounts that are materially misstated. We address materiality and audit risk at an
overall level to help us develop an audit strategy that will provide sufficient evidence to
enable us to evaluate whether the accounts are materially misstated.
At the account balance or class of transactions level, audit risk is the product of the risks
that : Factors in a company's internal or external operating environment, before considering
the functioning of internal controls, will lead to a material error inherent risk;
A material error will not prevented or detected on a timely basis by the system of internal
control control risk; and
The auditor's procedures will fail to detect a material error not detected by the system of
internal control detection risk.
The Audit Approach provides a methodology for relating these risk concepts to materiality
and correlating them to the nature, timing, and extent of our audit procedures. This is
accomplished through the Specific Risk Analysis and the Preliminary Audit Approach.


A companys internal accountants are primarily responsible for preparing financial
statements. In contrast, the purpose of the auditor is to express an opinion on the assertions of

management found in financial statements. The auditor arrives at an objective opinion by

systematically obtaining and evaluating evidence in conformity with professional auditing
standards. Audits increase the reliability of financial information and consequently improve
the efficiency of capital markets. Auditing standards require that all audits be conducted by
persons having adequate technical training. This includes formal education, field experience,
and continuing professional training.
ACT, 1956
The provisions in the matter of books of account which a company is required to maintain are
contained in section 209 of the Companies Act, 1956. They are briefly summarized below:
Every company shall maintain at its registered office proper books of account with
regard to:
(a) all sums of money received and expended by the company and the matters in
respect of which the receipts and expenditure take place;

all sales and purchases of goods by the company;

(c) the assets and liabilities of the company; and

(d) in case, it is a company engaged in production, processing, manufacturing or mining
activities, particulars relating to utilisation of material or labour or other items of cost,
provided there is such a requirement by the Central Government in respect of
the class of companies to which it belongs.
N.B. - It is permissible, however, for all or any of the books of account may be kept at such
place in India as the Board of directors may decide but, when a decision in this regard is
taken, the company shall file with the Registrar of Companies a notice giving full address of
the other place.
When a company has a branch office, whether in or outside India, to comply with the
aforementioned provisions, the company must maintain proper books of account relating to
transactions effected at the branch office, also arrange to obtain from the branch proper
summarised returns, at intervals of not more than three months, for being kept at the
registered office or the other place.


For the purposes of sub-sections (1) and (2), proper books of account shall not be

deemed to be kept with respect to the matters specified therein :

(a) if there are not kept such books as are necessary to give a true and fair view of the
state of affairs of the company or branch office, as the case may be, and to explain
its transactions; and
(b) if such books are not kept on accrual basis and according to the double entry
system of accounting.
(4) The books of account and other books and papers shall be open to inspection by any
director during business hours.

4A) The books of account together with vouchers relevant to any entry made therein for a
period of not less than eight years immediately preceding the current year shall be preserved
by the company in good order.
(5) If any of the persons referred to in sub-section (6), fails to take reasonable steps to
secure compliance with the requirements of law aforementioned or by a wilful act causes any
default by the company, he shall be punishable for each offence with imprisonment for a term
which may extend to six months or a fine which may extend to ` 10000 or with both. But he
may be relieved from such a liability if he can show that he has reasonable ground to believe
that a competent and responsible person was charged with the duty of seeing that these
requirements were complied with and he was in a position to discharge that duty.
(6) Where the company has a managing director or manager, such managing director or
manager and all officers and other employees of the company; and where the company
has neither a managing director nor manager, every director of the company.
(7) If a person, not being a person referred to in the foregoing paragraph, who has been
charged with the duty of seeing that requirements of law in regard to the books of
account is complied with, makes a default in doing so, he shall, in respect of each offence, be
punishable with a fine which may extend to ` 10,000.

Managerial Remuneration
The term remuneration covers the following types of expenditure incurred by the company
for its Director or his family
Rent free accommodation;
Any benefit or amenity in respect of accommodation free of charge;
Any other benefit or amenity free of charge at a concessional rate;
Any personal obligation; and
Insurance on the life of, or to provide any pension, annuity or gratuity for, any of the director
or his /her spouse or child.
But the definition is inclusive one. It covers every amount that the company pays or spends
for or for the benefit of a Director, in whatever form and by whatever name.
Section 198 and 309 deals with the provisions relating to managerial remuneration. The term
managerial remuneration mentioned in section 198 and 309 covers the remuneration of all
Directors and also its manager. It is applicable to all public companies and private company
which is a subsidiary of public company. Provisions of the above mentioned section are not
applicable on government companies (within the meaning of section 619 of the Act).

Ceiling on Managerial Remuneration:

Section 198(1) lays down 11% of net profits of the company computed in the manner as laid
down in section 349 and 350 as the overall ceiling on the total remuneration of the company.
While computing the net profits the remuneration of the Directors shall not be deducted from
the gross profits. The above mentioned limit shall be exclusive of sitting fees payable to the
directors in terms of section 309 (2).
Purchase of Goods: Cash purchases should be verified by reference to cash memos
or receipted invoices by suppliers. Payments made against credit purchases should be
vouched with the receipts issued by the suppliers and the credit to their accounts on the basis
of invoices entered in the Purchases Day book. There must be also evidence of the goods
having been received through an entry in the Goods Inward Books or stock ledger. It is
necessary, however, to make a distinction between a payment for goods and an advance
against supplies to be made in future; the latter should be classified as advance recoverable in
cash or in kind or for value to be received. Since the amount shown as an advance paid
against goods may be only a camouflage for assistance to a party, it is necessary for the
auditor to confirm that the advance was paid pursuant to a normal trade practice and supplies
were, subsequently, received with a reasonable period of the advance.

Remuneration paid to Directors:

The following points must be considered while vouching the directors remuneration in case
of a public company and private company which is a subsidiary of a public company(i)
Examine the Entitlement: The directors are not automatically entitled to remuneration.
It is paid either according to the term of articles of association or in accordance with a
resolution of the general meeting.
Examine Adherence to Legal Provisions: The auditor should examine adherence to
relevant sections of the Act such as Section 309(3) and (4) which deals with manner of payment of managerial remuneration.
Section 309(2) which deals with payment of listing fees.
Section 198 which has prescribed the overall limit to managerial remuneration.
Schedule XIII to the Act that has laid down conditions for payment of remuneration
for companies having profits those having no profits or inadequate profits and
companies having negative effective capital.
Section 310 which provides for increase in remuneration.
1) AUTORIZATION: check article of association, service contract ,minutes of general
meeting to check authorization of such payment
2) S.227(1A): ensure and enquire that personal expenses are not camouflaged in any other
item as contemplated under section 227(1a)
3) Supporting documents: check the documents to examine the payment reimbursement
4) CARO 2003: chek the compliance with requirements of CARO 2003

:- 1)A/A: see the article of association of company and note the rules regarding the payment
of commission
2) Agreement : examine the terms and condition of the agreement to find out the rate of
commission payable
3) Compliance: check section 198 and 309 also see calculation as per section 349,350 and
351 of the act
4) calculation :vouch calculation of commission paid and verify with receipt

DIVIDENDS :The return on investment in share is called dividend. It is the part of the profit earned by the
Dividend rate approved in the general meeting by the shareholders.
DUTIES OF AUDITOR RELATING TO DIVIDENDS :Following are the important duties of the auditor :
1. Rules Of Company :The auditor should check the rules of a company. He should examine that articles of
association and companies ordinance allow the management to propose dividends out of
revenue profits.
2. Rate Of Dividend :The auditor should check that rate of dividend must not be above the rate of profit. It should
also not exceed the market rate.
3. Reasonable Profit :The auditor should check that amount of revenue profits is reasonable. If it is not reasonable
then dividend should not be paid.
4. Account :Dividend amount is payable with in the days. The auditor should check that dividend account
is opened in the bank or not. The amount equal to dividend must be deposited.
5. Tax :It is also the duty of the auditor that he should check the tax payable or dividend is paid to the
Govt. or not ? The payment of tax is a legal formality.
6. Not Collected :Sometimes shareholders fail to collect the amount from the banks. The auditor should check
such amount because it is stated in the balance sheet as liability.
7. Profit & Loss Account :The profit and loss appropriation account must be checked by the auditor. He should note the
amount of dividend recorded in it.
8. Account Statement :The auditor examines that amount of dividend paid and due prepares reconciliation statement
of dividend account. He should make detailed checking in case of discrepancy. The errors can
be detected.
9. Warrant :To register the shareholder management issues dividend warrants. Such amount can be
claimed by the shareholders from the bank. The auditor should check these warrants has been
issued or not?


