INTRODUCTION OF AUDIT

INTRODUCTION
The term audit is derived from the Latin term audire, which means to hear. In early
days an auditor used to listen to the accounts read over by an accountant in order to check
them. Auditing is as old as accounting. It was in use in all ancient countries such as
Mesopotamia, Greece, Egypt. Rome, U.K. and India. The Vedas contain reference to
accounts and auditing. Arthasashthra by Kautilya detailed rules for accounting and auditing
of public finances. The original objective of auditing was to detect and prevent errors and
frauds. Auditing evolved and grew rapidly after the industrial revolution in the 18th century
With the growth of the joint stock companies the ownership and management became
separate. The shareholders who were the owners needed a report from an independent expert
on the accounts of the company managed by the board of directors who were the employees.
In India the companies Act 1913 made audit of company accounts compulsory. With
the increase in the size of the companies and the volume of transactions the main objective of
audit shifted to ascertaining whether the accounts were true and fair rather than true and
correct. Hence the emphasis was not on arithmetical accuracy but on a fair representation of
the financial efforts. The companies Act.1913 also prescribed for the first time the
qualification of auditors. The International Accounting Standards Committee and the
Accounting Standard board of the Institute of Chartered Accountants of India have developed
standard accounting and auditing practices to guide the. accountants and auditors in the day
to day work. The later developments in auditing pertain to the use of computers in accounting
and auditing. In conclusion it can be said that auditing has come a long way from hearing of
accounts to taking the help of computers to examine computerized accounts.

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 OBJECTIVES OF THE STUDY

The objectives of our project is -

To understand the concept of Auditing, Its Features & Importance in Corporate

Sector.

To study the various aspects in company audit.

To study the scope of Auditing in Modern Business.

To study the various Objectives of Auditing.

To understand the concept of Application of Caro 2003.

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 RESEARCH METHODOLOGY

I have conducted the research to achieve my objectives for my academic purpose. The
Research Design helped me to give proper guideline in my research work and also give
recommendations on the basis of the finding of the research.
The Research has been created with the help of Desk And Web Based Research. A
detailed search was conducted in Business journals, market research sites, business
newspapers, and publications to study their CSR activities, CSR strategy and identify metrics
used by them (if any).

Features of Auditing :

A) Audit is a systematic and scientific examination of the books of accounts of a business.

B) Audit is undertaken by an independent person or body of persons who are duly qualified
for the job.

C) Audit is a verification of the results shown by the profit and loss account and the state of
affairs as shown by the balance sheet.

D) Audit is a critical review of the system of accounting and internal control.

E) Audit is done with the help of vouchers, documents, information and explanations
received from the authorities.

F) The auditor has to satisfy himself with the authenticity of the financial statements and
report that they exhibit a true and fair view of the state of affairs of the concern.

G) The auditor has to inspect, compare, check, review, scrutinize the vouchers supporting the
transactions and examine correspondence, minute books of share holders, directors,
Memorandum of Association and Articles of association etc., in order to establish correctness
of the books of accounts.

Basic Principles of Audit :

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 AAS-1 describes the basic principles, which govern the auditor's professional
responsibilities and which should be complied with whenever an audit is carried out. These
are:-
1) Integrity, objectivity and independence:
The auditor should be straightforward, honest and sincere in his approach to his professional
work. He must be fair and must not allow prejudice or bias to override his objectivity. He
should maintain an impartial attitude and appear to be free of any interest which might be
regarded. Whatever it's actual effect, as being incompatible with integrity and objectivity.
2) Confidentiality:
The auditor should respect the confidentiality of information acquired in the course of his
work and should not disclose any such information to a third party without specific authority
or unless there is legal or professional duty to disclose. It is remarked that an auditor should
keep his ears and eyes open but his mouth shut.
3) Skill and competence:
The audit should be performed and the report prepared with due professional care by persons
who have adequate training, experience and competence. This can be acquired through a
combination of general education, technical knowledge obtained through study and formal
courses concluded by a qualifying examination recognized for this purpose and practical
experience under proper supervision.
4) Work performed by others:
When the auditor delegates work to assistant* or uses work performed by other auditors or
experts, he will continue to be responsible for forming and expressing his opinion on the
financial information. At the same time he is entitled to rely on work performed by others
provided he exercises adequate skills and care and is not aware of any reason to believe that
he should not have relied. The auditor should carefully direct, supervise & review work
delegated by assistants. He should obtain reasonable assurance that work performed by other
auditors or experts is adequate for this purpose.
5) Documentation:
The auditor should document matters, which are important in providing evidence that the
audit was carried out in accordance with the basic principles.
6) Planning:
The auditor should plan his work to enable him to conduct an effective audit in an efficient
and timely manner. Plans should be based on knowledge of client's business. They should be
further developed and revised, if required, during the course of audit.

