Handbook Compendium of Guidance Notes Vol II 2011

8/13/2019 Handbook Compendium of Guidance Notes Vol II 2011

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Handbook ofAuditing Pronouncements

Volume II

Compendium of Guidance Notes(As on October 1, 2011)

The Institute of Chartered Accountants of India

(Set up by an Act of Parliament)

New Delhi


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The Institute of Chartered Accountants of India

All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form, or by any means, electronic,mechanical, photocopying, recording, or otherwise without prior permission, in

writing, from the publisher.

First Edition : 2002Second Edition : 2003

Third Edition : 2005

Fourth Edition : 2007

Fifth Edition : 2008

Sixth Edition : 2009

Seventh Edition : 2010

Eighth Edition : 2011

Committee/ : Auditing and Assurance Standards Board

Department

E-mail : [email protected]

Price : Rs. 900/- (For complete set comprising Volumes I.A, I.B,

and II along with CD)

ISBN : 978-81-8441-495-0

Published by : The Publication Department on behalf of the Institute of

Chartered Accountants of India, ICAI Bhawan, Post Box

No. 7100, Indraprastha Marg, New Delhi - 110 002.

Printed by : Sahitya Bhawan Publications, Hospital Road, Agra 282 003

October /2011/ 1,000 Copies


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iii

Foreword

The expectations of the society from the audit function as well as theauditors are growing with the passage of time. Auditors needs to haveadequate knowledge and skills/techniques to meet the ever growingexpectations of the various stakeholders like the clients, the regulators,the government, the investors and the society from them.

For effective audits, it is essential to have performance (engagement)standards for auditors which are at par with globally accepted auditing

standards. The Engagement and Quality Control Standards issued by theAuditing and Assurance Standards Board (AASB) of the ICAI under theauthority of the Council of the ICAI are harmonized with the globallyrecognized International Standards issued by the International Auditingand Assurance Standards Board (IAASB). I am happy to mention that theICAI has also completed convergence with the other InternationalEngagement Standards issued by the IAASB in addition to theInternational Standards on Audit.

I am also happy to note that AASB is bringing out this 2011 edition ofthe Handbook of Auditing Pronouncements, which is a one stopreferencer of the Standards, Statements and Guidance Notes onauditing issued by the ICAI. The Handbook contains the text of all theEngagement and Quality Control Standards as well as the Statementsand Guidance Notes on auditing aspects issued by the ICAI till October1, 2011.

I am sure that the members will find the publication immensely useful.

October 11, 2011

New Delhi

CA. G. Ramaswamy

President, ICAI


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Preface

I feel immense pleasure in placing in hands of the members the 2011 edition of

the Handbook of Auditing Pronouncements, the benchmark publication of the

Auditing and Assurance Standards Board. The Handbook contains the text of all

the Standards, Statements and Guidance Notes on Auditing as on October 1,

2011.

This edition of the Handbook also contains the text of the Standard on Assurance

Engagements (SAE) 3402, Assurance Reports on Controls At a Service

Organisationand the Guidance Note on Audit of Property, Plant and Equipment.

Members may note that the Guidance Note on Audit of Fixed Assets issued in

1985 has been withdrawn pursuant to issuance of the Guidance Note on Audit of

Property, Plant and Equipment.

As always, the Handbook is in two Volumes. Volume I contains the text of the

Standards and Statements and Volume II contains the text of the Guidance

Notes on auditing. Volume I is further divided into two sub volumes. Volume I.A

contains the text of, inter alia, the Preface, Framework, Glossary of Terms,Standard on Quality Control, and the various Engagement Standards, viz.,

Standards on Auditing, Standards on Review Engagements, Standards on

Assurance Engagements and Standards on Related Services. Volume I.B

contains the text of Statements on Auditing.

Finally, I wish to express my deep gratitude to CA. G. Ramaswamy, President,

ICAI and CA. Jaydeep N. Shah, Vice President, ICAI for their invaluable

guidance and support to the activities of the Auditing and Assurance StandardsBoard. I also wish to thank all my colleagues at the Central Council for their

cooperation and guidance in formulating and finalizing the various authoritative

auditing pronouncements of the Board.

My sincere thanks are also due to my Council colleagues at the Board, viz., CA.

Rajkumar S Adukia, Vice Chairman, CA. Amarjit Chopra, CA. Naveen N.D.

Gupta, CA. Sanjeev K. Maheshwari, CA. M. Devaraja Reddy, CA. Rajendra

Kumar P, CA. J. Venkateswaralu, CA. Sumantra Guha, CA. Anuj Goyal, CA.Pankaj Tyagee, CA. Jayant P Gokhale, CA. S Santhanakrishnan, CA. Mahesh

P. Sarda, CA. Vijay Kumar Garg, CA. V. Murali, CA. Nilesh S. Vikamsey and the

Central Government nominees, Shri Prithvi Haldea and Smt. Usha Sankar and


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Contents

Foreword ............................................................................................................... iii

Preface ................................................................................................................ v

Guidance Notes

1. Provision for Proposed Dividend.................................................................. 1

2. Auditing of Accounts of Liquidators.............................................................. 3

3. Guidance Note on Independence of Auditors (Revised) .............................. 5

4. Preparation of Financial Statements on Letter-headsand Stationery of Auditors.......................................................................... 22

5. Guidance Note on Certificate to be Issued by the Auditor of a Company

Pursuant to Companies (Acceptance of Deposits) Rules, 1975 ................ 23

6. Guidance Note on the Duty Cast on the Auditors under

Section 45-MA of the Reserve Bank of India Act, 1934 ............................. 28

7. Guidance Note on Audit Reports and Certificates for

Special Purposes ....................................................................................... 398. Guidance Note on Section 293A of the Companies Act

and the Auditor........................................................................................... 51

9. Guidance Note on Audit of Fixed Assets ................................................... 62

10. Guidance Note on Audit of Property, Plant and Equipment ....................... 63

11 Guidance Note on Audit of Accounts of

Non-Corporate Entities (Bank Borrowers).................................................. 82

12 Guidance Note on Reports in Company Prospectuses (Revised) ........... 13313 Guidance Note on Audit of Abridged Financial Statements ..................... 228

14 Guidance Note on Certification of Documents for

Registration of Charges ........................................................................... 229

15 Guidance Note on Audit of Inventories .................................................... 252

16 Guidance Note on Audit of Investments................................................... 272

17 Guidance Note on Audit of Debtors, Loans and Advances...................... 290

18 Guidance Note on Audit of Cash and Bank Balances.............................. 307

19 Guidance Note on Audit of Liabilities ....................................................... 316

20. Guidance Note on Audit of Revenue ....................................................... 337


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21. Guidance Note on Certificate on Corporate Governance (Revised) ........ 345

22. Guidance Note on Section 227(3)(e) and (f) of the

Companies Act, 1956 (Revised) .............................................................. 417

23. Guidance Note on Audit of Expenses ...................................................... 44324. Guidance Note on Special Considerations

in the Audit of Small Entities .................................................................... 461

25. Guidance Note on Audit of Miscellaneous Expenditure (Revised)........... 501

26. Guidance Note on Audit of Consolidated Financial Statements .............. 512

27. Guidance Note on Computer Assisted Audit Techniques (CAATs) ......... 543

28. Guidance Note on Audit of Payment of Dividend..................................... 559

29. Guidance Note on Audit of Capital and Reserves.................................... 584


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Contents of Volume I.A

Foreword

Preface

Section I: Authority and Preface

1. Announcements of the Council regarding Status of Various DocumentsIssued by the Institute of Chartered Accountants of India ......................... 1

2. Preface to the Standards on Quality Control, Auditing, Review,

Other Assurance and Related Services................................................... 27

Section II: Glossary of Terms issued by ICAI

Glossary of Terms .............................................................................................. 49