The auditor should undertake the following activities before starting an initial audit:
Perform procedures regarding the acceptance of the client relationship and the specific audit
engagement; and
Communicate with the predecessor auditor in situations in which there has been a change of
auditors in accordance with AU sec. 315, Communications Between Predecessor and
Successor Auditors.
The purpose and objective of planning the audit are the same for an initial audit or a
recurring audit engagement. However, for an initial audit, the auditor should determine the
additional planning activities necessary to establish an appropriate audit strategy and audit
plan, including determining the audit procedures necessary to obtain sufficient appropriate
audit evidence regarding the opening balances.
The Central Government hereby directs vide General Circular No: 2/2011 (issued by MCA
dated 08-02-2011) that provisions of Section 212
shall not apply in relation to subsidiaries of those companies which fulfil the following
The Board of Directors of the Company has by resolution given consent for not
attaching the balance sheet of the subsidiary concerned;
(ii) The company shall present in the annual report, the consolidated financial
statements of holding company and all subsidiaries duly audited by its statutory
(iii) The consolidated financial statement shall be prepared in strict compliance with
applicable Accounting Standards and, where applicable, Listing Agreement as prescribed by
the Security and Exchange Board of India;
(iv) The company shall disclose in the consolidated balance sheet the following
information in aggregate for each subsidiary including subsidiaries of subsidiaries:(a) capital

(b)reserves (c) total assets (d) total liabilities (e) details of investment

(except in case of investment in the subsidiaries)

(f) turnover

(g) profit before

taxation (h) provision for taxation (i) profit after taxation (j) proposed dividend;
(v) The holding company shall undertake in its annual report that annual accounts of the
subsidiary companies and the related detailed information shall be made available
to shareholders of the holding and subsidiary companies seeking such information at
any point of time. The annual accounts of the subsidiary companies shall also be
kept for inspection by any shareholders in the head office of the holding company

and of the subsidiary companies concerned and a note to the above effect will be
included in the annual report of the holding company. The holding company shall
furnish a hard copy of details of accounts of subsidiaries to any shareholder on
(vi) The holding as well as subsidiary companies in question shall regularly file such data to
the various regulatory and Government authorities as may be required by them;

(vii) The company shall give Indian rupee equivalent of the figures given in foreign
currency appearing in the accounts of the subsidiary companies along with exchange rate as
on closing day of the financial year;
(Note: Students may note that as per section 227 of the Act, the duty of the auditor
extends to expressing an opinion on balance sheet and profit and loss account and all
other documents annexed thereto. Since section 212 requires that particulars of
subsidiary company are required to be attached to balance sheet of holding company, the
same shall not be covered by auditors report. Also refer to section 222 which deals with
construction of references to documents annexed to accounts. The Boards Report under
section 217 is also attached to every balance sheet of a company.
Profit and loss account to be annexed and auditors report to be attached to balance sheet The profit and loss account shall be annexed to the balance sheet and the auditors report
including the auditors separate, special or supplementary report, if any shall be attached


Verification of the constitution and powers - A company can function within the limits
prescribed by the documents on the basis of which it has been registered. It raises its capital
from the public on certain conditions, specified in the Prospectus. Before commencing
business, to purchase a property or to have subscription to its capital underwritten on this
account, it is essential that the auditor, prior to starting the audit of a company, shall examine:
(a) The Memorandum of Association.
(b) The Articles of Association.
(c) Contracts entered into with vendors and other persons relating to purchase of property,
payment of commission, etc.
A company cannot enter into a contract before it has been registered. What is more, a public
company cannot commence business until the certificate of commencement of business has
been granted to it by the Registrar of Companies. It is, therefore, the duty of the auditor to

take into account, while examining the transaction entered into by the company, the dates
when these were entered into for confirming the validity.
With a view to carrying out the audit effectively, it is necessary that the auditor should know
the authority structure of the company. Under Section 291 of the Act, the Board of Directors
of a company are entitled to exercise all such powers, and to do all such acts and things, as
company is authorised to do. However, the Board shall not exercise any power or do any act
or thing which is directed or required by any legislation (including the Companies Act) or by
the memorandum or articles of the company, to be exercised or done by the company, in
general meeting.
Section 292 specifies six types of decisions that can be taken by the Board of Directors only
in Boards meetings. These relate to :

making calls on partly paid shares.


issue of debentures,


borrowing monies otherwise than on debentures,

(iv) investing the funds of the company, and

(v) making loans.
The transaction barring the first three can be delegated to any of the following:
(a) a committee of directors,
(b) Managing director,
(c) Manager,
(d) Any other principal officer of the company, or
(e) Principal Officer of the branch office, in relation to the branch.
Apart from the above, a number of other functions are also carried out by the Board. A few of
such functions are stated herein by way of examples:
(a) Adopting of accounts before the same submitted to the auditor for their report-Section
(b) Appointment of the first auditors and filling of casual vacancy - Section 224.
(c) Investment in shares of companies within the limits specified in Section 372A.
(d) Entering into contracts with persons who are directors of the company or related to or
associated with the directors as are specified in Section 297 of the Act.

Some of the matters which only the shareholders can sanction at a general meeting :
Appointment and fixation of remuneration of auditors in the annual general meeting
-Section 224.

Declaration of dividends - Regulation 85, Table A.

Appointment of relatives of directors etc. to an office or place of profit in the
company under Section 314 of the Act.

Sale, lease or a disposal of the whole of the companys undertaking or a substantial

of it and donations above a certain limits [Section 293(1)].


Matters which require sanction of the Central Government :

Loans to directors by a company other than a banking or a finance company (Section 295).
For verifying the foregoing transactions and others authorised by the directors or
shareholders, the auditor should refer to the minutes of the meeting at which these have
been considered. Further, for judging the validity or otherwise of section accorded, the
relevant provision of law must be referred to. A few such instances are given below :
(a) Appointment of Directors (Section 256).
(b) Disqualifications of Directors (Section 274).
(c) Conduct of Board Meeting (Sections 285-290).
(d) General powers of Board (Section 291).
(e) Powers which the Board must exercise only at a meeting (Section 292).
Restriction on powers of the Board regarding disposal of the undertaking or part of it
etc. (Section 293).
(g) Prohibitions and restrictions regarding political contributions (Section 293A).
(h) Power of Board and other persons to make contributions to the National Defence
Fund, etc. (Section 293B).

Restriction on advancing loans to Directors, etc. (Section 295).

Restriction on a Director or his relative, a firm in which a director or relative is a
partner; or any other partner of the firm or a private company of which such a director is a
member or director to enter into a contract of sale or purchase of goods except with the
sanction of the Board of Directors (Section 297).

Restriction on an interested director in participating in or voting at Boards

proceedings (Section 300).


Disclosure of interest by directors (Section 299).

(m) Register of contracts, Companies or firms in which directors are inspected (Section 301)
(n) Remuneration of directors (Section 309).
(o) Restraint on a directors holding offices or places of profit (Section 314).
(p) Restraint on payment of compensation for loss of office to a director (Sections 318 to
(q) Restriction on loans, etc., to companies under the same management (Section 370).
(r) Regulation of inter-corporate loans and investments (Section 372A).

Liabilities reorganization is the concession items made by a creditor in accordance with the
agreement made with a debtor in financial difficulty or rules of the court. There are four
major forms of liabilities reorganization:
To confirm whether the date of liabilities reorganization is accurately defined. The fair market
price of assets varies from date to date, the amount of liabilities payable with interest also
varies from each other. Consequently, the profits and losses of liabilities reorganization and
the relevant records of assets and liabilities recognized in different dates vary from each
other. In addition, the date of liabilities reorganization is also the basis for defining the
accounting period. No matter when the assets transactions were conducted, the reorganization
date should be the accounting cut-off date. Auditors, in carrying out auditing, shall obtain the
asset reorganization agreement files in the first place to identify the date of reorganization.
They should then review the accounting information to check whether the valuation of the
assets and liabilities are based on the reorganization date and the accounting information
prepared are within the corresponding accounting period.