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7) Audit evidence:
The auditor should obtain sufficient appropriate audit evidence through the performance of
compliance and substantive test procedure. It will enable him to draw reasonable conclusions
there from on which he has to base his opinion on the financial information.
8) Accounting system & internal control:
The auditor should gain an understanding of the accounting system and related internal
controls. He should study and evaluate the operation of those internal controls upon which he
wishes to rely in determining the nature, timing and extent of other audit procedures.
9) Audit conclusions and reporting:
The auditor should review and assess the conclusions drawn from the audit evidence obtained
and from his knowledge of business of the entity as the basis for the expression of his opinion
on the financial information.
OBJECTIVES OF AUDITING

There are two main objectives of auditing. The primary objective and the secondary or
incidental objective.

A. Primary Objective as per Section 227 of the Companies Act 1956, the primary duty
(objective) of the auditor is to report to the owners whether the balance sheet gives a true and
fair view of the Companys state of affairs and the profit and loss A/c gives a correct figure of
profit of loss for the financial year.

B. Secondary Objective it is also called the incidental objective as it is incidental to the

satisfaction of the main objective. The incidental objective of auditing are:

i. Detection and prevention of Frauds, and

ii. Detection and prevention of Errors.

Detection of material frauds and errors as an incidental objective of independent

financial auditing flows from the main objective of determining whether or not the financial
statements give a true and fair view. As the Statement on auditing Practices issued by the
Institute of Chartered Accountants of India states, an auditor should bear in mind the
possibility of the existence of frauds or errors in the accounts under audit since they may
cause the financial position to be mis-stated. Fraud refers to intentional misrepresentation of
financial information with the intention to deceive. Frauds can take place in the form of
manipulation of accounts, misappropriation of cash and misappropriation of goods. It is of
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 great importance for the auditor to detect any frauds, and prevent their recurrence. Errors
refer to unintentional mistake in the financial information arising on account of ignorance of
accounting principles i.e. principle errors, or error arising out of negligence of accounting
staff i.e. Clerical errors.
Auditing refers to a systematic and independent examination of books, accounts, documents
and vouchers of an organization to ascertain how far the financial statements present a true
and fair view of the concern. It also attempts to ensure that the books of accounts are
properly maintained by the concern as required by law. Auditing has become such an
ubiquitous phenomenon in the corporate and the public sector that academics started
identifying an "Audit Society".The auditor perceives and recognizes the propositions before
him/her for examination, obtains evidence, evaluates the same and formulates an opinion on
the basis of his judgement which is communicated through his audit report.

Any subject matter may be audited. Audits provide third party assurance to various stakeholders
that the subject matter is free from material misstatement. The term is most frequently applied
to audits of the financial information relating to a legal person. Other areas which are
commonly audited include: internal controls, quality management, project management, water
management, and energy conservation.

As a result of an audit, stakeholders may effectively evaluate and improve the effectiveness of
risk management, control, and the governance process over the subject matter.

The word audit is derived from a Latin word "audire" which means "to hear".During the
medieval times when manual book-keeping was prevalent, auditors in Britain used to hear the
accounts read out for them and checked that the organization's personnel were not negligent or
fraudulent.