Section III: Standards on Quality Control (SQCs)

SQC 1: Quality Control for Firms that Perform Audits and Reviews of Historical

Financial Information, and Other Assurance and Related ServicesEngagements ..................................................................................................... 81

Section IV: Framework for Assurance Engagements

Framework for Assurance Engagements ......................................................... 117

Section V: Audits and Reviews of Historical FinancialInformation

100-999 Standards on Auditing (SAs)

100-199 Introductory Matters

200-299 General Principles and Responsibilities

200 (Revised) Overall Objectives of the Independent Auditor and theConduct of an Audit in Accordance with Standards on Auditing ............ 145

210 (Revised) Agreeing the Terms of Audit Engagements........................... 188

220 (Revised) Quality Control for an Audit of Financial Statements ............. 224

230 (Revised) Audit Documentation ............................................................. 246


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240 (Revised) The Auditors Responsibilities Relating to Fraudin an Audit of Financial Statements ....................................................... 261

250 (Revised) Consideration of Laws and Regulations in an Audit of

Financial Statements ............................................................................. 311260 (Revised) Communication with Those Charged with Governance......... 328

265 Communicating Deficiencies in Internal Control to Those Chargedwith Governance and Management ....................................................... 354

299 Responsibility of Joint Auditors .............................................................. 379

300-499 Risk Assessment and Response to Assessed Risks

300 (Revised) Planning an Audit of Financial Statements ............................ 384

315 Identifying and Assessing the Risks of Material Misstatement ThroughUnderstanding the Entity and Its Environment....................................... 399

320 (Revised) Materiality in Planning and Performing an Audit ................... 458

330 The Auditors Responses to Assessed Risks ....................................... 472

402 (Revised) Audit Considerations Relating to an Entity Using aService Organisation ............................................................................ 498

450 Evaluation of Misstatements Identified During the Audit........................ 523500-599 Audit Evidence

500 (Revised) Audit Evidence ...................................................................... 536

501 (Revised) Audit EvidenceSpecific Considerations forSelected Items ....................................................................................... 555

505 (Revised) External Confirmations .......................................................... 567

510 (Revised) Initial Audit Engagements Opening Balances..................... 584

520 (Revised) Analytical Procedures............................................................ 599

530 (Revised) Audit Sampling ...................................................................... 612

540 (Revised) Auditing Accounting Estimates, Including Fair ValueAccounting Estimates, and Related Disclosures ................................... 630

550 (Revised) Related Parties...................................................................... 678

560 (Revised) Subsequent Events ............................................................... 709

570 (Revised) Going Concern ...................................................................... 723

580 (Revised) Written Representations ........................................................ 742


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600-699 Using Work of Other

600 Using the Work of Another Auditor ........................................................ 761

610 (Revised) Using the Work of Internal Auditors....................................... 768

620 (Revised) Using the Work of an Auditors Expert................................... 779

700-799 Audit Conclusions and Reporting

700 (Revised) Forming an Opinion and Reporting onFinancial Statements ............................................................................. 801

700 The Auditors Report on Financial Statements ...................................... 838

705 Modifications to the Opinion in the Independent Auditors Report ......... 858

706 Emphasis of Matter Paragraphs and Other Matter Paragraphsin the Independent Auditors Report ...................................................... 891

710 (Revised) Comparative InformationCorresponding Figures andComparative Financial Statements ........................................................ 906

710 Comparatives......................................................................................... 928

720 The Auditors Responsibility in Relation to Other Information inDocuments Containing Audited Financial Statements........................... 941

800-899 Specialized Areas

800 Special ConsiderationsAudits of Financial Statements Prepared inAccordance with Special Purpose Frameworks..................................... 948

805 Special ConsiderationsAudits of Single Financial Statements andSpecific Elements, Accounts or Items of a Financial Statement............ 965

810 Engagements to Report on Summary Financial Statements ................. 988

2000-2699 Standards on Review Engagements (SREs)2400 (Revised) Engagements to Review Financial Statements ................... 1017

2410 Review of Interim Financial Information Performed by theIndependent Auditor of the Entity......................................................... 1044

Section VI: Assurance Engagements Other Than Audits orReviews of Historical Financial Information

3000-3699 Standards on Assurance Engagements (SAEs)3000-3399 Applicable to All Assurance Engagements

3400-3699 Subject Specific Standards


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3400 The Examination of Prospective Financial Information........................ 1095

3402 Assurance Reports on Controls At a Service Organisation ................. 1113

Section VII: Related Services4000-4699 Standards on Related Services (SRSs)

4400 Engagements to perform Agreed-Upon Procedures RegardingFinancial Information ........................................................................... 1170

4410 Engagements to Compile Financial Information .................................. 1181


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Contents of Volume I.B

1. Statement on Reporting under Section 227(1A) of the Companies Act,1956........................................................................................................... 1

2. Statement on the Companies (Auditors Report) Order, 2003 [Issuedunder Section 227 (4A) of the Companies Act, 1956].............................. 10


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1PROVISION FOR PROPOSED DIVIDEND*

1. This Statement summarises the Councils view regarding theresponsibility of the auditor relating to the provision for and disclosure of

proposed dividend and replaces all earlier statements on this subject.

2. The Council is aware of the fact, that a large number of companies do

not provide for the proposed dividend but either carry forward the balance on

the profit and loss account or transfer an amount to the General Reserve and

charge the dividend to the profit and loss account or to the reserve when

payment is made.

3 The Council is of the view that a proposed dividend does not represent

a liability nor does it amount to a provision, pending the approval of the

shareholders in General Meeting. Since the meeting to approve the accounts

would take place after the Balance Sheet date, there could not be any liability

in respect of the proposed dividend on the date of the Balance Sheet. The

Council is of the opinion that merely because the form requires proposed

dividend to be shown under Current Liabilities and Provisions, it does not

mean that in fact the proposal for the dividend becomes a liability or is

necessarily a provision. The Council would draw attention to the forms of

accounts laid down under the Insurance Act, 1938 and the Banking

Regulation Act, 1949, in both of which it is not a requirement to show

proposed dividend and it cannot be contended that merely because

proposed dividend is not shown in the accounts, that the accounts of

Insurance and Banking Companies do not disclose a true and fair view.

4. Since, however, the form of Balance Sheet prescribed in Part 1 of

Schedule VI requires proposed dividends to be shown under Provisions,

*Published in CICA Newsletter, November, 1975, p.78.


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and since paragraph 3(xiv) of Part II of the same Schedule requires the

proposed dividends to be disclosed, the Council is of the opinion that,

though on correct accounting principles, the proposed dividend does not

become a liability for reasons mentioned above, the attention of theshareholders would have to be drawn to the fact that no appropriation has

been made for the proposed dividend, the amount in respect of which should

be specified.

5. The Council, therefore, recommends that the fact that provision for

proposed dividend has not been made should be disclosed by means of a

note in the accounts and that the auditor should refer to the note in his report

and make his report subject thereto.


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2AUDITING OFACCOUNTS OF L IQUIDATORS*

Audit Report under Section 551 of the Companies Act,1956

Members of the profession are called upon to conduct the audit of the

accounts submitted by a Liquidator in a voluntary winding-up under Section

551. There are no statutory provisions in regard to the manner of conducting

such audit, nor is there any statutory provision regarding the form in which

the auditors' report is to be submitted after such an audit under Section 551.

The Research Committee has considered this question in all its aspects and

its recommendations in this connection are outlined below:

First, the professional skill and audit procedures to be applied in case of an

audit under Section 531 would be similar to those applied in the case of the

normal audit of a company.

