Rules and Regulations of India

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Section 4 – MANUFACTURING AND OTHER COMPANIES (AUDITOR’S REPORT) ORDER,1988

4. Matters to be included in the auditor’s report

The auditor’s report on the accounts of a company to which this order applies shall include a statement on the following matters, namely:-

 

(A) In the case of a manufacturing, mining or processing company:-

 

(i) whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets; whether these fixed assets have been physically verified by the management at reasonable intervals; whether any material discrepancies, were noticed on such verification and if so, whether the same have been properly dealt with in the books of account;

 

(ii) whether any of the fixed assets have been revalued during the year? If so, the basis of revaluation should be indicated;

 

(iii) whether physical verification has been conducted by the management at reasonable intervals in respect of finished goods, stores, spare parts and raw materials?

       

(iv) are the procedures of physical verification of stocks followed by the management reasonable and adequate in relation to the size of the company and the nature of its business? If not, the inadequacies in such procedures should be reported;

 

(v) whether any material discrepancies have been noticed on physical verification of stocks as compared to book records, and if so, whether the same have been properly dealt with in the books of account;

 

(vi) whether the auditor, on the basis of his examination of stocks, is satisfied that such valuation is fair and proper in accordance with the normally accepted accounting principle? Is the basis of valuation of stocks same as in the preceding year? If there is any deviation in the basis of valuation, the effect of such deviation, if material, should be reported;

 

(vii) if the company has taken any loans, secured or unsecured, from companies, firms   or other parties listed in the register maintained under section 301 Companies Act, 1956 (1 of 1956), and/or from the companies under the same management as defined under sub-section (1B) of section 370 of the Companies Act, 1956 (1 of 1956), whether the rate of interest and other terms and conditions of such loans are prima facie prejudicial to the interest of the company;

 

(viii) if the company has granted any loans, secured or unsecured, to companies, firms or other parties listed in the register(s) maintained under section 301 and/or to the companies under the same management as defined under sub-section (1B) of section 370 of the Companies Act, 1956 (1 of 1956), whether the rate of interest and other terms and conditions of such loans are prima facie prejudicial to the interest of the company;

 

(ix) whether the parties to whom the loans, or advances in the nature of loans, have been given by the company are repaying the principal amounts as stipulated and are also regular in payment of the interest and if not whether reasonable steps have been taken by the company for recovery of the principal and interest;

 

(x) is there an adequate internal control procedure commensurate with the size of the company and the nature of its business, for the purchase of stores, raw materials, including components, plant and machinery, equipment and other asset, and for the sale of goods;

 

(xi) whether the transaction of purchase of goods and materials and sale of goods, materials and services, made in pursuance of contracts or arrangements entered in the register(s) maintained under section 301 of the Companies Act, 1956 (1 of 1956), as aggregating during the year to Rs. 50,000 (rupees fifty thousand) or more in respect of
each party, have been made at prices which are reasonable having regard to prevailing market prices for such goods, materials or services or the prices at which transactions for similar goods or services have been made with other parties;

 

(xii) whether any unserviceable or damaged stores, raw materials or finished goods, are determined and whether provisions for the loss, if any, have been made in the accounts;

 

(xiii) in case the company has accepted deposits from the public, whether the directives issued by the Reserve Bank of India and the provisions of section 58A of the Companies Act, 1956, and the rules framed thereunder where applicable, have been complied with. If not, the nature of contraventions should be stated;

 

(xiv) is the company maintaining reasonable records for the sale and disposal of realizable by-products and scraps, where applicable;

 

(xv) in the case of companies having a paid-up capital exceeding Rs. 25 lakhs as at the commencement of the financial year concerned, or having an average annual turnover exceeding Rs. 2 crores for a period of three consecutive financial years immediately preceding the financial year concerned, whether the company has an internal audit system commensurate with its size and nature of its business;

 

(xvi) where maintenance of cost records has been prescribed by the Central Government under section 209(1)(d) of the Companies Act, 1956 (1 of 1956), whether such accounts and records have been made and maintained;

 

(xvii) is the company regular in depositing Provident Fund and Employees’ State Insurance dues with the appropriate authority and if not, the extent of arrears of Provident Fund and Employees’ State Insurance dues shall be indicated by the auditor;

 

(xviii) whether any undisputed amounts payable in respect of income-tax, wealth-tax, sales tax, customs duty and excise duty were outstanding, as at the last day of the financial year concerned, for a period of more than six months from the date they became payable; if so, the amounts of such outstanding dues should be reported;

 

(xix) whether personal expenses have been charged to revenue account; if so, the details thereof should be reported;

 

(xx) whether the company is a sick industrial company within the meaning of clause (o) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); if so, whether a reference has been made to the Board for Industrial and Financial Reconstruction under section 15 of that Act;

 

(B) In the case of a service company:-

 

(i) all the matters specified in clause (A) to the extent to which they are applicable;

 

(ii) whether the company has a reasonable system of recording receipts, issues and consumption of material and stores and allocating materials consumed to the relative jobs, commensurate with its size and nature of its business;

 

(iii) whether the company has a reasonable system of allocating man-hours utilized to the relative jobs, commensurate with its size and nature of its business;

 

(iv) whether there is a reasonable system of authorization at proper levels, and an adequate system of internal control commensurate with the size of the company and the nature of its business, on issue of stores and allocation of stores and labor to jobs.

 

(C) In the case of a trading company:-

       

(i) all the matters specified in clause (A) to the extent to which they are applicable;

 

(ii) have the damaged goods been determined and if the value of such goods is significant, has provision b
een made for the loss?

 

(D) In the case of a finance, investment, chit fund, nidhi or mutual benefit company:-

 

(i) all the matters specified in clause (A) to the extent to which they are applicable;

 

(ii) whether adequate documents and records are maintained in a case where the company has granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities;

 

(iii) whether the provisions of any special statute applicable to chit fund, nidhi or mutual benefit society have been duly complied with; and

 

(iv) if the company is dealing or trading in shares, securities, debentures and other investments, whether proper records have been maintained of the transactions and contracts and whether timely entries have been made therein; also whether the shares, securities, debentures and other investments, have been held by the company in its own name except to the extent of the exemption, if any, granted under section 49 of the Companies Act, 1956 (1 of 1956).

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