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The Department of Company Affairs (DCA) notifiedthe Companies (Auditors Report) Order, 2003[CARO 2003] vide GSR 480 (E) dated 12.06.2003CARO 2003 supersedes the existing Manufacturingand Other companies (Auditors Report) Order, 1988[Old Order].The 20 clauses of the old Order will be replaced by33 clauses of CARO 2003. The propriety concept hasmade greater inroads in the new reporting order. Forexample CARO 2003 requires reporting even aboutthe end-uses raised in a public issue. CARO 2003 isapplicable for every financial year ending on or after

1.7.2003.


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` Issues in Corporate governance

` Streamlining of reporting,deleting RedundantParagraphs

` Emphasis on Internal control,Internal Audit

` Reporting on fraud

` Widening the scope of reporting


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Audit reports relating to all statutory financialstatements 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 s25companies.


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` External auditors report is prepared on thecompanys financial statements and its accompanyingnotes.

` This auditor's report is intended to advise investors,

the government, and other users on whether thecompanys financial statements have been preparedin accordance with Generally Accepted AccountingPrinciples (GAAP),

` Whether they are free of material misstatement (e.g.free of important and significant errors), and whetherthey show a true and fair view of the operatingresults, financial position and cash flows of the

company.


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` Section 227 of the Companies Act 1956 deals with theauditors 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 byhim.

` The account

sinclude:

` 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 balancesheet 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 companydirector 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.


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` Companies Auditors Report Order 2003

Requirements:` Dubious practices like loan to private companies, sale

and purchase transactions by book entries and / or atfictitious prices not open to Normal Audit.

` Investing public lost heavily in some listed companies.

` Daphtary-Sastri Committee recommendations


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` Requirements dispensed with under CARO

` Revaluation of Fixed Assets.

` Comment on fair & proper valuation of Inventory.

` Determination of any unserviceable stores andprovision for the loss.

` Records for sale and disposal of byproducts and scraps.

` Personal expenses charged to revenue


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` Physical Verification of Inventory

` Loan Transactions with parties covered by Section 301

` Internal Control

` Transactions (other than Loan) with Parties coveredunder 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 beendisposed 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 beendeposited on account of any dispute, then theamounts involved and the forum where dispute ispending may please be mentioned.


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` Default in repayment of dues to FIs / Banks

` Whether the Company has defaulted in repayment ofdues to a financial institution or bank or

debentureholders ? If yes, the period and amount ofdefault 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'slargest professional service firms. It was formed in 1998from a merger between Price Waterhouse and Coopers& Lybrand, both formed in London.

` It has grossed worldwide revenues of $28 billion andhas its presence in over 150 countries.

` KPMG has its global headquarters located inAmstelveen, Netherland. It was incepted in 1987 withthe merger of Peat Marwick International and KlynveldMain Goerdeler. Today it runs in over 140 countries.


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` The Auditors Report acts as a catalyst towards ensuringa better quality of financial performance of a company.

` It expresses the auditors view on true and fairness of thecompany 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 certainmatters, 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 aremade)

` Countries image where the scandal occurs also gettarnished 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 theyear? If so, the basis of revaluation should be indicated.

Clause 6:

Whether the auditor, on the basis of examination of stocks, issatisfied that such valuation is fair and proper in accordancewith the normally accepted accounting principles? Is the basisof valuation of stocks same as in the preceding year? If there isany 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.


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Clause 14:Is the company maintaining reasonable records for thesale and disposal of realisable by-products and scraps,where applicable.

Clause 19:Whether personal expenses have been charged torevenue account; if so, the details thereof should bereported.

In respect of service companies

(all the clauses have been omitted)


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Clause 1(c):

Ifasubstantial part of fixedassets havebeendisposed

offduringthe year, whetherit hasaffectedthegoing

concernClause 2(c):

Whetherthe company is maintaining properrecords of

inventory

Clause 11:

Whetherthe company hasdefaultedinrepayment of

duesto a financialinstitution orbank ordebenture

holders? If yes,the periodandamount ofdefaultto be

reported


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` Clause 12:Whetheradequatedocumentsandrecordsare maintainedin

cases wherethe company hasgrantedloansandadvances on

thebasis ofsecurity by way of pledge ofshares,debentures and

othersecurities. Ifnot,thedeficienciesto be pointed out.` Clause 15:

Whetherthe company hasgivenany guarantee forloanstakenby

others from bank or financialinstitutions,thetermsand conditions

whereofare prejudicialto theinterest ofthe company.

` Clause 16:

Whetherterm loans wereapplied forthe purpose forwhich the

loans were obtained


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Clause 17:Whether the funds raised on short-term basis have been used for long terminvestment 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 partiesand companies covered in the Register maintained under section 301 of the Actand if so whether the price at which shares have been issued is prejudicial tothe 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 duringthe year; If yes, the nature and the amount involved is to be indicated.Additional reporting requirements of CARO.


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

Clause 3:a. Has the company either granted or taken any loans, secured orunsecured to/from companies, firms or other parties covered inthe register maintained under section 301 of the Act give thenumber of parties and amount involved in the transactions.

b. If overdue amount is more than one lakh, whether reasonablesteps have been taken by the company for recovery/payment ofthe principal and interest.


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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 priceswhich are reasonable having regard to the prevailing

market prices at the relevant timeClause 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 rulesframed there under, where applicable, have been compliedwith. If not, the nature of contraventions should be stated. If anorder has been passed by Company Law Board whether thesame has been complied or not


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Clause 7:

Inthe case oflisted companiesand/orothercompanies havinga paid-up capitalandreservesexceeding Rs. 50 lakhsasatthe commencement ofthe financial

yearconcerned, orhavinganaverageannualturnoverexceeding 5 crore

rupees fora period ofthree consecutive financial yearsimmediately preceding

the financial yearconcerned, whetherthe company hasaninternalauditsystem

commensurate with itssizeandnature ofitsbusiness.

Clause 9:Isthe company regularindepositingundisputedstatutory duesincluding

Provident Fund,Investor Educationand Protection Fund,Employees State

Insurance, Income-tax, Salestax,Wealth Tax,Custom Duty,Excise Duty, cess

andany otherstatutory dues with theappropriate authoritiesandifnot,the

extent ofthearrears of outstandingstatutory duesas atthelastday ofthe

financial yearconcerned fora period of morethansix months from thedate

they became payable,shallbeindicatedby theauditor. Perfirmsguidancethis

includes foreign country statutory duesas well !


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