www.safeecollege.com 1 section 227(1a) section 227(3) section 227(4a)

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Section 227(1A)Section 227(1A)

Section 227(3)Section 227(3)

Section 227(4A)Section 227(4A)


Under Section 227(1A) auditor has to make enquiry & comment onUnder Section 227(1A) auditor has to make enquiry & comment on

following matters.following matters.

1.1. Whether Whether loan & advancesloan & advances made by company on the basis made by company on the basis of security is properly secured & whether on which such of security is properly secured & whether on which such loan & advance being made, are not prejudicial to the loan & advance being made, are not prejudicial to the interest of company.interest of company.

Loan 10000 RsLoan 10000 Rs

ExampleExample:- XYZ Creditor A:- XYZ Creditor A

LIC Policy ApprovedLIC Policy Approved

Face Value 50000 Rs.Face Value 50000 Rs.

Surrender Value 7500 Rs.Surrender Value 7500 Rs.

[Section 227(1A), In the present case company has given loan to Ms.[Section 227(1A), In the present case company has given loan to Ms.

A amounting 10000 Rs. A against which , Mr. A has assigned “LIC A amounting 10000 Rs. A against which , Mr. A has assigned “LIC


policy” in favour of company.policy” in favour of company.

The surrender value of LIC policy is 7500 Rs. Therefore out of 10000The surrender value of LIC policy is 7500 Rs. Therefore out of 10000

Rs., 7500 Rs. Is secured & remaining balance 2500 Rs. IsRs., 7500 Rs. Is secured & remaining balance 2500 Rs. Is

unsecured. Hence auditor should offer his comment in this regard.unsecured. Hence auditor should offer his comment in this regard.

ConclusionConclusion:- little scope of qualification.]:- little scope of qualification.]

2.2. Whether transaction of the company, represented merely byWhether transaction of the company, represented merely by

book entriesbook entries are prejudicial to the interest of the company. are prejudicial to the interest of the company.

ExampleExample:- Mr. X MD:- Mr. X MD

90% 40%90% 40%

A Co. A Co. B Co.B Co.

3131stst December 31 December 31stst March March

Cotton Basis Cotton Basis

Anti dated contract, buying 1000 cotton bales from B @ 25 Rs/cottonAnti dated contract, buying 1000 cotton bales from B @ 25 Rs/cotton

bales.bales.


A company will sell 1000 cotton bales to B @ 50 Rs/cotton bales.A company will sell 1000 cotton bales to B @ 50 Rs/cotton bales. A BA B 25000/- profit 25000/- loss25000/- profit 25000/- lossConclusionConclusion:- Fake and manipulative entry, the auditor is required to:- Fake and manipulative entry, the auditor is required to qualify his report.qualify his report.

3.3. Where company is not an investment company or bankingWhere company is not an investment company or banking company, so much of company, so much of assets consist of sharesassets consist of shares and debentures and debentures have been sold at a price less than price at which they werehave been sold at a price less than price at which they were purchased.purchased. ConclusionConclusion:- The auditor has to ensure that sales proceed has duly:- The auditor has to ensure that sales proceed has duly accounted for in books of accounts.accounted for in books of accounts.

4.4. Whether loans & advances have been shown as deposits.Whether loans & advances have been shown as deposits.

LoanLoan InterestInterest Deposits Deposits Business purposeBusiness purpose intention to earn intention to earn Advance Advance No intention to No intention to recover only setoffrecover only setoff


ConclusionConclusion:- If loan and advances have been shown as deposits, it:- If loan and advances have been shown as deposits, it will distort true and fair view and auditor is required towill distort true and fair view and auditor is required to qualify his report. qualify his report.

5.5. Whether Whether personal expensespersonal expenses have been (shown) charged to have been (shown) charged to revenue.revenue.

QuestionQuestion:- Director’s personal expenses have been charged to:- Director’s personal expenses have been charged to revenue. Comment?revenue. Comment?