Secondly, there should be a fair measure of uniformity in the reports

submitted by auditors conducting an audit under Section 551 of theCompanies Act, 1956. The Research Committee recommends that the report

of the auditor may be on the following lines:

(a) Whether he has obtained all the information and explanations, which to

the best of his knowledge and belief, were necessary for the purposes

of his audit,

(b) Whether in his opinion, proper books of account as required by the

Companies Act, 1956 and Companies (Court) Rules, 1959 have been

* This is an integrated note of the notes published in The Chartered Accountant, Feb. 1962, p.289, and Aug. 1963, p.98.


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kept by the Liquidator, so far as appears from his examination of these

books,

(c) Whether the Liquidator's Account relating to realisations and

disbursements is in agreement with the books and records produced

before him,

(d) Whether in his opinion, and to the best of his information and according

to the explanations given to him, the Liquidator's Account including

Annexure I (excepting items included in I (a) in so far as they relate to

estimates of the Liquidator and items 4, 5, 6 and 7), Annexure II, III, 1V

and V, give the information required by the Companies Act, 1956, and

the Companies (Court) Rules, 1059 in the manner sorequired and givea true and correct view of the realisations and disbursements of the

Liquidator.

Thirdly, in order to establish a healthy convention, the Council recommends

that, where a chartered accountant acts as a liquidator, the statements of

accounts to be filed under Section 551(1) of the Companies Act, 1956,

should be audited by a qualified chartered accountant other than the

chartered accountant who is the liquidator of the company.


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3GUIDANCE NOTE ONINDEPENDENCE OFAUDITORS (REVISED)*

Contents

Paragraph(s)

Introduction ..................................................................................1.1-1.13

Threats to Independence .................................................................... 2.1

Safeguards to Independence .......................................................3.1-3.4

Conclusion .....................................................................................4.1-4.2

* Issued in January, 2005. This Guidance Note replaces the Guidance Note published in TheChartered Accountant, June 1968, p. 670--672.


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1. Introduction

1.1 This Guidance Note aims to clarify the meaning of independencewhile performing their duties as Auditors. Professional integrity andindependence is an essential characteristic of all the professions but is more

so in the case of accountancy profession. Independence implies that the

judgement of a person is not subordinate to the wishes or direction of

another person who might have engaged him, or to his own self-interest. This

document shall provide guidance to members about the specific

circumstances and relationships that may create threats to independence.

The Guidance Note also provides safeguards that should be employed by the

auditors to mitigate the risk arising from such circumstances and relationship

leading to the threats to independence.

1.2 It is not possible to define independence precisely. Rules ofprofessional conduct dealing with independence are framed primarily with a

certain objective. The rules themselves cannot create or ensure the

existence of independence. Independence is a condition of mind as well as

personal character and should not be confused with the superficial and

visible standards of independence which are sometimes imposed by law.

These legal standards may be relaxed or strengthened but the quality of

independence remains unaltered.

1.3 There are two interlinked perspectives of independence of auditors,one, independence of mind; and two, independence in appearance.

The Code of Ethics for Professional Accountants, issued by International

Federation of Accountants (IFAC) defines the term Independence asfollows:

Independence is:

(a) Independence of mind the state of mind that permits the

provision of an opinion without being affected by influences

that compromise professional judgment, allowing an

individual to act with integrity, and exercise objectivity and

professional skepticism; and

(b) Independence in appearance the avoidance of facts and

circumstances that are so significant a reasonable and

informed third party, having knowledge of all relevant


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information, including any safeguards applied, would

reasonably conclude a firms, or a member of the assurance

teams, integrity, objectivity or professional skepticism had

been compromi sed.

1.4 Independence of the auditor has not only to exist in fact, but alsoappear to so exist to all reasonable persons. The relationship between the

auditor and his client should be such that firstly, he is himself satisfied about

his independence and secondly, no unbiased person would be forced to the

conclusion that, on an objective assessment of the circumstances, there is

likely to be an abridgement of the auditors independence.

1.5 In all phases of a Chartered Accountants work, he is expected to beindependent, but in particular in his work as auditor, independence has a

special meaning and significance. Not only the client but also the

stakeholders, prospective investors, bankers and government agencies rely

upon the accounts of an enterprise when they are audited by a Chartered

Accountant. As statutory auditor of a limited company, for example, the

Chartered Accountant would cease to perform any useful function if the

persons who rely upon the accounts of the company do not have any faith inthe independence and integrity of the Chartered Accountant. In such cases

he is expected to be objective in his approach, fearless, and capable of

expressing an honest opinion based upon the performance of work such as

his training and experience enables him to do so.

1.6 The objective of an audit of financial statements, prepared within aframework of recognized accounting policies and practices and relevant

statutory requirements, if any, is to enable an auditor to express an opinion

on such financial statements. 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.

1.7 The idea of independence is instilled in the minds of CharteredAccountants from the commencement of their training under articles or audit

service. It has to be applied in their day-to-day work and their success is

dependent entirely upon their integrity, competence and independence of

approach.


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1.8 Dependent as it is on the state of mind and character of a person,independence, is a very subjective matter. One person might be

independent in a particular set of circumstances, while another person might

feel he is not independent in similar circumstances. It is therefore the duty ofevery Chartered Accountant to determine for himself whether or not he can

act independently in the given circumstances of a case and quite apart from

legal rules, in no case to place himself in a position which would compromise

his independence.

1.9 The auditor should be straightforward, honest and sincere in hisapproach to his professional work. He must be fair and must not allow

prejudice or bias to override his objectivity. He should maintain an impartialattitude and both be and appear to be free of any interest which might be

regarded, whatever its actual effect, as being incompatible with integrity and

objectivity. This is not self evident in the exercise of the reporting function but

also applies to all other professional work. In determining whether a member

in practice is or is not seen to be free of any interest which is incompatible

with objectivity, the criterion should be whether a reasonable person, having

knowledge of relevant facts and taking into account the conduct of the

member and the members behaviour under the circumstances, couldconclude that the member has placed himself in a position where his

objectivity would or could be impaired.

1.10 While performing audit functions, maintaining quality control is theobjectives of the quality control and policies to be adopted by an Auditor shall

ordinarily incorporate the following:

(a) Professional Requirements: Personnel in the firm are to adhere to theprinciples of Independence, Integrity, Objectivity, Confidentiality and

Professional Behaviours.

(b) Skil ls and Competence: The firm is to be staffed by personnel whohave attained and maintained the Technical Standards and Professional

Competence required to enable them to fulfill their responsibilities with

Due Care.

(c) Assignment: Audit work is to be assigned to personnel who have thedegree of technical training and proficiency required in thecircumstances.


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(d) Delegation: There is to be sufficient direction, supervision and reviewof work at all levels to provide reasonable assurance that the work

performed meets appropriate standards of quality.

(e) Consultation: Whenever necessary, consultation within or outside thefirm is to occur with those who have appropriate expertise.

(f) Acceptance and Retention of Clients: An evaluation of prospectiveclients and a review, on an ongoing basis, of existing clients is to be

conducted. In making a decision to accept or retain a client, the firms

independence and ability to serve the client properly are to be

considered.

(g) Monitoring: The continued adequacy and operational effectiveness ofquality control policies and procedures is to be monitored.

1.11 A member not in practice has a duty to be objective in carrying out hisor her professional work whether or not the appearance of professional

independence is attainable. Thus a member performing professional work

must recognize the problems created by personal relationships or financial

involvement, which by reason of their nature or degree might threaten his

independence.

1.12 Standing alone, the word Independence may lead observers tosuppose that a person exercising professional judgment ought to be free

from all economic, financial and other relationships. This is impossible, as

every member of society has relationships with others. Therefore, the

significance of economic, financial and other relationships should also be

evaluated in the light of what a reasonable and informed third party having

knowledge of all relevant information would reasonably conclude to be

unacceptable.