To check whether the accounting of the liabilities reorganization is proper. Major tool of such
auditing is to examine on a sample basis the accounting vouchers of liabilities reorganization.
These vouchers are verified against relevant agreement to make sure (1) relevant assets,
liabilities and capital items are consistent with the agreement,- (2) proper accounting items
have been applied and (3) accurate amounts have been recorded. Special attention shall be
paid to see if the capital received and the capital reserve have been classified accurately, if the
bad debt provision of the creditor has been written off and if contingent expenditures have
been given due consideration?

To check whether the calculation and recognition of the profits and losses of liabilities
reorganization has been conducted in accordance with relevant requirements. Review of the
calculation of the profits and losses of liabilities reorganization is done through consulting
and examining such information as the reorganization agreement, information provided by
intermediary institutions and market information, the book value of debtor's liabilities, book
value of assets, fair value of assets, fair value of shareholder's equity, future payables, the
creditor's net credit value, future receivables. The calculation of the profits and losses of the
enterprise is then reviewed to make sure data has been applied correctly and correct
calculation has been conducted. Special attention shall be paid to see if the fair market value
of assets, shareholder's equity and the amount of contingent liabilities have been accurately
defined on proper basis and, whether the accounting period of the profits and losses is
To audit whether the disclosure of reorganization is sufficient. Accounting standards require
that liabilities reorganization be disclosed in the footnotes of the financial statements at the
end of an accounting period, explaining the contents and impact of the reorganization. Such
disclosure aims to make the user of financial statements better informed of the financial
condition of the enterprise. The user of the financial statements will not be able to understand
the full impact of the reorganization on the assets and liabilities, profits and losses of the
enterprise, nor can they study the value for money of the enterprise correctly if the disclosure
is not properly made. It is therefore necessary to observe carefully if complete disclosure has
been made by the enterprise through examining the disclosure of the process of liabilities


1. The nature of the Companys business / activities for the year are such that the
requirements of items (iii), (vi), (x), (xii), (xiii), (xiv), (xv), (xvi), (xviii), (xix) and (xx) of
paragraph 4 of the Order are not applicable to the Company.
2. In respect of its fixed assets:
a. The Company has maintained proper records showing full particulars,
including quantitative details and situation of fixed assets.
b. Some of the fixed assets were physically verified during the year by the
management in accordance with a program of verification which, in our
opinion, provides for physical verification of all the fixed assets at
reasonable intervals. According to the information and explanations given to
them, no material discrepancies were noticed on such verification.
3. In respect of its inventories:
a. As explained to them, inventories were physically verified during the year by
the management at reasonable intervals.
b. In teams opinion and according to the information and explanations given to
us, the procedures of physical verification of inventories followed by the
management were reasonable and adequate in relation to the size of the
Company and the nature of its business.
c. In teams opinion and according to the information and explanations given to
them, the Company has maintained proper records of its inventories and no
material discrepancies were noticed on physical verification.
4. In their opinion and according to the information and explanations given to them, there is
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. Team had not observed any continuing failure to correct major weaknesses in
the internal control system.
5. In respect of contracts and arrangements entered in the register maintained in pursuance of
Section 301 of the Companies Act, 1956, to the best of our knowledge and belief and
according to the best of the information and explanations given to them the particulars of
contracts or arrangements that needed to be entered into the register have been so entered.
6. In teams opinion, the Company has an adequate internal audit system commensurate with
the size of the Company and the nature of its business.

7. Team had broadly reviewed the books of account and records maintained by the Company
in respect of malted foods, pursuant to the order made by the Central Government for the
maintenance of cost records under Section 209(1)(d) of the Companies Act, 1956 and are of
the opinion that, prima facie, the prescribed accounts and records have been made and
The auditing team, however, not made a detailed examination of the records with a view to
determining whether they are accurate or complete. To the best of the knowledge and
according to the information and explanations given to them, the Central Government has not
prescribed the maintenance of cost records for any other product of the Company.
8. Statutory and other dues: According to the information and explanations given to them,
the Company has generally been regular in depositing undisputed statutory dues, including
Provident Fund, Investor Education and Protection Fund, Employees State Insurance,
Income-tax, Service Tax, Sales-tax, Wealth Tax, Custom Duty, Excise Duty and any other
material statutory dues with the appropriate authorities during the year.
9. According to the information and explanations given to them, the teams are of the opinion
that the Company has not defaulted in the repayment of dues to financial institutions / banks.
10. According to the cash flow statement and other records examined by them and the
information and explanations given to them, on an overall basis, funds raised on short-term
basis have, prima facie, not been used during the year for long-term investment.
11. to the best of our knowledge and belief and according to the information and
explanations given to company, no material fraud on or by the Company was noticed or
reported during the year.




The Companies Act 1956, in existence in the statute book for more than five and half
decades, has been the mother law governing the functioning of all companies in India.
Exceeding half a century this law has been avidly discussed, interpreted and complied by the
companies and generations of professionals. The successive Central Governments of the day
have also ensured its compliance and various courts and judicial authorities have settled
disputes arising out of this law.
Although the Companies Act 1956 went through numerous amendments in its life time in
keeping with the changing economic, legal and social scenario of this great Country; in recent
times it has been the overwhelming opinion across the spectrum of public, professionals,
business men and the Government itself that the Law needs to be relooked and reviewed
comprehensively. The need has been felt more due to:1

Expansion and growth of the Indian economy increasing the options and avenues for
more international business opportunities and investments, and

Sustaining this growth by putting in place a modern legal framework that would
enable the Indian corporate sector to operate in an environment of best international
practices in a globally competitive manner, while promoting a positive environment
for investment and growth enhancement of a vibrant corporate sector and business

While keeping in view the said need, the Government had also kept in view the following
while proposing the new Company Legislation :1

Bringing about compactness by deleting the provisions that had become redundant
over time and by regrouping the scattered provisions relating to specific subjects.

Re-writing various provisions of the Act to enable easy interpretation.

Delinking the procedural aspects from the substantive law and provide greater
flexibility in rule making to enable adaptation to the changing economic and technical

Reports of various expert Committees have proposed extensively in formulation of the new
law keeping in view the various provisions and best practices across the world. Thereafter,
the Bill was drawn up by the Government and then through comprehensive consultative
processes with all relevant stakeholders, the proposals have been examined by the Standing
Committee on Finance of Parliament, twice, initially for the Companies Bill 2009 and then its
replacement, the Companies Bill 2011.

The Bill of 2011 was ultimately elaborately debated and passed as the Bill of 2012 by the Lok
Sabha on 18th December 2012 and after that passed by the Rajya Sabha on 8th August 2013
which subsequently received the assent of the President of India on 29th August 2013,
and the new Companies Act 2013 is being notified in Gazette of India in phases starting
from 12th September 2013, 27th February 2014 and recently on 26th March 2014 {w.e.f. 1st
April 2014} . Thus, till date out of total 470 sections of the new Act , 283 sections{fully or
partly} have been notified & 187 sections are yet to be notified. All the six Schedules have
also been notified.
The drafts of the relevant rules through which many sections of the new Law had to be
implemented had been put in public domain by the Government for public response. The
same have been finalized by the Government and notified and made effective w.e.f. 1st
April 2014. Since then a number of clarifications have also been issued by the Government.
The clarifications continue to be issued which many times alter the position of understanding
the new law.
The new Companies Act 2013 is a progressive piece of legislation having far reaching
implications and is also forward looking which promises improved corporate governance and
is in a position to significantly change the manner in which corporate operates in India. It is
anticipated to be fully implemented in months to come.
With this new Law in the statute book, the interpretations, understandings and the
compliances by companies and others will have to start afresh with a new outlook. Wherever
possible the erstwhile law of 1956 and its interpretation could be the guiding factor for the
fresh interpretation.
The Act broadly seeks to achieve the following objectives:
a. To promote the development of the economy by encouraging entrepreneurship and
enterprise efficiency and creating flexibility and simplicity in the formation and
maintenance of companies;
b. To encourage transparency, accountability and high standards of corporate governance;
c. To recognize various new concepts and procedures facilitating ease of doing business
while protecting interests of all the stakeholders;
d. To enforce stricter action against fraud and gross non-compliance with company law
e. To set up institutional structure in the form of various authorities, bodies and panels as
well as by including recognition of various roles for professionals and other experts; and
f. To cater to the need for more effective and time bound approvals and compliance