AnswerAnswer:- As per section 227(1A) clause(e) where personal:- As per section 227(1A) clause(e) where personal expenses of directors have been charged to revenue,expenses of directors have been charged to revenue, auditor must report the matter.auditor must report the matter. Where personal expenses of director areWhere personal expenses of director are i. Covered by companies contractual obligation.i. Covered by companies contractual obligation. ii. ii. As per accepted business practices auditor has noAs per accepted business practices auditor has no further duty to report.further duty to report. Where personal expenses of directors are not covered byWhere personal expenses of directors are not covered by companies contractual obligations or as per acceptedcompanies contractual obligations or as per accepted business practices, auditor should report on the mattersbusiness practices, auditor should report on the matters i. If amount involved is material, auditor may qualify hisi. If amount involved is material, auditor may qualify his report.report.


6.6. Where company have issued Where company have issued share for cash,share for cash, whether cash whether cash has been actually received and where no cash is received, has been actually received and where no cash is received, whether position stated in the books of accounts and balance whether position stated in the books of accounts and balance sheetsheet is correct, regular & not misleading. is correct, regular & not misleading.

ExampleExample:- Spargo Case:- Spargo Case

If shares have been issued against genuine debt. It isIf shares have been issued against genuine debt. It is

perfect compliance of section 75.perfect compliance of section 75.


Reporting Responsibility Section 227(3)Reporting Responsibility Section 227(3)

Under section 227(3), auditor has to report on following matters.Under section 227(3), auditor has to report on following matters.

A.A. Whether he has Whether he has obtained all informationobtained all information and explanation which and explanation which to the best of his knowledge & belief, were necessary for the to the best of his knowledge & belief, were necessary for the purpose of the audit.purpose of the audit.

B.B. i. Where report on branch accounts auditor under section 228i. Where report on branch accounts auditor under section 228 by a person other than company auditor has been forwardedby a person other than company auditor has been forwarded to him and how he has dealt with the same in preparing histo him and how he has dealt with the same in preparing his report. (when company auditor & branch auditor are notreport. (when company auditor & branch auditor are not same than applicable)same than applicable)

ii. Where balance sheet & profit and loss account of theii. Where balance sheet & profit and loss account of the company as dealt with by the report are in agreement withcompany as dealt with by the report are in agreement with books of accounts.books of accounts.

iii. Whether any director is disqualified to be appointed asiii. Whether any director is disqualified to be appointed as director in any other company under section 274(1)(g).director in any other company under section 274(1)(g).


Elaboration of section 274(1)(g)Elaboration of section 274(1)(g)Section 274(1)(g)Section 274(1)(g)

A director of public company shall be disqualifies to be appointed A director of public company shall be disqualifies to be appointed as director in any other public company. If the public company in as director in any other public company. If the public company in which he is director.which he is director.

He has not filed annual accounts or annual return for 3 He has not filed annual accounts or annual return for 3 consecutive financial year.consecutive financial year.

Has failed to repaid its deposit or interest on due date or failed to Has failed to repaid its deposit or interest on due date or failed to pay dividend or failed to redeem its debentures on due date & pay dividend or failed to redeem its debentures on due date & failure continues for 1 year or more.failure continues for 1 year or more.

ExampleExample:- Due date of redemption of debentures 5/1/2010:- Due date of redemption of debentures 5/1/2010 Debentures not redeemed till 4/1/2011Debentures not redeemed till 4/1/2011 Resignation by director 1/1/2011Resignation by director 1/1/2011 Accepted on 2/1/2011Accepted on 2/1/2011 NoteNote:- Director has escaped from his liability by:- Director has escaped from his liability by resignation.resignation.

Whether cess payable under section 441A ofWhether cess payable under section 441A of company act has been so paid, if not details ofcompany act has been so paid, if not details of amount of cess not paid shall be given.amount of cess not paid shall be given.