1.13 Many different circumstances, or combination of circumstances, maybe relevant and accordingly it is impossible to define every situation that

creates threats to independence and specify the appropriate mitigating action

that should be taken. In addition, the nature of assurance engagements may

differ and consequently different threats may exist, requiring the application

of different safeguards. A conceptual framework that requires charteredaccountants to identify, evaluate and address threats to independence,

rather than merely comply with a set of specific rules in the public interest.


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2. Threats to Independence

2.1 The Code of Ethics for Professional Accountants, prepared by theInternational Federation of Accountants (IFAC) identifies five types of threats.

These are:

1. Self-interest threats, which occur when an auditing firm, its partner orassociate could benefit from a financial interest in an audit client.

Examples include (i) direct financial interest or materially significant

indirect financial interest in a client, (ii) loan or guarantee to or from the

concerned client, (iii) undue dependence on a clients fees and, hence,

concerns about losing the engagement, (iv) close business relationship

with an audit client, (v) potential employment with the client, and (vi)

contingent fees for the audit engagement.

2. Self-review threats, which occur when during a review of any judgementor conclusion reached in a previous audit or non-audit engagement, or

when a member of the audit team was previously a director or senior

employee of the client. Instances where such threats come into play are

(i) when an auditor having recently been a director or senior officer of

the company, and (ii) when auditors perform services that arethemselves subject matters of audit.

3. Advocacy threats, which occur when the auditor promotes, or isperceived to promote, a clients opinion to a point where people may

believe that objectivity is getting compromised, e.g. when an auditor

deals with shares or securities of the audited company, or becomes the

clients advocate in litigation and third party disputes.

4. Familiarity threats are self-evident, and occur when auditors formrelationships with the client where they end up being too sympathetic to

the clients interests. This can occur in many ways: (i) close relative of

the audit team working in a senior position in the client company, (ii)

former partner of the audit firm being a director or senior employee of

the client, (iii) long association between specific auditors and their

specific client counterparts, and (iv) acceptance of significant gifts or

hospitality from the client company, its directors or employees.

5. Intimidation threats, which occur when auditors are deterred from actingobjectively with an adequate degree of professional skepticism.

Basically, these could happen because of threat of replacement over


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disagreements with the application of accounting principles, or pressure

to disproportionately reduce work in response to reduced audit fees.

3. Safeguards to Independence3.1 The Chartered Accountant has a responsibility to remain independent

by taking into account the context in which they practice, the threats to

independence and the safeguards available to eliminate the threats.

3.2 To address the issue, Members are advised to apply the followingguiding principles: -

For the public to have confidence in the quality of audit, it is essentialthat auditors should always be and appears to be independent of theentities that they are auditing.

In the case of audit, the key fundamental principles are integrity,objectivity and professional skepticism, which necessarily require the

auditor to be independent.

Before taking on any work, an auditor must conscientiously considerwhether it involves threats to his independence.

When such threats exist, the auditor should either desist from the taskor, at the very least, put in place safeguards that eliminate them. All such

safeguards measure needs to be recorded in a form that can serve as

evidence of compliance with due process.

If the auditor is unable to fully implement credible and adequatesafeguards, then he must not accept the work.

3.3 Provisions contained under the Companies Act, 1956

3.3.1 In order to ensure independence, the law has made certain provisionswhich either prohibit the appointment of a person as auditor in certain

circumstances or place certain restrictions on his appointment as auditor or

put third parties on guard against the possibility of an abridgement of

independence by requiring certain disclosures to be made. These provisions

are briefly outlined below:3.3.2 Section 226 of the Companies Act, 1956 prohibits the appointment ofa Chartered Accountant as auditor of a Company if he is:

(i) an officer or employee of the Company;


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(ii) a partner of a person in the employment of an officer or of an employeeof the Company;

(iii) a person who is indebted to the company for an amount exceeding Rs.1000;

(iv) a person who has given any guarantee or provided any security inconnection with the indebtedness of any third person to the company for

an amount exceeding Rs. 1000;

(v) a person holding any security of that company.3.3.3 A person who is disqualified from becoming auditor of any bodycorporate under the above rules is also disqualified from appointment asauditor of such bodys subsidiary, co-subsidiary or holding company.

3.3.4 Section 314 of the Companies Act, 1956 makes separate provision forthe case where an auditor of a Company (whether public or private) is a

relative of a director, or manager of a private company of which the director

of the company is a director or member. In the case of such a person he

may be appointed as auditor of a company only if such appointment if

approved with the consent of the company in general meeting obtained by aspecial resolution.

3.3.5 It will be observed from the above that the Act has specificallyprovided for cases where the independence of an auditor may be affected by

his connection with the company and prohibited or restricted him from acting

as auditor under those circumstances.

3.3.6 A question often arises as to whether an indebtedness (as referred inpara (iii) above) arises in cases where in accordance with the terms of hisengagement by a client (e.g. resolution passed at the general meeting) the

auditor recovers his fees on a progressive basis as and when a part of the

work is done without waiting for the completion of the whole job. In these

circumstances, where in accordance with such terms the auditor recovers his

fees on a progressive basis he cannot be said to be indebted to the company

at any stage.

3.3.7 A question of indebtedness may also be raised where an auditor of acompany purchases goods or services from a company audited by him. In

such a case, if the amount outstanding exceeds Rs. 1000/- irrespective of the

nature of the purchase or period of credit allowed to other customers the


26/619


13

provisions concerning disqualification of auditor as contained in Section 226

(3)(d) of the Companies Act, 1956 will be attracted.

3.3.8 Another question which arises for consideration is whether a partner isdisqualified from appointment as auditor when the firm of which he is a

partner is indebted to the company in excess of the limit prescribed and

whether the firm is disqualified from appointment as auditor when a partner

of the firm is indebted in excess of the prescribed limit. In both cases, the

disqualification will apply, because when a firm is appointed as auditor, each

partner is deemed to be so appointed and when a firm is indebted, each

partner is deemed to be indebted.

3.3.9 There may also be situations in which, though the appointment is inthe individual name of a partner, the work, is, in fact, carried out by the firm

and the fees are credited to the account of the firm. In such situations, the

firm will be deemed to be acting as auditor and the disqualification will be

attracted.

3.4 Provisions contained under the Chartered Accountants Act, 1949,

Chartered Accountants Regulations, 1988 and under Code of Ethics to

ensure Independence of Auditors

3.4.1 Clause (10) of Part I of the First Schedule to the CharteredAccountants Act, 1949 prohibits acceptance of, what have been described as

contingent fees, i.e., fees, which are either based on percentage of profits or

otherwise dependent on the finding or the results of employment.

3.4.2 What distinguishes a profession from a business is that professionalservice is not rendered with the sole purpose of a profit motive. Personal

gain is one but not the main or the only objective. Professional opinion,

therefore, frowns upon methods where payment is made to depend on the

basis of results. It is obvious that a person who is to receive payment in

direct proportion to the benefit received by his client, may be tempted to

exaggerate the advantage of his service or may adopt means which are not

ethical. It will have the effect of undermining his integrity and impairing his

independence. Therefore, the members are prohibited from charging or

accepting any remuneration based on a percentage of the profits or on thehappening of a particular contingency such as, the successful outcome of an

appeal in revenue proceedings.

3.4.3 Professional services should not be offered or rendered under anarrangement whereby no fee will be charged unless a specified finding or


27/619


14

result is obtained or where the fee is otherwise contingent upon the findings

or results of such services. However, fee should not be regarded as being

contingent if fixed by a Court or other public authority.

3.4.4 The Council of the Institute has framed Regulation 192 which exemptsmembers from the operation of this Clause in certain professional services.

The said Regulation 192 is reproduced below:

192. Restri ction on fees

No chartered accountant in practice shall charge or offer to charge,

accept or offer to accept, in respect of any professional work, fees

which are based on a percentage of profits, or which are contingentupon the findings, or results of such work:

Provided that:

(a) in the case of a receiver or a liquidator, the fees may be based ona percentage of the realisation or disbursement of the assets;

(b) in the case of an auditor of a co-operative society, the fees may bebased on a percentage of the paid up capital or the working capital

or the gross or net income or profits; and

(c) in the case of a valuer for the purposes of direct taxes and duties,the fees may be based on a percentage of the value of the

property valued.

