The Department of Company Affairs (DCA) notified the Companies (Auditors Report) Order, 2003 [CARO 2003] vide

GSR 480 (E) dated 12.06.2003 CARO 2003 supersedes the existing Manufacturing and Other companies (Auditors Report) Order, 1988 [Old Order]. The 20 clauses of the old Order will be replaced by 33 clauses of CARO 2003. The propriety concept has made greater inroads in the new reporting order. For example CARO 2003 requires reporting even about the end-uses raised in a public issue. CARO 2003 is applicable for every financial year ending on or after 1.7.2003.

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Issues in Corporate governance Streamlining of reporting,deleting Redundant Paragraphs Emphasis on Internal control,Internal Audit Reporting on fraud Widening the scope of reporting

Audit reports relating to all statutory financial statements ending on or after July 1, 2003. DOES NOT APPLY  If :To a private limited company,  Paid up capital + reserves < Rs 50 lakhs  No public deposits accepted  Loan outstanding < Rs 10 lakhs from banks or financial institutions  Turnover < Rs 5 crores  To banking and insurance companies and s25 companies.

External auditors report is prepared on the companys financial statements and its accompanying notes. This auditor's report is intended to advise investors, the government, and other users on whether the companys financial statements have been prepared in accordance with Generally Accepted Accounting Principles (GAAP), Whether they are free of material misstatement (e.g. free of important and significant errors), and whether they show a true and fair view of the operating results, financial position and cash flows of the company.

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Section 227 of the Companies Act 1956 deals with the auditors report. Essentially it is of two types: Clean Audit Report. Qualified Audit Report. The auditor makes the report to the members of the company on the accounts of the company examined by him. The accounts include: Every balance sheet. Profit and loss account. Every other document that is a part of or is annexed to the balance sheet or the profit and loss account.

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The auditor establishes the following about the balance sheet and the profit and loss account: Comply with the necessary accounting standards. Are in agreement with the books of accounts and returns. Comply with the GAAP principles. The report also states whether any director is disqualified from being appointed as a company director if such person is already a director of a public company which: (Sec 274). Hasnt filled the annual accounts and returns for any three consecutive years (from 1.04.99) Has failed to repay its deposit or interest thereon on due date.

Companies Auditors Report Order 2003

Requirements:
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Dubious practices like loan to private companies, sale and purchase transactions by book entries and / or at fictitious prices not open to Normal Audit. Investing public lost heavily in some listed companies. Daphtary-Sastri Committee recommendations

Requirements dispensed with under CARO Revaluation of Fixed Assets. Comment on fair & proper valuation of Inventory. Determination of any unserviceable stores and provision for the loss. Records for sale and disposal of byproducts and scraps. Personal expenses charged to revenue

Physical Verification of Inventory Loan Transactions with parties covered by Section 301 Internal Control Transactions (other than Loan) with Parties covered under section 301 Fixed Deposit Internal Audit System

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Disposal of Substantial part of Fixed Assets If a substantial part of the Fixed Assets have been disposed off during the year, whether it has affected going concern. Disputed Statutory Dues In case dues of sales tax / income tax / custom tax / wealth tax / excise duty / cess have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending may please be mentioned.

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Default in repayment of dues to FIs / Banks Whether the Company has defaulted in repayment of dues to a financial institution or bank or debentureholders ? If yes, the period and amount of default to be reported.

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Auditors Reports leads to the following utilities: Effective corporate governance Impacts the enhancement of shareholders and stakeholders value. These reports are supposed to be a bond of trust for the investors both present and potential. Some of the largest Auditing Firms are: Price water house coopers Deloitte touche tohmatsu Ernst & young KPMG

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PricewaterhouseCoopers (or PwC) is one of the world's largest professional service firms. It was formed in 1998 from a merger between Price Waterhouse and Coopers & Lybrand, both formed in London. It has grossed worldwide revenues of $28 billion and has its presence in over 150 countries. KPMG has its global headquarters located in Amstelveen, Netherland. It was incepted in 1987 with the merger of Peat Marwick International and Klynveld Main Goerdeler. Today it runs in over 140 countries.