Whether proper book of accounts as required by theWhether proper book of accounts as required by the law has been maintained by the company so far aslaw has been maintained by the company so far as it appears from the examination of accounts andit appears from the examination of accounts and proper return adequate for the purpose of audit hasproper return adequate for the purpose of audit has been received by the branches not visited by him.been received by the branches not visited by him.

Meaning of proper books of accountsMeaning of proper books of accounts

A company shall be deemed as not maintaining book of accounts if:-A company shall be deemed as not maintaining book of accounts if:- If books are not kept on double entry system.If books are not kept on double entry system. If books are not kept on accrual basis.If books are not kept on accrual basis. If transactions so recorded are not showing true and fair view.If transactions so recorded are not showing true and fair view. Where companies balance sheet ad profit and loss account comply Where companies balance sheet ad profit and loss account comply

with accounting standard as referred under section 211(3C).with accounting standard as referred under section 211(3C). Whether accounts give the information as required by act in the Whether accounts give the information as required by act in the

manner so provided.manner so provided. Whether accounts give true and fair view, in case of balance sheetWhether accounts give true and fair view, in case of balance sheet , of the state of company affairs, or in case of profit and loss , of the state of company affairs, or in case of profit and loss

account for the period.account for the period.


Reporting Responsibility Section Reporting Responsibility Section 227(4A) 227(4A)

CARO 2004CARO 2004ApplicabilityApplicability:- CARO 2004 applies to all companies including foreign:- CARO 2004 applies to all companies including foreign companies as defined under section 591 of companiescompanies as defined under section 591 of companies act.act.

ExceptionException:- CARO does not apply on following:-:- CARO does not apply on following:-1.1. Banking companies as defined under section 5(C) of banking Banking companies as defined under section 5(C) of banking

regulation act 1949.regulation act 1949.2.2. Insurance companies as defined under section 2(21) of Insurance companies as defined under section 2(21) of

companies act 1956.companies act 1956.3.3. Companies licensed to operate under section 25 of companies Companies licensed to operate under section 25 of companies

act.act.4.4. Private companies subject to following conditions:-Private companies subject to following conditions:-

a)a) Aggregate of Aggregate of paid up capitalpaid up capital and and reservereserve should not should not exceed rupees 50 lacks.exceed rupees 50 lacks.


b)b) Loan outstandingLoan outstanding from any bank and FI should not from any bank and FI should not exceed Rs. 25 lacks.exceed Rs. 25 lacks.c)c) TurnoverTurnover should not exceed Rs. 5 crore. should not exceed Rs. 5 crore.

Paid up CapitalPaid up Capital:-:- It include both preference and equity share capital.It include both preference and equity share capital. Unpaid capital/calls shall be deducted from paid up share Unpaid capital/calls shall be deducted from paid up share

capital.capital. Amount originally collected on forfeited shares shall be Amount originally collected on forfeited shares shall be

included in paid up share capital.included in paid up share capital. Share application money is not considered part of paid up Share application money is not considered part of paid up

share capitalshare capital ReservesReserves:-:-

It includes both capital and revenue reservesIt includes both capital and revenue reserves Debit balance in profit and loss account shall be adjusted Debit balance in profit and loss account shall be adjusted

against revenue reserveagainst revenue reserve Credit balance shall be included in the reserveCredit balance shall be included in the reserve Revaluation reserve shall be included in reserveRevaluation reserve shall be included in reserve Unwritten off miscellaneous expenses, shall not be Unwritten off miscellaneous expenses, shall not be

deducted from reservededucted from reserve


ExampleExample:- :- Private company XYZPrivate company XYZ Equity share reserve - 40 lackEquity share reserve - 40 lack Revaluation reserve - 5 lackRevaluation reserve - 5 lack Capital reserve - 6 lackCapital reserve - 6 lack Debit balance in profit and loss account - 2 lackDebit balance in profit and loss account - 2 lack AnswerAnswer:- CARO will apply on the company:- CARO will apply on the company

Loan OutstandingLoan Outstanding:-:- Loan includesLoan includes

• Term loanTerm loan• Demand loanDemand loan• CC limitCC limit• Overdraft facilityOverdraft facility• Work capital loanWork capital loan• Export creditExport credit• Bills purchaseBills purchase• Discounted billsDiscounted bills• Etc….Etc….