3.4.5 Attention of the members is invited to the provisions of Clause (4) ofPart I of the Second Schedule to the Chartered Accountants Act, 1949 which

provides that a Chartered Accountant in practice shall be deemed to be guiltyof professional misconduct if he expresses his opinion on financial

statements of any business or any enterprise in which he, his firm or a

partner in his firm has a substantial interest, unless he discloses his interest

also in his report.

3.4.6 If the opinion of auditors are to command respect and the confidenceof the public, it is essential that they must disclose every factor which is likely

to affect their independence. Since financial interest in the business can be

one of the important factors, which may disturb independence, the clause

provides that the existence of such an interest direct or indirect should be

disclosed. This is intended to assure the public as regards the faith and


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15

confidences that could be reposed on the independent opinion expressed by

the auditors.

3.4.7 The words financial statements used in this clause would cover bothreports and certificates usually given after an examination of the accounts or

the financial statement or any attest function under any statutory enactment

or for purposes of income-tax assessments. This would not however, apply to

cases where such statements are prepared by members in employment

purely for the information of their respective employers in the normal course

of their duties and not meant to be submitted to any outside authority.

3.4.8 Public conscience is expected to be ahead of the law. Members,therefore, are expected to interpret the requirement as regardsindependence much more strictly than what the law requires and should not

place themselves in positions which would either compromise or jeopardise

their independence.

3.4.9 A Member must take care to see that he does not get into situationswhere there could be a conflict of interest and duty. For example, where a

Chartered Accountant is appointed the liquidator of a company, he should

not himself audit the Statement of Account to be filed under Section 551 (1)of the Companies Act, 1956. The audit in such circumstances should be

done by a Chartered Accountant other than the one who is the liquidator of

the company. Attention of the members is drawn to the audit assignments

where appointment is done by the Comptroller & Auditor General of India

(C&AG), Reserve Bank of India (RBI) and such other authorities. In addition

to ensuring independence during the assignment, it is also essential to avoid

any situation in near future which may be interpreted as a threat to

independence, as for example, he or any other partner of his firm should not

accept any other assignment such as internal audit, system audit and

management consultancy services within one year from the completion of

audit assignment.

3.4.10A Chartered Accountant in employment should not certify the financialstatements of the concern in which he is employed, or of a concern under the

same management as the concern in which he is employed, even though he

holds certificate of practice and that such certification can be done by any

chartered accountant in practice. This restriction would not however apply

where the certification is permitted by any law, e.g. Section 228 (iv) of the

Companies Act, 1956 and the Companies (Branch Audit Exemption) Rules


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16

made thereunder. The Council has decided that a chartered accountant

should not by himself or in his firm name:-

(i) accept the auditorship of a college, if he is working as a part-time

lecturer in the college.

(ii) accept the auditorship of a trust where his partner is either an employee

or a trustee of the trust.

3.4.11Many new areas of professional work have been added, e.g., SpecialAudit under the Statutes, Tax Audit, Concurrent Audit of Banks, Concurrent

Audit of Borrowers of Financial institutions, Audit of non-corporate borrowers

of banks and financial institutions, audit of stock exchange, brokers etc. TheCouncil wishes to emphasis that the requirement of Clause (4) of Part I of the

Second Schedule to the Chartered Accountants Act, 1949 is equally

applicable while performing all types of attest functions by the members.

3.4.12Some of the situations which may arise in the applicability of Clause(4) of Part I of the Second Schedule to the Chartered Accountants Act, 1949

are discussed below for the guidance of members:-

1. Where the member, his firm or his partner or his relative hassubstantial interest in the business or enterprise.

The independence of mind is a fundamental concept of audit and/or

expression of opinion on the financial statements in any form and,

therefore, must always be maintained. Nothing can substitute for the

essential and fundamental requirements of independence. Therefore,

the Councils views are clarified in the following circumstances.

(i) An enterprise/concern of which a member is either an owner or apartner

The holding of interest in the business or enterprise by a member

himself whether as sole-proprietor or partner in a firm, in the

opinion of the Council, would affect his independence of mind in

the performance of professional duties in conducting the audit

and/or expressing an opinion on financial statements of such

enterprise. Therefore, a member should not audit financialstatements of such business or enterprise.


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17

(ii) Where the partner or relative of a member has substantial interest

The holding of substantial interest by the partner or relative of the

member in the business or enterprise of which the audit is to be

carried out and opinion is to be expressed on the financial

statement, may also affect the independence of mind of the

member, in the opinion of Council, in the performance of

professional duties. Therefore, the member may, for the same

reasons as not to compromise his independence, desist from

undertaking the audit of financial statements of such business or

enterprise. However, where a member undertakes the audit of

such business or enterprise, he should disclose such interest in hisreport while expressing his opinion on the financial statements of

such business or enterprise.

2. Where the member or his partner or relative is a director or in the

employment of an off icer or an employee of the company

Section 226 of the Companies Act, 1956 specifically prohibits a member from

auditing the accounts of a company in which he is a director or in the

employment of an officer or an employee of the company. Although theprovisions of the aforesaid section are not specifically applicable in the

context of audits performed under other statutes, e.g. tax audit, yet the

underlying principle of independence of mind is equally applicable in those

situations also. Therefore, the Councils views are clarified in the following

situations.

(i) Where a member is a director

In cases where the member is a director of a company the financial

statements of which are to be audited and/or opinion is to be expressed, he

should not undertake such job and/or express opinion on the financial

statements of that company.

(ii) Where a partner or relative of the member is a director in the company

who has a substantial interest.

In such cases for the reason as not to compromise with the independence ofmind, the member may desist from undertaking the audit of financial

statements and/or expression of opinion thereon. However, if a member feels

that his independence is not affected and undertakes the audit of such


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18

company, he should disclose such interest in his report while expressing his

opinion on the financial statements of such company.

The meaning of the words relative and substantial interest shall be the

same as are contained in the Resolution passed by the Council in pursuance

to Regulation 190A of Chartered Accountants Regulations, 1988 (Appendix 9

of 2002 edition).

3.4.13 An accountant is expected to be no less independent in the discharge

of his duties as a tax consultant or as a financial adviser than as auditor. In

fact, it is necessary that he should bear the same degree of integrity and

independence of mind in all spheres of his work. Unless this is done, the

accounts of companies audited by Chartered Accountants or statementsmade by them during the course of assessment proceedings would not be

relied upon as correct by the authorities.

3.4.14The Members are not permitted to write the books of accounts of theirauditee clients.

3.4.15A statutory auditor of a company cannot also be its internal auditor, asit will not be possible for him to give independent and objective report issued

under sub-Section 4A of Section 227 of the Companies Act, 1956 read with

the Companies (Auditors Report) Order, 2003.

3.4.16The Council has issued a Notification No.1-CA(37)/70 dated 23rdMay,1970 whereby a member of the Institute in practice shall be deemed to be

guilty of professional misconduct, if

I. he accepts appointment as Cost auditor of Company under Section

233B of the Companies Act, 1956 while he -(a) is an auditor of the company appointed under Section 224 of the

Companies Act; or

(b) is an officer or employee of the company; or

(c) is a partner, or is in the employment of an officer or employee of

the company; or

(d) is a partner or is in the employment of the Companys auditorappointed under Section 224 of the Companies Act, 1956; or

(e) is indebted to the company for an amount exceeding one thousand

rupees, or has given any guarantee or provided any security in


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19

connection with the indebtedness of any third person to the

company for an amount exceeding one thousand rupees;

OR

II. after his appointment as Cost Auditor, he becomes subject to any of the

disabilities stated in items I (a) to (e) above and continues to function as

a cost auditor thereafter.