The Companies Act, 2013 has 470 Sections (covered in 29 Chapters) and 7 Schedules as
against 658 Sections (covered in 13 Parts) and 15 Schedules of the Companies Act, 1956.
It may be noted that the number of Sections has been drastically reduced, but at the same time
the Central Government has been empowered, in number of Sections, to prescribe various
aspects in the form of Rules, thereby recognizing the more importance of delegated
It can be said Companies Act, 2013 has been structured on skeleton approach. This has been
done for ensuring that the law remains relevant at all times in the changing economic
Section 1 provides that the Companies Act, 2013 applies on whole of India.
Companies Act, 1956 also applies on whole of India. However, proviso to Section 1(3) of the
Companies Act, 1956 empowers the Central Government to modify the provisions of the Act,
while applying this Act on the State of Nagaland. Similarly, Sections 620B and 620C of the
Companies Act, 1956 empowers the Central Government to, modify, or exempt from, the
provisions of the Act, while applying this Act on the States of Goa, Daman, Diu and Jammu
Kashmir respectively. These kind of powers of the Central Government has been taken away
the Companies Act, 2013.
Thus, the 2013 Act puts an end to the power of the Central Government under the 1956 Act to
exempt companies from provisions of Act based on regional considerations.
Following are the important highlights of Companies Act, 2013 :
New definitions have been introduced, some of which are auditing standards, associate
company, CEO, CFO, control, employee stock option, financial statement, global
depository receipt, Indian depository receipt, independent director, interested director,
key managerial personnel, promoter, one person company, small company, turnover,
voting right, etc.
Number of existing definitions have been modified, for example, definitions of abridged
prospectus, body corporate, director, expert, managing director, officer in default, etc.
Definition of private company changed - the limit on maximum number of members
increased from 50 to 200.
The concept of One Person Company introduced. It will be a private limited company.
Capital Raising

Money raised through a prospectus cannot be used for dealing in equity shares of another
company. If a company changes terms of the prospectus or objects for which money is
raised, it shall provide dissenting shareholders an exit opportunity.
Shares, other than Sweat Equity Shares, cannot be issued at a discount. It means the
practice of issuing shares at a discount with the approval of CLB, as provided in Section
79 of Companies Act, 1956, has been discontinued.
Public companies can accept deposit from public on complying with certain conditions
like credit rating.
Management & Administration
All companies to follow uniform financial year, running from April to March.
Exceptions to be made only for certain companies with the approval of NCLT.
First Annual General Meeting of the Company shall be held within 9 months from the
closure of its first financial year instead of 18 months from the date of incorporation, as
provided in the Companies Act, 1956.
Quorum of general meeting for a public company will now depend upon the numbers of
the company. For companies with up to 1000 members, 5 members personally present;
for companies with members more than 1000 but up to 5000, 15 members personally
present; and for companies with more than 5000 members, 30 members personally
present, shall be the quorum. The Companies Act, 1956 prescribes a fixed quorum of 5
members personally present.
Postal Ballot to be applicable to all the companies, whether listed or unlisted.
The National Advisory Committee on Accounting Standards renamed as The National
Financial Reporting Authority (NFRA).
Auditors & Financial Statements
Every company is required at its first annual general meeting (AGM) to appoint an
individual or a firm as an auditor. The auditor shall hold office from the conclusion of
that meeting till the conclusion of its 6th AGM and thereafter till the conclusion of every
6th meeting. The appointment of the auditor is to be ratified at every AGM.
Individual auditors are to be compulsorily rotated every 5 years and audit firm every 10
years in listed companies & certain other classes of companies, as may be prescribed.
A companys auditor shall not provide, directly or indirectly, the specified services to the
company, its holding and subsidiary company

Prescribed class or classes of companies are required to appoint at least one woman
director (Woman Director).
At least one director should be a person who has stayed in India for a total period of not
less than 182 days in the previous calendar year (Resident Director).
At least one-third of the total number of director of a listed public company should be
independent directors. Government may prescribe requirement of Independent Directors

for certain unlisted public companies also.

Liability of independent directors and non-executive directors not being promoter or key
managerial personnel to be limited.
A person can hold directorship of up to 20 companies, of which not more than 10 can be
public companies.
Companies can have maximum of 15 directors. More can be appointed after passing a
special resolution.
Companies with more than 1,000 shareholders, debenture-holders, and any other security
holders at any time during a financial year to constitute a Stakeholders Relationship
Committee, with a non-executive director as a chairperson.
The provisions on inter-corporate loans and investment (372A of Companies Act, 1956)
extended to include loan and investment to any person.
A company cannot, unless otherwise prescribed, make investment through more than 2
layers of investment companies.
No central government approval required for entering into any related party transactions.
No central government approval required for appointment of any director or any other
person to any office or place of profit in the company or its subsidiary.
The Act makes provision for cross border amalgamation between Indian Companies and
companies incorporated in the jurisdictions of such countries as may be notified from
time to time by the central government.
The authority CLB is being replaced by National Company Law Tribunal (NCLT).
The Act provides provisions related to Corporate Social Responsibility (CSR).
The Act provides for class action suit by specified number of members or depositors


Sr. No.


Section of
Act, 1956



Provisions of the Companies Act, 1956 which have been deleted in

the Companies Act, 2013
Private company to become public company in certain cases.
Filing of Prospectus or statement in lieu of prospectus by private
company on ceasing to be private company.
The provisions of section 58AA relating to acceptance of deposits
small depositors and intimation of default in repayment of deposits
thereof has been dropped
Section 58AAA which makes any offence connected with or arising


of acceptance of deposits u/s 58A or 58AAas cognizable has been

done away with.
The concept of perpetual debentures has been omitted.


The concept of re-issue of redeemed debentures has been omitted.


Appointment of public trustee


Statutory meeting and statutory report of company


Auditor not to be appointed except with the approval of the company

by special resolution in certain cases



Power of Central Government to direct special audit in certain cases



Right of company to increase or reduce the number of directors.



Time within which share qualification is to be obtained and maximum

amount thereof.



Power of Central Government to prohibit the appointment of sole

selling agents in certain cases.



Employees securities to be deposited in post office savings bank or

Scheduled Bank.

Companies Act, 2013 defines One Person Company (OPC) as Company which has only one
person as member. Further, Section 3 of the Act provides that a company may be formed for
any lawful purpose by one person. One person Company is a Private Company formed by
subscribing the name of such one person to the Memorandum and complying with the
requirements of the Act in respect of registration. As regards the name of a One Person
Company, the Act provides that the words One Person Company or OPC shall be
mentioned in brackets below the name of such Company, wherever its name is printed,
affixed or engraved.
The concept of OPC provides a more flexible and less compliance structure of a
Independent Directors

With a view to add transparency, fairness and independence in decision making to safeguard
of stakeholders interest, the concept of Independent Directors was introduced. While the
concept was till date applicable on Listed Public Companies, the New Company Law
proposes to introduce the same upon big Public Companies as well. It is much likely that
rationalism and objectivity would be inducted in the processes of the Company with this
Dormant Company
Dormant Company means a company which is not carrying on any significant accounting
transaction for a period of two years. It can apply to Registrar of Companies for getting
declared itself as Dormant Companies. It may be noted that ROC may, suo moto, also declare
a company as a Dormant Company. In todays economic environment, a lot of Companies are
formed for the purpose of holding any assets particularly real assets or any IPR or for a future
project and such Company just keeps on complying with the laws even if no actual business
is being done or transacted.
Class Action
Class action is a right to members or deposit holders or representative of such members or
deposit holders to file an application before National Company Law Tribunal (NCLT) for
restraining the Company from some specified acts. The most important part of such class
action is that such members as prescribed can claim damages or compensation against
Company, Directors, Auditors, Experts, Advisors for wrongful conduct of them.