Loan includes short term as well as long term loansLoan includes short term as well as long term loans Loan includes secured as well as unsecured loansLoan includes secured as well as unsecured loans


Non fund based limits to the extent converted into fund Non fund based limits to the extent converted into fund based limit shall be included in the loanbased limit shall be included in the loan

Interest accrued and due shall be included in the loanInterest accrued and due shall be included in the loan Interest accrued but not due shall not be included in the Interest accrued but not due shall not be included in the

loanloan

TurnoverTurnover:-:- Turnover means amount for which sale was affected by the Turnover means amount for which sale was affected by the

company. Sale effected – is the sale of goods as well as company. Sale effected – is the sale of goods as well as service rendered.service rendered.

Sales tax and custom duty received shall not be considered Sales tax and custom duty received shall not be considered part of turnover if sales tax and part of turnover if sales tax and custom duty credited custom duty credited separately in sales tax account and custom duty account.separately in sales tax account and custom duty account.

Trade discount allowed shall be deducted from turnover.Trade discount allowed shall be deducted from turnover. Cash discount shall not be deducted.Cash discount shall not be deducted. Commission paid to third party shall not be deducted.Commission paid to third party shall not be deducted. Rental income and dividend received shall notRental income and dividend received shall not constitute constitute

turnover. However if principal business is of letting out of turnover. However if principal business is of letting out of property for where company is an investment company property for where company is an investment company than rental income or dividend income constitute turnover.than rental income or dividend income constitute turnover.


SaleSale Sale ReturnSale Return RemarkRemark C.Y. SR is made out of C.Y. SR is made out of Deducted fromDeducted from Current year sale TurnoverCurrent year sale Turnover & received Within & received Within F.Y.F.Y. C.Y. C.Y. SR related to C.Y. Not deductedSR related to C.Y. Not deducted Sale not received Sale not received after end of C.Y. after end of C.Y. C.Y. C.Y. SR related to sales DeductedSR related to sales Deducted Of P.Y. and Of P.Y. and received in C.Y.received in C.Y.

In short all sales whether in the C.Y. or previous yearIn short all sales whether in the C.Y. or previous year received in the C.Y. shall be deducted.received in the C.Y. shall be deducted.


Fixed assetsFixed assets Whether or not proper record have been maintainedWhether or not proper record have been maintained by the by the

company:-company:-• Showing full particularShowing full particular• Quantitative detailQuantitative detail• SituationSituation

Physical verification by management at regular interval & Physical verification by management at regular interval & resoluement of discrepancy if any.resoluement of discrepancy if any.

Whether going assumption is violated where substantial part of Whether going assumption is violated where substantial part of F.A. has been sold.F.A. has been sold.

InventoryInventory Whether proper records have been maintained.Whether proper records have been maintained. Physically verification by the management at regular interval.Physically verification by the management at regular interval. Whether procedure adopted by management is reasonable Whether procedure adopted by management is reasonable

having regard to size of the company & nature of business.having regard to size of the company & nature of business.


Loan to/from Directors & Interested PartiesLoan to/from Directors & Interested Parties Has the company granted/taken loan secured/unsecured Has the company granted/taken loan secured/unsecured

to/from companies/parties covered in the registered to/from companies/parties covered in the registered maintained under section 301, if so givemaintained under section 301, if so give

• No. of PartiesNo. of Parties• Amount InvolvedAmount Involved

Whether rate of interest & terms and conditions of such loan Whether rate of interest & terms and conditions of such loan are prejudicial to the interest of company.are prejudicial to the interest of company.