3.4.17The Council has issued a Notification No.1-CA(39)/70 dated 16thOctober, 1970 whereby a member of the Institute in practice shall be deemed

to be guilty of professional misconduct, if he accepts the appointment as

auditor of a company under Section 224 of the Companies Act, 1956, whilehe is an employee of the cost auditor of the Company appointed under

Section 233B of the Companies Act, 1956.

3.4.18The Council has issued a Notification No.1-CA(7)/60/2002 dated 8thMarch, 2002 whereby a member of the Institute in practice shall be deemed

to be guilty of professional misconduct, if he accepts the appointment as

statutory auditor of Public Sector Undertaking(s)/ Government

Company(ies)/Listed Company(ies) and other Public Company(ies) having

turnover of Rs. 50 crores or more in a year and accepts any other work(s) or

assignment(s) or service(s) in regard to the same Undertaking(s)/

Company(ies) on a remuneration which in total exceeds the fee payable for

carrying out the statutory audit of the same Undertaking/company.

3.4.19The Council has issued a Notification No.1-CA(7)/63/2002 dated 2ndAugust, 2002 whereby a member of the Institute in practice shall be deemed

to be guilty of professional misconduct, if he accepts appointment as auditor

of a concern while he is indebted to the concern or has given any guarantee

or provided any security in connection with the indebtedness of any third

person to the concern, for limits fixed in the statute and in other cases for

amount exceeding Rs. 10,000/-.

3.4.20To ensure that the professional independence of a member doingattest function does not appear to be jeopardized he should, as far as

possible, take care to see that the professional fees for audit and other

services received by the firm in which he is a partner, by him and hispartners individually and by firm or firms in which he or his partner are

partners from one or more clients or companies under the same

management does not exceed 40% of the gross annual fees of the firm, firms

and partners referred to above. Companies under the same management


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20

here would refer to the definition of this expression as provided in section

370(1-B) of the Companies Act, 1956.

Provided that no such ceiling on the gross annual professional fees of a member

would be applicable where such fees do not exceed two lakhs of rupees in

respect of a member or firm including fees received by the member or firm for

other services rendered through the medium of a different firm or firms in which

such member or firm may be a partner or proprietor.

Provided further that no such ceiling on the gross annual professional fees of a

member would be applicable in the case of audit of government companies,

public undertakings, nationalized banks, public financial institutions or where

appointments of auditors are made by the Government.

3.4.21Members attention is also drawn to Clauses (8) & (9) of Part I of theFirst Schedule to the Chartered Accountants Act, 1949:

A Member shall be deemed to be guilty of professional misconduct, if

he:

X XX XXX XXXX

(8) accepts a position as auditor previously held by another

chartered accountant or a restricted state auditor without first

communicating with him in writing;

(9) accepts an appointment as auditor of a company without first

ascertaining from it whether the requirements of Section 225 of the

Companies Act, 1956 in respect of such appointment have been duly

complied with.

3.4.22 Clause (8) of Part I of First Schedule to the Chartered Accountants

Act, 1949 emphasized the requirement of mandatory communication with the

previous auditor in all types of audit viz., statutory audit, tax audit, internal

audit, concurrent audit or any kind of audit and it is equally applicable to

audits of both government and non-government entities.

3.4.23 Clause (9) of Part I of First Schedule to the Chartered Accountants

Act, 1949 provided that an auditor of the company before accepting the

appointment, should ascertain from the auditor whether the requirements of

Section 225 of the Companies Act, 1956 in respect of such appointment have

been duly complied with. Section 224 of the Companies Act, 1956 contains

several provisions in the matter of appointment of auditors in different


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21

circumstances and situations whereas Section 225 laid down the procedure

which must be followed whenever a company desires to change its auditor.

Also that the validity of the appointment of an auditor is not challenged or

objected to by shareholders or the retiring auditors at a later date, it hasbeen made obligatory to ascertain from the company that the appropriate

procedure in the matter of appointment has been faithfully followed.

Independence of auditor is a concept to be addressed through its all the

possible aspects and the message of Clause (8) & (9) is to ensure that an

auditor should be conscious about this aspect from the very point of

accepting the position of an auditor.

4. Conclusion4.1 The Council feels that there are adequate safeguards provided in theCompanies Act, 1956 as well as in the Chartered Accountants Act, 1949.

The Council is of the view that independence, being a state of the mind, is

not necessarily affected by the fact of mere relationship any more than it

should be existence if the relationship did not exist. In any case, lest there

may be any feeling in the public mind that relationship would affect the

independence of auditors, the Council suggests that where, due to nearrelationship of an auditor, with a Managing or a Whole-Time Director the

independence of an auditor is likely to be jeopardized, he should use his

good sense, and acting in the best traditions of the profession, refrain from

accepting the appointment.

4.2 If the opinion of chartered accountant is to command respect and theconfidence of the public, it is essential that they must ensure their

independence to assure the public as regards the faith and confidence thatcould be reposed on them. The Chartered Accountant should ensure his

independence in all assurance services including concurrent audit, tax audit

and internal audit. The chartered accountant should make it certain that his

independence is not jeopardized. Where he feels that his independence is

jeopardized, he should refrain from accepting the assignment.


35/619

4PREPARATION OF

FINANCIAL STATEMENTS ON

LETTER-HEADS AND STATIONERY OFAUDITORS

The Research Committee's attention has been drawn to the fact that financial

statements of some enterprises are prepared on letter-heads and stationery

of their auditor carrying the latter's names and address. The Committee

wishes to point out that the above practice is liable to be misinterpreted and,

as such, should be avoided. The members are, therefore, requested to note

and follow the above recommendation.

Published in the August, 1982 issue of the Chartered Accountant p. 175.


36/619

5GUIDANCE NOTE ON CERTIFICATE TO BEISSUED BY THEAUDITOR OFACOMPANY

PURSUANT TO COMPANIES

(ACCEPTANCE OF DEPOSITS)RULES,1975

1. The Companies (Acceptance of Deposits) Amendment Rules, 1978

promulgated on 30thMarch, 1978 to amend the Companies (Acceptance of

Deposits) Rules, 1975 issued under Section 58A of the Companies Act, inter

alia, have introduced a new requirement of certification of the Return ofDeposits to be filed with the Registrar of Companies under Rule 10, by the

auditor of the Company.

2. The aforesaid amendment rules have come into force with effect from 1st

April, 1978 and, accordingly, all the Returns of Deposits made as on 31st

March, 1978 onwards require to be duly certified by the auditors of the

companies concerned.

3. Rule 10(1) of the Companies (Acceptance of Deposits) Rules, 1975 as it

stands after the amendment referred to above requires, every company to

which these rules apply shall, on or before the 30thday of June of every year,

file with the Registrar, a return in the form annexed to these rules and

furnishing the information contained therein as on 31stday of March of that

year, duly certified by the auditor of the Company. It follows, therefore, that

every company to which these rules apply shall prepare the return as on 31st

March of every year, shall get the return certified by the concerned auditorand shall submit the audited return to the Registrar of Companies by 30th

June.

Published in The Chartered Accountant, September, 1979, pp. 275-276.


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24

4. It may be observed that neither the amended Rule 10 of the Companies

(Acceptance of Deposits) Rules, 1975 nor the form of return prescribed

thereunder provides the manner in which the auditor should certify the return.

Even in the form of return, no space has been provided for auditors'certificate. Consequently, no statutory guidance is available to the auditor as

regards the scope, manner and limitations inherent in this requirement of

certification.

5. There are inherent practical problems involved in this certification. Having

regard to the problems, the Company Law Committee of the Institute has

decided to issue this Guidance Note for aiding the members in correctly

understanding the implications involved and for securing uniformity inapproach.