Corporate Social Responsibility

This is a new initiative of Ministry of Corporate Affairs to ask corporate to contribute
towards society. It is a paradigm shift in this area since earlier there were only voluntary
guidelines for CSR and now there is a mandatory provision of CSR by some prescribed
companies which is expected to cover a huge number of companies in India. It may add sense
of responsibility and contribution among corporate. It is expected to be beneficial to different
class of people such as children, women, uneducated, unemployed etc towards which such
CSR activities may be focused. There is social security system in most of developed countries
and mandating CSR is a step towards creating some social security for citizens of India with
focused contribution from Corporate. In case of non-compliance of requirement of CSR, the
Board shall, in its report, explain the reasons for the same. The approach is to comply or
Rotation of Auditors
Under the extant Companies Act, 1956, there is no provision for compulsory Rotation of
Auditors. As a result, an auditor in some Companies continue for over 10-15 years and even
more. To overcome this hitch, Companies Act has provided for Rotation of Auditors after a

specific time frame to ensure independence of Auditor and strengthen diligence in their role
an conduct. Compulsory rotation of audit partners is a global practice prevailing in developed
countries also like USA.
Secretarial Audit
The Companies Act, 2013 provides for compulsory Secretarial Audit by certain class of
companies and annexing of audit report with Board Report, which is circulated to all the
shareholders. The present Companies Act, 1956 provides for Compliance Certificate to be
issued by a Company Secretary in practice and annexed to Board Report by certain class of
Companies. The government must be thinking of widening the scope of such Compliance
Certificate so introduced the concept of Secretarial Audit. The Board of Directors also has to
explain in its Board Report to every qualification, reservation or adverse remark or disclaimer
made by the Company Secretary in his Secretarial Audit Report.
(a) Declaration of Compliance at the time of Incorporation (Section 7)
A company secretary in practice engaged for the incorporation of a company shall be
competent to give a declaration that all requirements of the Act and rules in respect of
registration and the matters precedent or incidental thereto have been complied with.
(b) Annual Return (Section 92)
Under the Companies Act of 1956, the annual returns of listed companies are required to
be signed by company secretary in practice. Section 92 of the Act has further widened
this requirement by providing that annual return of certain other unlisted companies shall
also be required to be certified by a company secretary in practice.
(c) Secretarial Standards (Section 118)
Till date, the Secretarial Standards are recommendatory in nature. The Act gives statutory
recognition to the Secretarial Standards specified by the ICSI. Section 118(10) mandates
that every company shall observe Secretarial Standards with respect to general and board
meetings as specified by the ICSI and approved by the Central Government.
(d) Appointment of Whole-time Key Managerial Personnel (Section 203)
Section 203 provides for compulsory appointment of whole-time Key Managerial
Personnel (KMP) in respect of certain class of companies to be prescribed by Central
Government. A company secretary is covered under the term whole-time KMP. Thus,
the appointment of company secretary will become mandatory in certain companies.

(e) Introduction of Secretarial Audit (Section 204)

Secretarial Audit is an audit to check compliance of various provisions of all the
corporate laws, by a company. Secretarial Audit has been introduced for the first time in
section 204 of the Companies Act, 2013. Under the section, every listed company and a
company belonging to such class as may be prescribed in the rules, shall annex with its
Boards report a Secretarial Audit Report, given by a company secretary in practice.
(f) Functions of Company Secretary (Section 205)
For the first time, the functions of the company secretary have been specified in the
Companies Act. He has to report to the Board about the compliance of the provisions of
the Act, rules and other laws applicable to the company. He has also to ensure that the
company complies with the Secretarial Standards (as issued by the ICSI and approved by
the Central Government) as applicable to the company. Other duties will be prescribed in
the Rules to be framed by the Central Government. This provision casts an onerous
responsibility on company secretaries in employment in the discharge of their duties and
they are expected to exhibit a proactive and responsible role to meet the expectations of
the respective companies and regulatory authorities.
(g) Professional Assistance to Company Liquidator (Section 291)
With the sanction of the Tribunal, the Company Liquidator may appoint one or more
professionals, including company secretaries, to assist him in the performance of his
duties and functions under the Act.
(h) Qualifications of Members of Tribunal (Section 409)
The constitution of the National Company Law Tribunal offers opportunities to company
secretaries in practice to become Technical Members of the Tribunal. Amongst others, a
secretary in practice is eligible to become a Technical Member of National
Company Law Tribunal, if he is in practice for at least fifteen years.
(i) Appearance before Tribunal (Section 432)
A party to any proceedings or appeal before the NCLT or the NCLAT may authorize amongst
others, a company secretary, to present the case before the Tribunal or the Appellate Tribunal,
as the case may be.
(j) Others

In addition to the areas listed above, company secretaries can also play a key role in the fields
of valuation, corporate restructuring, winding up and in certification of areas of compliances
specified in the Act

In view of the above, it can be said that the Companies Act, 2013 shall, to a large extent,
Widen the scope of profession of Company Secretaries




Companys Stationery
including Letter Head


Business letters, Billheads, Letter papers and in all its

notices and other official publications should contain
Company Name
Company Address of registered office



Section 2(41)Financial Year

Section 2(85)-Small


Section 73, 74(1) and

76- Provisions related
to acceptance of
Section 129- Financial

Section 134- Financial

statement, Boards
report, etc.

Corporate Identity Number

Fax Number, email and website addresses
Every Company is required to have One Resident
Hold directorship in 20 companies ( not more than 10
public limited companies including private companies)
Document signing should contain
Directors Name
the financial year for all companies should end on 31
March, with certain exceptions approved by the National
Company Law Tribunal
Criteria:- Other than Public company whose
Paid up capital < 5 Mio. ( 50 Mio if specified) OR
Turnover < 20 Mio. (200 Mio if specified) as per
last P&L
Not a Holding /Subsidiary Company
Act Provides certain exemptions ( Board Meeting, CFS
presentation, Merger Process etc.,)
Stringent Provisions for accepting deposits
Repay deposits within one year accepted under act 1956

Mandatory Preparation of Consolidated Financial

Statement for all companies which have one or more
subsidiaries in addition to the standalone financial
- The boards report will be more informative with
extensive additional disclosures
declaration of independence by the independent
related party transactions
directors appointment and remuneration
IV. policy by the company on corporate social

Section 138- Internal


Section 139Appointment of


Corporate Social

Mandates internal audit for prescribed class of



Paid up capital > 500 Mio. OR
Turnover >2000 Mio. OR
Borrowings> 1000 Mio OR
Outstanding Deposits> 250 Mio.


PRIVATE COMPANY ( Last Financial)

Turnover >2000 Mio. OR
Borrowings> 1000 Mio OR
Outstanding Deposits> 250 Mio.
Period of 5 years (subject to ratification at every AGM)
Individual auditor 5 years and Audit Firm- 10 years
Rotate at expiry of the term and reappointed after
cooling off period of 5 years
Transition Period:- 3 years from 1 April 2014
Under the New Act, the Companies on which CSR
provisions are applicable, has to spend 2% of average net
profits for last 3 years and comply with the provisions of
the Act and CSR Rules.
CSR applies to the following companies having: - Net
worth of INR 500 Crore or more; or Turnover of INR
1,000 Crore or more; or Net profit of INR 5 Crore or
Not applicable



Women Director and

Small Shareholders
Annual report
Maximum Directors


Exemptions withdrawn -



Annual Report to be filed ROC within 60 days of AGM

Increases the limit of the number of Directors from 12 to
Further issue of Share Capital by Right issue
if not right issue then:
o to any person if authorized by Special
o at a price to be determined by registered valuer &
o subject to other conditions as may be prescribed
Check Note

Depreciation Chart- Comparative Analysis


Rate of
tion1956 Act

ed to


Continuous Process Plant

5.28 %




General Plant & Machinery

4.75 %




6.66 %

General Rate for furniture &


6.33 %




10 %




12.5 %

16.21 %



33.33 %

Furniture & fittings used in

hotels etc

9.5 %



12.5 %

Building (other than factory

building) other than RCC frame

1.63 %




3.33 %


1.63 %




3.33 %

Electrically Operated Vehicles



Longe Rate of
r life/ Depreciat
ion- 2013
(Short Act
er life)