Accounting

Due to strong incentives (including taxation, misselling and other forms of fraud) to misstate
financial information, auditing has become a legal requirement for many entities who have the
power to exploit financial information for personal gain. Traditionally, audits were mainly

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associated with gaining information about financial systems and the financial records of a
company or a business.

Financial audits are performed to ascertain the validity and reliability of information, as well as
to provide an assessment of a system's internal control. As a result of this, a third party can
express an opinion of the person / organization / system (etc.) in question. The opinion given on
financial statements will depends on the audit evidence obtained

TYPES OFAUDIT

Integrated Audits

In US audits of publicly traded companies are governed by rules laid down by the Public
Company Accounting Oversight Board (PCAOB), which was established by Section 404 of the
SarbanesOxley Act of 2002. Such an audit is called an integrated audit, where auditors, in
addition to an opinion on the financial statements, must also express an opinion on the
effectiveness of a company's internal control over financial reporting, in accordance with
PCAOB Auditing,

There are also new types of integrated auditing becoming available that use unified compliance
material (see the unified compliance section in Regulatory compliance). Due to the increasing
number of regulations and need for operational transparency, organizations are adopting risk-
based audits that can cover multiple regulations and standards from a single audit event.This is
a very new but necessary approach in some sectors to ensure that all the necessary governance
requirements can be met without duplicating effort from both audit and audit hosting resources.

Assessments

The purpose of an assessment is to measure something or calculate a value for it. Although the
process of producing an assessment may involve an audit by an independent professional, its

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purpose is to provide a measurement rather than to express an opinion about the fairness of
statements or quality of performance.

Auditors

Auditors of financial statements can be classified into two categories:

External auditor / Statutory auditor is an independent firm engaged by the client subject
to the audit, to express an opinion on whether the company's financial statements are free
of material misstatements, whether due to fraud or error. For publicly traded companies,
external auditors may also be required to express an opinion over the effectiveness of
internal controls over financial reporting. External auditors may also be engaged to
perform other agreed-upon procedures, related or unrelated to financial statements. Most
importantly, external auditors, though engaged and paid by the company being audited,
should be regarded as independent.

Cost auditor / Statutory Cost auditor is an independent firm engaged by the client subject
to the Cost audit, to express an opinion on whether the company's Cost statements and
Cost Sheet are free of material misstatements, whether due to fraud or error.

Internal auditors are employed by the organizations they audit. They work for
government agencies (federal, state and local); for publicly traded companies; and for
non-profit companies across all industries. The internationally recognised standard setting
body for the profession is the Institute of Internal Auditors - IIA (www.theiia.org). The
IIA has defined internal auditing as follows: "Internal auditing is an independent,
objective assurance and consulting activity designed to add value and improve an
organization's operations. It helps an organization accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and improve the effectiveness of risk
management, control, and governance processes". Thus professional internal auditors
provide independent and objective audit and consulting services focused on evaluating
whether the board of directors, shareholders, stakeholders, and corporate executives have
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 reasonable assurance that the organization's governance, risk management, and control
processes are designed adequately and function effectively. Internal audit professionals
(Certified Internal Auditors - CIAs) are governed by the international professional
standards and code of conduct of the Institute of Internal Auditors. [10] While internal
auditors are not independent of the companies that employ them, independence and
objectivity are a cornerstone of the IIA professional standards; and are discussed at length
in the standards and the supporting practice guides and practice advisories. Professional
internal auditors are mandated by the IIA standards to be independent of the business
activities they audit.

Performance Audits

Safety, security, information systems performance, and environmental concerns are increasingly
the subject of audits. There are now audit professionals who specialize in security audits and
information systems audits. With nonprofit organizations and government agencies, there has
been an increasing need for performance audits, examining their success in satisfying mission
objectives.