6. The problems associated with this work of certification include the

following:

Accounting year ending of companies in large number of cases may not

coincide with the date prescribed for making the return i.e., 31st March. As a

result the following situations may arise:

(a) A part of the accounting data of some of the companies, relating to

deposits underlying the balances included in the return of deposit is

bound to remain unchecked during the normal cycle of statutory audit.

(b) Similarly, companies whose year-end after 31st March will invariably

have data to be included in the Return of Deposit covered by the

checking of two successive statutory audits, which may not necessarily

be by the same auditor.

(c) There may also occur a change in the auditors during the reporting

period, i.e., between April and June. It is possible in such a case that

the retiring auditors hold office for a part of this period and the new

auditors hold office for the remaining part.

7. The following can be considered as satisfactory approach in the

circumstances enumerated above.

(a) The auditor, if the period of his office has not come to an end by thetime he certifies the return or he is re-appointed, should carry out the

necessary checking of the transactions falling beyond the period

covered by statutory audits so as to satisfy himself about the accuracy

of the figures, set against various items in the return and the


38/619

Certificate Pursuant to Companies (Acceptance of Deposits) Rules, 1975

25

information, if any, contained in the return. If, however, the auditor in

view of the volume of transactions in the balance period, is unable to

carry out a complete audit for the balance period, he may qualify and

indicate the extent of checking done for the balance period. In any case,the auditor who certifies the return should ensure that any residual

period not already audited is covered by necessary checking.

(b) Where the auditor is faced with a situation that part of the period

covered by the return under certification has been statutorily audited by

a different auditor, he is in the normal course entitled to rely on the work

performed by such auditor as is related to his work in connection with

the certification. It may also be pointed out that this principle has beenexplicitly accepted by the Institute of Chartered Accountants of India in

Clause (2) of Part I of the Second Schedule to the Chartered

Accountants Act, 1949. However, it would be desirable that the auditor

makes a mention of the fact that part of the data underlying the figures

in the return have been audited by other auditor and he has relied on

such work. In making this mention, the period covered by the audit of

the other auditor should also be mentioned. However, if there are

circumstances to suggest that the work of the previous auditor mayrequire a review before being relied upon, it would be safer to do the

review before deciding whether to place reliance on such work or not. It

is emphasised that the need for a review would not in the normal course

arise; it is, however, possible that in course of audit of the accounts of

the current year, matters may come to the notice of the auditor to

warrant a need for review.

(c) In the natural course it is expected that the outgoing auditor will do thecertification if he has covered longer part of the period for which the

return is made. In case, for any reason, the outgoing auditor is not able

to undertake this certification, the incoming auditor will certify the return

in accordance with the procedure referred to earlier.

8. In terms of Rule 10(1) the auditor is to certify the deposit return. The

deposit return is also required to be certified by the Manager of the Company

pursuant to the form of return as annexed to the Companies (Acceptance ofDeposits) Rules. The Manager has to verify and certify the figures of

deposits, liquid assets and interest rates under Parts A, B, and C of the

Return form as correctly prepared. In addition, he is to certify the aggregate

of the paid-up capital and free reserves, etc., as arrived at on the lines


39/619


26

indicated in explanation to Rule 3 of the Rules. It is open to debate whether

the certificate of the Manager on paid-up capital and free reserves referred to

above requires a further certification by the auditor. Rule 10(1) requires the

return together with the information contained therein to be duly certified bythe auditor of the company. The Managers certificate on paid-up capital and

free reserves constitutes information contained in the return and accordingly

this requires to be covered by the certificate of the auditor.

9. The auditor in drafting the certificate should make clear what he is

certifying. The Institute does not approve the issue of a bald certificate such

as Examined and found correct. Two suggested certificates-an unqualified

one and the other a qualified one, are given hereunder for the guidance ofthe members:

(i) We have examined the books of account and other records maintained

by .. Company Ltd. in respect of the particulars

furnished in the Return of Deposits as on 31st March, 19____ and

certify that to the best of our knowledge and according to the

information and explanations given to us and as shown by the records

examined by us, the figures of deposits and interest rates under PartsA, B, and C of the Return are correct.

We further certify the correctness of the particulars of the paid-up

capital and free reserves, etc., given in the Managers Certificate.

Place:

Date: Chartered Accountants

(ii) We have verified the figures of deposits and interest recorded in the

annexed Return of Deposits of . as at 31st March, 19_____ with

the register maintained by the Company in accordance with the

Companies (Acceptance of Deposits) Rules, 1975 and certify that to the

best of our knowledge and according to the information and explanation

given to us and as shown by the record shown to us, the annexed

Return has been correctly prepared, except that deposits from

employees aggregating to Rs._______ have not been treated by theCompany as Deposits, for the purpose of this Return but instead

indicated in the Return separately in brackets against the respective

items of Deposits.


40/619

Certificate Pursuant to Companies (Acceptance of Deposits) Rules, 1975

27

We further certify the correctness of the particulars of the paid-up

capital and free reserves, etc., given in the Manager's Certificate.

Place:

Date: Chartered Accountants

10. If the auditor has any reservation about the figures stated in the return

either due to any error or on account of a particular interpretation being

followed by the company in treating items, say as deposits or exempt

deposits or otherwise, to which he does not subscribe, he should include a

suitable qualification in the Certificate.

11. Statements in the Certificate conveying reliance having been placed on

certain documents or representation of the management are superfluous and

may cause confusion and therefore such statements should be avoided.


41/619

6GUIDANCE NOTE ON THEDUTY CAST ON THEAUDITORS

UNDER SECTION 45-MA

OF THE RESERVE BANK OF INDIAACT,1934

1. The Reserve Bank of India (Amendment) Act, 1974 has inserted a newSection 45-MA in the Reserve Bank of India Act, 1934 with effect from 13th

December, 1974. This Section, which is reproduced below, requires the

auditors of non-banking institutions to enquire whether or not the institution,in case it has accepted deposits, has furnished to the Reserve Bank of India

statements, information or particulars relating to the deposits as are

required to be furnished under Chapter IIIB of the Reserve Bank of India Act.

It further states that in case the auditor of a non-banking institution is not

satisfied about due compliance by it of the aforesaid requirement to furnish

statements, information or particulars, it is his duty to make a report to the

Reserve Bank giving the aggregate amount of deposits held by theinstitution.

There is an additional part in this requirement specifically concerning

company auditors. If a non-banking company has accepted 'deposits' and in

the opinion of the auditor, has failed to furnish the required statements,

information or particulars, his duty to report to the Reserve Bank has been

combined with his duties under Section 227 of the Companies Act. He is to

incorporate the Report made or intended to be made to the Reserve Bank in

his Report to the company under Section 227 of the Companies Act.

Published in the CICA Newsletter May, 1976, pp.259.


42/619

Auditors Duties u/s 45MA of RBI Act, 1934

29

Section 45-MA (1) - It shall be the duty of an auditor of a non-banking

institution to inquire whether or not the non-banking institution has

furnished to the Bank such statements, information or particulars

relating to or connected with deposits received by it, as are required tobe furnished under this chapter, and the auditor shall, except where he

is satisfied on such enquiry that the non-banking institution has

furnished such statements, information or particulars, make a report to

the Bank giving the aggregate amount of such deposits held by the non-

banking institution.

(2) Where, in the case of a non-banking institution, being a company,

the auditor has made, or intends to make, a report to the Bank undersub-section (1), he shall include in his report under sub-section (2) of

Section 227 of the Companies Act, 1956, the contents of the report

which he has made, or intends to make, to the Bank.