If useful life or residual value is different for Schedule II, Justification to be

Component accounting under Note 4
Extra Shift depreciation higher 50%
Triple Shift - 100%


PARA 1. Applicability: It shall apply to every company including a foreign company as
defined u/s 2 (42) of the
Companies Act, 2O13 except:
a banking company as defined in clause (c) of section 5 of the Banking Regulation Ac,
an insurance company as defined under the Insurance Act,1938;
a company licensed to operate u/s 8 of the Companies Act, 2013;
a One Person Company as defined u/s 2 (62) of the Companies Act and a small company as
defined u/s 2
(85) of the Companies Act; and
a private limited company with a paid up capital and reserves not more than Rs. 50 Lakh
and which does
not have loan outstanding exceeding Rs. 25 lakh from any bank or financial institution and
does not have
a turnover exceeding Rs. 5 crore at any point of time during the financial year.
All the eligibility conditions of private limited company need to be checked at any point of
Paid up capital includes equity as well as preference.
Amount originally paid up on forfeited shares should be added to the figure of paid up
Share Application money should not be considered as part of paid up capital.
Reserves include Capital reserves, revenue reserves as well as Revaluation Reserves.
Credit Balance of P&L A/c will form part of reserve. Debit balance will be deducted only if
revenue reserve
Miscellaneous expenditure is not allowed to be deducted.
Loans from banks and financial institutions are to be considered in aggregate.
Long term loans as well as short term loans, secured as well as unsecured will be
Loans may be in any form like term loan, demand loans, cash credit overdraft, export credit,
bill purchased/
Non fund based credit facilities to the extent such facilities have devolved and have been
converted into
fund based credit facilities should also be considered as outstanding loan.
Outstanding dues in respect of credit cards will also be considered.
Interest accrued as well as due does form part of outstanding loan whereas interest accrued
but not due
is not considered as a loan.
Turnover means sales effected during the year including the value of service rendered.

In an agency relationship, turnover is the amount of commission earned by the agent and
not the aggregate
amount for which sales are affected or services rendered.
Income received by way of rent or dividend or interest would not form part of turnover.
However if
principal business of the company is letting out of property or it is an investment company,
the rent or
dividend/interest would constitute turnover.
Sales Tax/Excise Duty charged separately in invoice does not form part of turnover.
Sales returns (even belong to prior years) should be deducted.
Trade Discount should be deducted from the figure of turnover.
Commission to third parties will not be deducted.
PARA 2. Auditor's report to contain matters specified in paragraphs 3 and 4: Every report
made by the auditor u/s
143 of the Companies Act, on the accounts of every company examined by him to which this
Order applies for the
financial year commencing on or after 1st April, 2014, shall contain the matters specified in
paragraphs 3
(a) Adequacy of Records: Whether the company is maintaining proper records showing full
including quantitative details and situation of fixed assets.
Records should also contain particulars in respect of those items of FA that have been fully
depreciated or amortized or have been retired from active use and held for disposal. Records
should also contain necessary particular in respect of item of FA that have been fully impaired
during the period covered by the AR.
Physical Verifications: Whether these fixed assets have been physically verified by the
at reasonable intervals; whether any material discrepancies were noticed on such verification
if so, whether the same have been properly dealt with in the books of account.
Physical verification by Management and not by the auditor.
Verification can also be made by outside agencies engaged by the management.
Auditor should obtain MRL confirming that FAs are physically verified by the company as
policy of the company. MRL should also include the details of the material discrepancies
during the physical verification of the fixed assets. If no discrepancies were noticed, then this

fact should also be mentioned clearly.

(a) Whether physical verification of inventory has been conducted at reasonable intervals by
Physical verification of inventory is the responsibility of the management. Periodicity of the
physical verification depends upon the nature of inventories and their location.
Are the procedures of physical verification of inventory followed by the management
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.
If not reasonable and adequate, the auditor has to report the same.
Physical verification of inventories is primariliy the duty of the management, the auditor is
expected to examine the methods and procedures of such verification.
SA 501 "Audit Evidence - Additional Consideration for specific items": to be applied for
physical verification of inventory.
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
dealt with in the books of account.
Proper Records has not been defined.
Records should contain the particulars in respect of all items of inventories.
The auditor should satisfy himself that the stock registers are updated as and when the
transactions occur.
Whether the company has granted any loans, secured or unsecured to companies, firms or
parties covered in the register maintained u/s 189 of the Companies Act. If so,
(a) Whether receipt of the principal amount and interest are also regular; and
The auditor should obtain a list of companies, firms or other parties covered in the register
u/s 189 of the Act from the management.
The auditor has to examine whether the receipt of principal and interest is regular.
Regular means
the principal and interest should normally be received whenever they fall due respectively.
(b) If overdue amount is more than Rs. 1 lack, whether reasonable steps have been taken by
company for recovery of the principal and interest.

A loan is considered to be overdue when the payment has not been made or received on the
due date as per the lending arrangements.
In such cases, the auditor has to examine the steps, if any, taken for recovery of this amount.
It is not necessary that steps to be taken must necessarily be legal steps.
Depending upon the circumstances, issue of reminders or the sending of an advocates or
solicitors notice, may amount to reasonable steps even though no legal action is taken.
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.
Reference may also be made to SA 315 and SA 330.
The auditor should review the reports of internal auditor.
In case there is a continuing failure on the part of the company to correct major weakness in
the internal control system, the auditor should make a re-assessment of the control risk.
in case the company has accepted deposits, whether the directives issued by the Reserve
Bank of India and the provisions of sections 73 to 76 or any other relevant provisions of the
Companies 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
Reserve Bank of India or any court or any other tribunal, whether the same has been
with or not?
Where maintenance of cost records has been specified by the Central Government u/s 148 (1)
the Companies Act, Whether such accounts and records have been made and maintained.
The auditor should obtain a written representation (WR) from the management.
The auditor should, conduct a general review of the cost records to ensure that records as
prescribed are made and maintained. Clause (VII) Statutory Dues
Undisputed Statutory dues: is the company regular in depositing undisputed statutory dues
including provident fund, ESI, income-tax, sales-tax, wealth tax, service tax, duty of customs,
of excise, value added tax 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 FY
for a period of more than 6 months from the date they became payable, shall be indicated by
Disputed Statutory dues: in case dues of income tax or sales tax or wealth tax or service tax
or duty
of customs or duty of excise or value added tax or cess have not been deposited on account of
dispute, then the amount involved and the forum where dispute is pending shall be
A mere representation to the concerned Department shall not constitute a dispute.
Transferred to investor education and protection fund: Whether the amount required to be
transferred to investor education and protection fund in accordance with the relevant
of the Companies Act, 1956 (1 of 1956) and rules made there under have been transferred to
fund within time.
Whether in case of a company which has been registered for a period not less than 5 years,
accumulated losses at the end of FY are not less than 50 % of its net worth; and
Whether it has incurred cash losses in such FY and in the immediately preceding FY.
This clause is applicable to all the companies that are in existence for five years or more
the date of registration till the last day of the FY covered by the AR. This clause requires the
auditor to report:
Whether the accumulated losses at the end of the FY are > 50% of its net worth; and
Whether the company has incurred cash losses during the period covered by the report and
in the FY immediately preceding the period covered by the AR.
The term loss should be constructed to mean the net profit/loss shown by the P&L A/c of
company as adjusted after taking into account qualifications in the AR.
Net Worth is sum total of the paid-up capital and free reserves after deducting the
provisions or expenses as may be prescribed The figure of cash loss of the company for the
FY covered by the AR and the immediately
preceding FY should also be adjusted for the effect of qualifications in the respective AR.

Whether the company has defaulted in repayment of dues (Principal + Interest) to a

institution or bank or debenture holders?
If yes, the period and amount of default to be reported.
The auditor should obtain a schedule of repayments to banks, FI and debenture holders from
the management.
The auditor should examine the agreement or other document containing terms and
of loan.
Whether the company has given any guarantee for loans taken by others from bank or
institutions, the terms and conditions whereof are prejudicial to the interest of the company.
Guarantee given by a company is a contingent liability. In respect of contingent liabilities
auditor is normally concerned with seeking reasonable assurance that all contingent liabilities
are identified and properly valued and disclosed as an off-balance sheet item.
The auditor should examine MOA of the company with a view to determine whether the
company can give a guarantee. Clause (XI) Usage of loan
Whether term loans were applied for the purpose for which the loans were obtained.
Term loans are generally provided by banks and FI for acquisition of capital assets, which
become the security for the loan.