Whether company is regular in receive/payment of principal in Whether company is regular in receive/payment of principal in interestinterest

If overdue amount exceed Rs. 1 lacks, whether reasonable If overdue amount exceed Rs. 1 lacks, whether reasonable interest have been taken by the company for recovery of sameinterest have been taken by the company for recovery of same

Internal ControlInternal Control Having regard to size of the company & nature of the business Having regard to size of the company & nature of the business

whether company is having appropriate internal control system whether company is having appropriate internal control system in respect of following:-in respect of following:-

• Sale of goodsSale of goods• Purchase of InventoryPurchase of Inventory• Fixed AssetsFixed Assets


Transactions Covers under section 301Transactions Covers under section 301 Whether particular of controls or arrangements as referred Whether particular of controls or arrangements as referred

under section 301 have been so entered in the register under section 301 have been so entered in the register maintained under section 301.maintained under section 301.

Whether each of such transaction have been at a price which Whether each of such transaction have been at a price which are reasonable having regard to prevailing market price. are reasonable having regard to prevailing market price.

[This information is regarded to be given only if information[This information is regarded to be given only if information with any party in one financial year exceeds in value of Rs. 5with any party in one financial year exceeds in value of Rs. 5 lacks]lacks]

Loss Making CompanyLoss Making CompanyIn case of a company which has been registered for a period notIn case of a company which has been registered for a period notless than 5 years, following shall be reported:-less than 5 years, following shall be reported:- Whether accumulated losses at the end of relevant financial Whether accumulated losses at the end of relevant financial

year exceeds 50% of net worth of the company.year exceeds 50% of net worth of the company. Whether company has incurred cash loss in immediately Whether company has incurred cash loss in immediately

preceding financial year.preceding financial year.


Repayment of DuesRepayment of Dues Has the company paid principal & interest due to FI, banks & Has the company paid principal & interest due to FI, banks &

debenture holders without any default.debenture holders without any default. In case of default, period & amount of default shall be In case of default, period & amount of default shall be

indicated in the report.indicated in the report.

Loan Against SecurityLoan Against Security Where company has advanced/granted loan against the Where company has advanced/granted loan against the

security by way of pledge of shares, securities & debentures security by way of pledge of shares, securities & debentures etc, whether proper records & documents have been etc, whether proper records & documents have been maintained by the company.maintained by the company.

If Not, than deficiency shall be reported.If Not, than deficiency shall be reported.

Chit Fund/ Mutual Benefit Societies / NidhiChit Fund/ Mutual Benefit Societies / Nidhi Whether or not provisions of special statitute applicable on chit Whether or not provisions of special statitute applicable on chit

fund have been duly complied with.fund have been duly complied with. Whether net owned fund to deposit liability ratio is more than Whether net owned fund to deposit liability ratio is more than

1:20 as on balance sheet date.1:20 as on balance sheet date. Whether prudential norms for income recognition & asset Whether prudential norms for income recognition & asset

classification have been duly complied with.classification have been duly complied with. Whether their exists appropriate credit appraisal system in the Whether their exists appropriate credit appraisal system in the

company.company. Whether repayment schedule of the borrower is based on Whether repayment schedule of the borrower is based on

repayment capacity of the borrowerrepayment capacity of the borrower


Company dealing in sharesCompany dealing in shares

Where company is dealing or trading in shares, debentures etcWhere company is dealing or trading in shares, debentures etc

whetherwhether Proper records have been maintainedProper records have been maintained Timely entries have been passedTimely entries have been passed Share bonds, debentures have been held by company in its Share bonds, debentures have been held by company in its

own name except to the extent of exemption granted under own name except to the extent of exemption granted under section 49 of companies act.section 49 of companies act.