2. The directions issued by the Reserve Bank of India in exercise of thepowers vested under Chapter IIIB referred to above are contained in (a) Non-

Banking Financial Companies (Reserve Bank) Directions, 1966; and (b)

Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1973.These directions, at present cover only companies as defined in the

Companies Act, 1956, including foreign companies. Under Chapter IIIB of the

Reserve Bank of India Act, the Non-Banking Non-Financial Companies

(Reserve Bank) Directions, 1966 were also issued but they have been

withdrawn with effect from 3rd June, 1975 on the promulgation of the

Companies (Acceptance of Deposits) Rules, 1975 under Section 58-A of the

Companies Act, 1956. Certain classes of companies like banking companies,

insurance companies etc., are exempted from these directions and membersmay go through the directions to see what classes of companies are

exempted.

3. The duty of the auditor is confined to making inquiry. It is worthwhile tonote in this connection that Section 227(1A) of the Companies Act also

contains a requirement for inquiry into several specified matters and in this

connection members' attention is invited to Statement 204 of the Members

Handbook Series issued by the Council of the Institute. Therefore in thecontext of the requirement of the Reserve Bank of India, the word to inquire

simply means to seek information. The auditor, under the Reserve Bank

Act, should be acquainted with the statements, information or particulars

required to be submitted under Chapter IIIB of that Act and should ensure


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that proper evidence is available to show that such statements, information

or particulars have been furnished to the Reserve Bank of India.

If the auditor is satisfied that sufficient evidence is available about

submission of the statement etc., by the non-banking institution, no further

duty rests on him; he is not concerned to look into the accuracy of the

statements etc.

4. The auditor of a non-banking financial and miscellaneous non-bankingcompany (including a foreign company) should write to each such company

along the lines of the enclosed Annexure 'A' irrespective of, whether or not,

according to the books of account, any deposits have been obtained by the

client.

If the client indicates in reply to the enclosed letter that no deposits have

been obtained, the auditor should verify this from the records.

If deposits have been obtained and the client indicates that he has duly

furnished the necessary information and particulars to the Reserve Bank of

India, the auditor should ask the client to produce evidence to show that he

has done so. If the evidence is satisfactory, the auditor has no further

obligation because all that he is required to do by the aforesaid provision of

the Amendment Act is to satisfy himself that the necessary information,

particulars and statements relating to the deposits have been furnished to

the Reserve Bank of India.

If the auditor is not satisfied with the evidence indicating that the necessary

statements, information or particulars have been furnished to the Reserve

Bank of India he should write to the Reserve Bank as per the draft enclosed

as Annexure B. It would be noted that the Report to the Reserve Bank is

only to contain the aggregate amount of deposits held and the auditor is not

required to report his findings on the inquiry. For this purpose, he should

ascertain the aggregate amount of the deposits outstanding at the last date

of the financial year in respect of which the audit is conducted.

5. Where the auditor is obliged to write to the Reserve Bank pursuant tothe preceding paragraph, he should also include the undernoted paragraph in

his statutory report to the shareholders, at the end of the usual reportingrequirements:

We have not been satisfied on our inquiry during the course of our

audit that the Company has furnished the requisite statements;


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information or particulars as required to be furnished to the Reserve

Bank of India under Chapter IIIB of the Reserve Bank of India Act,

1934, and the aggregate amount of the total deposits outstanding as at

the last date of the financial year i.e. ..........................., 19 .............. isRs....(X or Nil as the case may be).

6. Since the auditor should be acquainted with the returns, etc., which areto be furnished to the Reserve Bank of India, for the guidance of the

members, the specific returns and statements to be furnished by different

classes of companies and the due date for each class of company have been

indicated in Annexure 'C'. Members should ascertain the class of company

involved for the purpose of ensuring that they correctly apply thespecifications indicated in Annexure 'C'.

7. Since an auditor can satisfy himself about the compliance with therequirements of submission of returns etc., only during the course of carrying

out of the audit, it may be reasonably construed that his duty to verify

compliance starts from the time he has assumed the office and stretches to

the date of his report on the accounts audited. Consequently, he has to verify

whether the audited Balance Sheet and the Profit and Loss Account whichwere laid in the Annual General Meeting in which he was appointed or re-

appointed, have been submitted to the Reserve Bank of India or not. As

regards the other returns, he is to enquire whether the particulars as of

March 31, in case of non-banking financial companies and as of March

31/September 30, in case of miscellaneous non-banking companies have

been filed with the Reserve Bank of India within the following June 30, and

December 31, respectively. Obviously, in those cases where the auditor has

already issued his report on the accounts of the Company before June 30 orDecember 31, as the case may be, it could not be said that it is the duty of

such auditor to look into the compliance with the requirement of submission

of the other returns. In such cases, the responsibility for the inquiry into

compliance with this requirement naturally falls on the next auditor.

8. No time limit appears to have been set for the auditor to submit hisreport to the Reserve Bank in the event he is not satisfied about the

furnishing of statements etc., by the non-banking institution. However, itshould be submitted to the Reserve Bank within a reasonable time of the

auditing work being completed. An auditor is not normally concerned with

delays in filing returns etc, with the Reserve Bank and, therefore, he should

report on the basis of the returns etc. filed by the date he signs his report on


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1975 and 2ndJune, 1975, it seems that non-banking non-financial companies

will have to meet the requirements of both the aforesaid Directions and the

Rules.

With effect from 3rd June, 1975, though the aforesaid Directions have been

cancelled, a transitional requirement has been placed on such companies as

were covered by the aforesaid Directions to furnish particulars of Deposits

held on 31stMarch, 1975 to the Reserve Bank before 30thSeptember of that

year, in Form 'D' and no corresponding duty to inquire and report has been

placed on the auditor.

It has been made clear by the Reserve Bank of India that the Non- Banking

Financial Companies and the Non-Banking Miscellaneous Companies willcontinue to be governed by the respective Directions which have not been

withdrawn and the auditors of such companies are required to carry out the

duty specified in Section 45-MA of the Reserve Bank of India Act, 1934.


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Annexure A

ABC Company Limited

Dear Sirs,

Reserve Bank of Ind ia Act , 1934

Pursuant to the requirements of Section 45-MA of the above Act, and

pursuant to the directions issued by the Reserve Bank of India from time to

time, we hereby call upon you to furnish the undernoted information as early

as possible in connection with our audit of your accounts for the year/period

ended............................(i) Have you received any deposits of the nature covered by the Reserve

Bank of India Act and the directions issued thereunder?

(ii) Have you furnished the requisite statements, information or particularsto the Reserve Bank of India as are required to be made by you, if any,

under Chapter IIIB of the Act, and can you satisfy us by producing

documentary evidence indicating that you have done so?

(iii) If your answer to question (ii) is in the negative, please indicate thebalance of the deposits outstanding at the last date of the financial year

i.e. ..............................

Yours faithfully,

Chartered Accountants


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Annexure B

Reserve Bank of India,

Department of Non-Banking Companies,Post Box No. 571,

15, Netaji Subhas Road,

Calcutta-700 001.

Dear Sirs,

ABC Company Limited

Reserve Bank o f India (Amendment) Act , 1974In connection with the inquiry made by us during the audit of the above

mentioned Company for the year/periodended.................., please note that

we have not been satisfied that the Company has furnished the requisite

statements, information or particulars as required to be furnished to the

Reserve Bank of India under Chapter IIIB of the Reserve Bank of India Act,

1934, and the aggregate amount of the total deposits outstanding as at the

last date of the financial year, i.e. 197 .. is Rs. (X orNil as the case may be).

Yours faithfully,

Chartered Accountants


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Annexure C

Type of Company Returns of Statements

to be furnished to theReserve Bank

Period and due date

Non-banking financial

companies this

includes mainly hire

purchase finance

companies, investment

companies, loan

companies, housing

finance companies,

mutual benefit finance

companies and

miscellaneous finance

companies.

(a) Audited Balance

Sheet as at

Handbook Compendium of Guidance Notes Vol II 2011

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