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.
The auditor should examine the reports of the internal auditor with a view to ascertain
whether any fraud has been reported or noticed by the management.
The auditor should also discuss the matter with other employees of the company and also
examine the minute book of the board meeting of the company in this regard.




auditor. According to para 3.3 of the Preface to the Statements of Accounting Standards2
issued by the Institute of Chartered Accountants of India, the term General Purpose
Financial Statements includes balance sheet, statement of profit and loss and other
statements and explanatory notes which form part thereof, issued for the use of
shareholders/members, creditors, employees and public at large. References to financial
statements in this Standard should be construed to refer to general purpose financial
Objective of an Audit
The objective of an audit of financial statements, prepared within a framework of recognised
accounting policies and practices and relevant statutory requirements, if any, is to enable an
auditor to express an opinion on such financial statements. 3. The auditors opinion helps
determination of the true and fair view of the financial position and operating results of an
enterprise. The user, however, should not assume that the auditors opinion is an assurance as
to the future viability of the enterprise or the efficiency or effectiveness with which
management has conducted the affairs of the enterprise
Responsibility for the Financial Statements
While the auditor is responsible for forming and expressing his opinion on the financial
statements, the responsibility for their preparation is that of the management of the
enterprise. Managements responsibilities include the maintenance of adequate accounting
records and internal controls, the selection and application of accounting policies and the
safeguarding of the assets of the enterprise. The audit of the financial statements does not
relieve management of its responsibilities.
Scope of an Audit
The scope of an audit of financial statements will be determined by the 2 The Preface to
Statements of Accounting Standards issued in 1979 has been withdrawn pursuant to issuance
of Revised Preface issued in 2004. The aspects relating to para 3.3. of original Preface are
dealt by para 3.4 of the said Revised Preface, according to which General Purpose Financial
Statements also includes Cash Flow Statements.

Objective and Scope of the Audit of Financial Statements

auditor having regard to the terms of the engagement, the requirements of relevant legislation
and the pronouncements of the Institute. The terms of engagement cannot, however, restrict
the scope of an audit in relation to matters which are prescribed by legislation or by the
pronouncements of the Institute. The audit should be organized to cover adequately all
aspects of the enterprise as far as they are relevant to the financial statements being audited.
To form an opinion on the financial statements, the auditor should be reasonably satisfied as
to whether the information contained in the underlying accounting records and other source
data is reliable and sufficient as the basis for the preparation of the financial statements. In
forming his opinion, the auditor should also decide whether the relevant information is
properly disclosed in the financial statements subject to statutory requirements, where
applicable. The auditor assesses the reliability and sufficiency of the information contained
in the underlying accounting records and other source data by: (a) making a study and
evaluation of accounting systems and internal controls on which he wishes to rely and testing
those internal controls to determine the nature, extent and timing of other auditing
procedures; and (b) carrying out such other tests, enquiries and other verification procedures
of accounting transactions and account balances as he considers appropriate in the particular
circumstances. 8. The auditor determines whether the relevant information is properly
disclosed in the financial statements by: (a) comparing the financial statements with the
underlying accounting records and other source data to see whether they properly summaries
the transactions and events recorded therein; and (b) considering the judgements that
management has made in preparing
the financial statements; accordingly, the auditor assesses the selectionand consistent
application of accounting policies, the manner in whichthe information has been classified,
and the adequacy of disclosure. The auditors work involves exercise of judgement, for
example, indeciding the extent of audit procedures and in assessing the reasonableness of the
judgements and estimates made by management in preparing the financial statements.
Furthermore, much of the evidence available to the auditor can enable him to draw only
reasonable conclusions therefrom. Because of these factors, absolute certainty in auditing is
rarely attainable.

SA 200A IV-10
10. In forming his opinion on the financial statements, the auditor follows procedures
designed to satisfy himself that the financial statements reflect a true and fair view of the
financial position and operating results of the enterprise. The auditor recognizes that because
of the test nature and other inherent limitations of an audit, together with the inherent
limitations of any system of internal control, there is an unavoidable risk that some material
misstatement may remain undiscovered. While in many situations the discovery of a material
misstatement by management may often arise during the conduct of the audit, such discovery
is not the main objective of audit nor is the auditors programme of work specifically
designed for such discovery. The audit cannot, therefore, be relied upon to ensure the
discovery of all frauds or errors but where the auditor has any indication that some fraud or

error may have occurred which could result in material misstatement, the auditor should
extend his procedures to confirm or dispel his suspicions. . The auditor is primarily concerned
with items which either individually or as a group are material in relation to the affairs of an
enterprise. However, it is difficult to lay down any definite standard by which materiality can
be judged. Material items are those which might influence the decisions of the
user of the financial statements3. It is a matter in which a decision is arrived
at on the basis of the auditors professional experience and judgment. The auditor is not
expected to perform duties which fall outside the scope of his competence. For example, the
professional skill required of an auditor does not include that of a technical expert for
determining physical condition of certain assets. Constraints on the scope of the audit of
financial statements that impair the auditors ability to express an unqualified opinion on such
financial statements should be set out in his report, and a qualified opinion or disclaimer of
opinion should be expressed, as appropriate.
Effective Date
This Standard on Auditing becomes operative for all audits relating to accounting periods
beginning on or after April 1, 1985.

The Audit of Financial Statements SA 200A

Objective of an audit
As per this SA 200 A, objective is to express an opinion on financial statements by the
auditor. Opinion helps the users of the financial statements to determine the true and fir view
of the financial statements.

Auditors opinion and future viability

This SA clarifies that auditors opinion on financial statements is not an assurance on the
future viability of the enterprise nor it is an assurance on efficiency or effectiveness of the
management in conducting the business of an enterprise.

Responsibility of preparing the financial statements

Responsibility of preparation of financial statements is of the management and not of the
auditor. Auditors responsibility is to express an opinion on financial statements prepared by
the management.
Further maintenance of accounting records and control and selection of accounting policies is
the sole responsibility of the management.

How the auditor should determine the scope and extent of auditing
The auditor should consider the following:
Terms of engagements.
Requirements of law: If the audit client is a company registered under the Companies
Act, 1956, requirement of Schedule VI is to be compiled with. If it is insurance
company, then Insurance Act, 1938 and IRDA requirements and so on.
Pronouncements of ICAI: Accounting Standards, Guidance Notes on various
accounting subjects and Auditing Standards.
Can terms of engagements restrict the scope of audit?
Terms of engagements prescribing the scope of the audit are determined by the appointing
authority of the auditor. However, the appointing authority cannot restrict the scope of an
audit in relation to matters prescribed by law and any pronouncements on the subject by the
How audit should be organized?
Audit should be organized in such a way that:
It covers all aspect of enterprise.
It ensures that accounting records on which basis financial statements are prepared are
reliable and sufficient.
Statutory requirements of disclosure are compile with in preparation of financial
3.6-1- How to assess the reliability and sufficiency of accounting records
The same can be done by:
Study and evaluation of accounting system and internal control.
Carrying out test checking, and enquiries and confirmation, etc, of accounting records
and balances.
Assessment of accounting policies followed.
Forming an opinion by the auditor
3.7 Auditor has to report whether the financial statements reflects the true and fair view of the
financial position and operating result of the enterprise. For forming such an opinion auditor
follows a procedure to satisfy himself.

Limitation faced by the auditor:

3.8 While forming an opinion by following certain audit procedures auditor faces certain
limitations, which are as under;
High and uncontrollable volume of transaction for example, if A an auditor,
conducts the audit of Bank of Baroda having more than 2000 branches and
billions of transactions, it will not be possible for him to check the accuracy of all
the transactions. Therefore, he has to conduct Test Check.
Limitation of any system of internal control.
Lack of technical knowledge of the enterprises business.
Does audit ensure that there are no frauds or errors?
3.9 SA 200 A states that audit cannot ensure that there are no frauds and error in audited
financial statements. In fact the objective of the audit is not o detect the fraud and error.