Guarantee GivenGuarantee Given

Where company has given guarantee for the loan taken byWhere company has given guarantee for the loan taken by

others from bank of FI, whether terms & conditions of suchothers from bank of FI, whether terms & conditions of such

guarantee are prejudicial to the interest of company.guarantee are prejudicial to the interest of company.

End use of BorrowingsEnd use of Borrowings

Whether term loan have been applied for the purpose suchWhether term loan have been applied for the purpose such

term loan have been obtainedterm loan have been obtained


Application of FundApplication of Fund Whether short term funds have been applied for long termWhether short term funds have been applied for long term investments & vise versa.investments & vise versa. If so give nature & amount involved.If so give nature & amount involved.

Preference Share AllotmentPreference Share Allotment Whether company has maid preferential allotment of shares to Whether company has maid preferential allotment of shares to

the parties covered in the registered maintained under section the parties covered in the registered maintained under section 301.301.

If so, whether issue price is prejudicial to the interest of If so, whether issue price is prejudicial to the interest of company.company.

Securities or DebenturesSecurities or Debentures Whether or not adequate secularity has been created in Whether or not adequate secularity has been created in

respect of debenture issue.respect of debenture issue.

End use of ProceedEnd use of Proceed Whether end use of money Raised by public issue has been Whether end use of money Raised by public issue has been

properly disclosed by the management.properly disclosed by the management. Whether such end use has been verified & disclosed.Whether such end use has been verified & disclosed.


FraudFraud Whether any fraud on or by the company has been noticed Whether any fraud on or by the company has been noticed

during the year.during the year. If so nature & amount involved should be stated in the report.If so nature & amount involved should be stated in the report.

Deposit accepted from publicDeposit accepted from public Whether directives issued by RBI have been duly complied Whether directives issued by RBI have been duly complied

with.with. Whether provision of section 58A & 58AA and rules framed Whether provision of section 58A & 58AA and rules framed

there under have been duly complied with.there under have been duly complied with. Whether order of CLB/NCLAT/Tribunal have been duly Whether order of CLB/NCLAT/Tribunal have been duly

complied with.complied with. Nature of contravention. Nature of contravention.

Internal AuditInternal Audit Having regard to size & nature of business, whether followingHaving regard to size & nature of business, whether following companies have internal audit system.companies have internal audit system.

Listed companies.Listed companies. Companies having aggregate of paid up capital & reserves Companies having aggregate of paid up capital & reserves

exceeding 50 Lacks at the commencement of F.Y.exceeding 50 Lacks at the commencement of F.Y. Companies having average annual turnover exceeding Rs. 5 Companies having average annual turnover exceeding Rs. 5

Crore in 3 immediately F.Y.Crore in 3 immediately F.Y.


Statutory DuesStatutory Dues Is company regular in depositing undisputed statutory dues Is company regular in depositing undisputed statutory dues

like:-like:-Pro FundPro FundESIESIVATVATExcise dutyExcise duty Income taxIncome taxWealth tax Wealth tax Service taxService taxCustom duty Custom duty Etc…Etc…

If not regular than extent of arrears of outstanding statutory If not regular than extent of arrears of outstanding statutory dues as at the last date of financial year for a period more dues as at the last date of financial year for a period more than 6 months.than 6 months.

Cost RecordsCost Records Where CG has prescribed maintenance of cost records underWhere CG has prescribed maintenance of cost records under section 207(1)(d), whether company is preparing andsection 207(1)(d), whether company is preparing and maintaining such records.maintaining such records. From the date they become payable shall be indicated.From the date they become payable shall be indicated. If non payment is on account of dispute than forum andIf non payment is on account of dispute than forum and amount involved shall be indicated.amount involved shall be indicated.

www.safeecollege.com 1 section 227(1a) section 227(3) section 227(4a)

Documents

banking company

comwhere company

favour of company

coma company

investment company

present case company

comunder section

loan advances