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The Auditors Report acts as a catalyst towards ensuring a better quality of financial performance of a company. It expresses the auditors view on true and fairness of the company in the: Balance sheet Profit in the case of profit & loss account Cash flow in the case of cash flow statement It covers opinion, views and comments on certain matters, crucial to functioning of the business and financial performance.

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Scandals it the region of manifold sums of money. Examples would be: Enron Satyam Computers Worldcom This eventually leads to: Huge loss to the shareholders (when disclosures are made) Countries image where the scandal occurs also get tarnished in a great deal. The reputation of India Inc. post the Satyam fiasco was a case in point.

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Clause 2: Whether any of the fixed assets have been revalued during the year? If so, the basis of revaluation should be indicated. Clause 6: Whether the auditor, on the basis of examination of stocks, is satisfied that such valuation is fair and proper in accordance with the normally accepted accounting principles? 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. Clause 12: 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.

Clause 14: Is the company maintaining reasonable records for the sale and disposal of realisable by-products and scraps, where applicable. Clause 19: Whether personal expenses have been charged to revenue account; if so, the details thereof should be reported. In respect of service companies (all the clauses have been omitted)

Clause 1(c): If a substantial part of fixed assets have been disposed off during the year, whether it has affected the going concern Clause 2(c): Whether the company is maintaining proper records of inventory Clause 11: Whether the company has defaulted in repayment of dues to a financial institution or bank or debenture holders? If yes, the period and amount of default to be reported

Clause 12: Whether adequate documents and records are maintained in cases where the company has granted loans and advances on the basis of security by way of pledge of shares,debentures and other securities. If not, the deficiencies to be pointed out. ` Clause 15: Whether the company has given any guarantee for loans taken by others from bank or financial institutions, the terms and conditions whereof are prejudicial to the interest of the company. ` Clause 16: Whether term loans were applied for the purpose for which the loans were obtained
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Clause 17: Whether the funds raised on short-term basis have been used for long term investment and vice versa; if yes, the nature and amount is to be indicated. Clause 18: Whether the company has made any preferential allotment of shares to parties and companies covered in the Register maintained under section 301 of the Act and if so whether the price at which shares have been issued is prejudicial to the interest of the Company. Clause 19: Whether securities have been created in respect of debentures issued. Clause 20: Whether the management has disclosed on the end use of money raised by public issues and the same has been verified. Clause 21: 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. Additional reporting requirements of CARO.

Clause 2(a):
Whether physical verification of inventory has been conducted at reasonable intervals by the management.

Clause 3:
a. Has the company either granted or taken any loans, secured or unsecured to/from companies, firms or other parties covered in the register maintained under section 301 of the Act give the number of parties and amount involved in the transactions. b. If overdue amount is more than one lakh, whether reasonable steps have been taken by the company for recovery/payment of the principal and interest.

Clause 5:

Whether transactions that need to be entered into a register in pursuance of section301 of the Act have been so entered. whether each of these transactions have been made at prices which are reasonable having regard to the prevailing market prices at the relevant time

Clause 6:
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 and 58AA of the Act and 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 whether the same has been complied or not

Clause 7:
In the case of listed companies and/or other companies having a paid-up capital and reserves exceeding Rs. 50 lakhs as at the commencement of the financial year concerned, or having an average annual turnover exceeding 5 crore rupees for a period of three consecutive financial years immediately preceding the financial year concerned, whether the company has an internal audit system commensurate with its size and nature of its business.

Clause 9:
Is the company regular in depositing undisputed statutory dues including Provident Fund,Investor Education and Protection Fund, Employees State Insurance, Income-tax, Salestax,Wealth Tax, Custom Duty, Excise Duty, cess and any other statutory dues with theappropriate authorities and if not, the extent of the arrears of outstanding statutory duesas at the last day of the financial year concerned for a period of more than six months from the date they became payable, shall be indicated by the auditor. Per firms guidance this includes foreign country statutory dues as well !