Technical expertness and auditor

Auditor should not perform the audit of the area, which is of technical nature and is outside
his competence.

Auditors report and constraints

There may be certain constraints, and problems due to which the auditor cannot express
unqualified opinion on the financial statements. Those constraints/problems should be set out
in his report.


The accounting process begins with the recording of transactions in the books of
primary entry. The accounting information resulting from the transactions so recorded gets
posted in to various accounting heads in the ledger. In the ledger each account is balanced at
the end of an accounting period and a summary of all balances in the various accounting
heads from the ledger is prepared which is known as trial balance from such trial balances
and after effecting certain adjustments considered necessary (which is dependent on the
particular accounting system followed by the organizations) the financial statements relating
to the accounting period are prepared
Financial statement is an organized collection of data according to logical and
consisted accounting procedures. Its purpose is to convey an understanding of some financial
aspects of a business form. It may reveal a series of activities over a given period of time, as
in the case of an income statement.
The focus of the financial analysis is on key figures in the financial statements and the
significant relationships the exists between them. The analysis of financial statements is a
process of evaluating relationships between component parts of financial statements to obtain
a better understanding of the firms position and performance.
Financial Analysis:
Financial analysis is the process of identifying the financial strengths and weakness of
the firm by property establishing relationships between the item of the balance sheet and the
profit and loss account. Financial analysis can be undertaken by management of the firm, or
by parts outside the firm.



Trade creditors




Management of the firm would be interested in every aspect of the financial analysis.
It is their overall responsibility to see that the resources of the firm are used most effectively
and efficiently and that the firms condition is sound.
Trade Creditors:
The trade creditors are to be paid in a short term solvency of the concern. The current
ratio and acid test ratio will enable the creditors to assets the short term solvency position of
the concern.
The Investors are interested their money in the firms shares, are not concerned about
the firms earnings. They restore more confidence in those firms that show steady growth in
earnings. As such, they concentrate on the analysis of the firms present and future
profitability. They are also interested in the firms financial structure to the extent it
influences the firms earning ability and risk.
The financial statements are used to asses tax liability of business enterprise. These
statements enable the government to find out whether the business is following various
regulations or not.
Trade associations, stock exchange and public at may also analyze the financial
statements to judge the financial position of different concerns.
According to Myres Financial statement analysis is largely is a study of the
Relationship among the various financial factors in a business as disclose by a single set of
statement and a study of the trend of these factors as show in a series of statements.






Financial Soundness

Analysis and interpretation of financial statements therefore refers to such a treatment

of the information contained in the income statement and the balance sheet so as to afford full
diagnosis of the profitability and financial soundness of the business.
The term analysis means methodical classification of the data given in the financial
statements. The term interpretation means explaining the meaning and significance of the
data so simplified.
Types of financial Analysis
Financial analysis can be classified in to different categories depending upon.

The material used


The modus operand of analysis

On the basis of materials used. According to this basis financial analysis can be of two types.
a) External Analysis
Those who are outsider for the business do this analysis. The outsiders include
investors, credit agencies. government agencies and other creditors who have no access to the
internal records of the company. These persons mainly depends upon, the published financial
statements. Their analysis serves only a limited purpose. The position of this analysis has
improved in recent times on account of increased governmental control over companies and
governmental regulations regulations requiring more detailed disclosures of information by
the companies in their financial statements.
b) Internal analysis:
This analysis is done by persons who have access to the books of account and other
information to the books of accounts related to the business., Executives and employees of
the organization or by officers appointed for this purpose by the government or the court
under powers vested in them can therefore do such an analysis. The analysis in done
depending upon the objective to be active depending upon the objective to be achieved
through this analysis.
On the basis of modus operandi according to this, financial analysis can also be two
a) Horizontal Analysis
In case of this type of analysis financial statements for a number of years are reviewed
and analyzed. The current years figures are compared with the standard or base year. The
analysis statement usually contains figures for too or more years and the changes are shown
regarding each item from the base year usually in the form of percentages. such as analysis
given the management considerable insight into levels and areas of strength and weakness.
Since this type of analysis is based on the date from year to year rather than on one date, it is
also termed as Dynamic Analysis?
b) Vertical Analysis:

In case of this type of analysis a study is made of the quantitative relationship of the
various items in the financial statements on a particular type, such an analysis is useful in
comparing the performance of servral companies in the same group, or divisions or
departments in the same company. Since this analysis depends on the data for one period, is
nor very conductive financial position. It is also called Static Analysis as it frequently used
to ratios developed on one date or for one accounting period. Tools or Techniques used for
1. Ratio Analysis
2. Method of least Squares (Trend Values)
3. Comparative statement Analysis.
These are explained in bring as follows.
1. Ratio Analysis:
Ratio Analysis is widely used tool of financial analysis. It is defined as the systematic
use of ratio to interpret the financial statements so that the strength and weakness of a firm as
well as its historical performance and current financial condition can be determined. The term
ratio refers to the numerical or quantitative relationship between two items/ Variable. This
relation can be expressed as.
a. Percentages
b. Fractions
c. Proportion of numbers.
Accounting ratios showed the relationship in mathematical terms between two
interrelated accounting figures. This is the most important tool available to financial analysis
for their work.
Ratio analysis is a process of identifying the financial strengths and weakness of the
firm. This may be accomplished either through a trend analysis of the firms ratios over a
period of time or through a comparison of the firms ratios with its nearest competitors and
with the industry averages. The four most important financial dimensions which a firm would
like to analyze are: liquidity, Leverage, Activity and Profitability.
Nature of Ratio Analysis:
A Financial ratio is a relationship between tow accounting numbers. ratios help to
make a qualitative judgment about the firms financial performance.
Financial Ratio:
Financial Ratio is a relationship between two financial variables. It helps to ascertain
the financial condition of a firm.
Types of financial Ratios:
Liquidity ratios

Leverages ratios
Activity ratios
Profitability ratios
Liquidity Ratio:
Liquidity Ratio measure the firms ability to meet current obligations, and are
calculated by establishing relationships between current assets and current liabilities.
Leverage ratio:
Leverage ratios measures the proportion of outsiders capital in financing the firms
assets, and is calculated by establishing relationships between borrowed capital and equity
Activity Ratio:
Activity ratio reflects the firms efficiency in utilizing its assets in generating sales and
is calculated by establishing relationships between sales and assets.
Profitability Ratio:
Profitability ratios measure the overall performance of the firm by deterring the
effectiveness of the firm ingenerating profit, and are calculated by establishing relationships
between profit figures on the one hard, and sales and assets on the other.
Utility of Ratio Analysis
Assessment of the firms financial conditions and capabilities.
Diagnosis of the firs problems, weakness and strengths.
Credit analysis
Comparative analysis
Time series analysis
Cautions in using ratio analysis
Standards of comparisons
Company differences
Prices level
Different definition
Changing situations
Past data
Standard of Comparison:
Time series analysis

Inter-firm analysis
Industry analysis
Preformed financial statement analysis
Advantages of Ratio Analysis:
1. It helps in analysis of the situation i.e. analysis on the financial situation and performance.
2. Inter-firm and Intra -firm comparison is both possible on the basis of accounting ratio
3. Accounting Ratio not only indicates the present position but they also indicate the cause
leading up to the position of a large extent
4. It helps in obtaining best result when ratios for a number of years are put in tabular form
so that the figure for one year can be easily compared with those of other year
5. It indicates the trend of the change, which helps in preparation of estimates for the future.



Every Company registered under Companies Act 1956; need to do its audit every year, which
is known as statutory audit. During the company audit, the auditor discusses his observations
with those charged with governance, such as the audit committee of the company, before
finalizing the report. The auditor should be firm in his opinion, and exercise his independence
at this level. This part of the audit is critical, and calls for resilience on the part of the auditor.
An audit report, being a public document, should be drafted skillfully. The code of conduct
prohibits an auditor from divulging any information received by him in the course of his
professional assignment, unless legally required so to do.
Therefore, the auditor shouldn't hesitate to take the help of a legal expert on whether to
include certain comments in his report. And at last he submit the reports with adverse,
modified or with qualified opinion.