Quality Audits

Quality audits are performed to verify conformance to standards through review of objective
evidence. A system of quality audits may verify the effectiveness of a quality management
system. This is part of certifications such as ISO 9001. Quality audits are essential to verify the
existence of objective evidence showing conformance to required processes, to assess how
successfully processes have been implemented, and to judge the effectiveness of achieving any
defined target levels. Quality audits are also necessary to provide evidence concerning reduction
and elimination of problem areas, and they are a hands-on management tool for achieving
continual improvement in an organization.

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To benefit the organization, quality auditing should not only report non-conformance and
corrective actions but also highlight areas of good practice and provide evidence of
conformance. In this way, other departments may share information and amend their working
practices as a result, also enhancing continual improvement.

PROJECT MANAGEMENT

Projects can undergo 2 types of Project audits:

Regular Health Check Audits: The aim of a regular health check audit is to
understand the current state of a project in order to increase project success.
Regulatory Audits: The aim of a regulatory audit is to verify that a project is
compliant with regulations and standards. Best practices of NEMEA Compliance Center
describe that, the regulatory audit must be accurate, objective, and independent while
providing oversight and assurance to the organization.

Energy Audits

An energy audit is an inspection, survey and analysis of energy flows for energy conservation in
a building, process or system to reduce the amount of energy input into the system without
negatively affecting the output(s).

Operations Audit

An operations audit is an examination of the operations of the client's business. In this audit the
auditor thoroughly examines the efficiency, effectiveness and economy of the operations with
which the management of the entity (client) is achieving its objective. The operational audit
goes beyond the internal controls issues since management does not achieve its objectives

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merely by compliance of satisfactory system of internal controls. Operational audits cover any
matters which may be commercially unsound. The objective of operational audit is to examine
Three E's, namely:[citation needed]
Effectiveness doing the right things with least wastage of
resources. Efficiency performing work in least possible time. Economy balance between
benefits and costs to run the operations[citation needed]

COMPANY AUDIT

INTRODUCTION

In 1959, The Tibetan Government in Exile was set up in India. The need for a separate audit
office with the objective of supervising and scrutinizing the accounts and records of all
government, semi government and various undertakings of the Central Tibetan
Administration was strongly felt. Thus in 1962, a separate Office of the Auditor General
(OAG) was established under the supervision of Kashag. It was then headed by an officer
with a rank of Secretary. Accordingly, audit rules and Regulations were also formulated
in conformity with the situations at that time.
AUDITOR GENERAL
With the adoption of the Charter of the Tibetans in exile in 1991 as the supreme law governing
the functions of Central Tibetan Administration, the Office of the Auditor General was
commissioned as an Autonomous Body status under the article 106 of the Charter. Article
107 provided for an Auditor General to be appointed by His Holiness the Dalai Lama.
Accordingly, the first Auditor General was appointed on the 23rd of September 1991.
AUDIT MANUAL
The very purpose of this Audit Manual is to ensure a standard procedure of auditing and to
achieve uniformity in all auditing procedures rather than following ones own personal
interpretations and opinions at the time of actual auditing. It is therefore mandatory for
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 all auditors to follow and adhere to the instructions provided in the manual rather than to
rely on personal interpretation & opinion. The purpose of audit is to enable the
Departments, offices and Institutions to efficiently carry out its various activities. It is not
aimed at finding faults. Taking this into consideration, guidance should be sought and
given as prescribed in this manual. The concerned parties/staff should maintain a healthy
and mutually beneficial professional relationship.
DUTIES AND POWERS OF THE OFFICE OF THE AUDITOR GENERAL
Article 108 of the Charter of the Tibetans in Exile and the Regulations of the Office of the
Auditor General 1992, clearly highlights the Duties and Powers of the office of the Auditor
General as under:
i) The Office of the Auditor General shall complete the audit of the accounts of all the
Departments and its branches and fully Government Funded autonomous institutions
within 7 months commencing from the end of the accounting year and submit the
certified Statement of Account and report thereof to the Assembly of Tibetan Peoples
Deputies within 9 months commencing from the end of the accounting year.
ii) The office of the Auditor General shall complete the audit of the accounts of the semi
Government funded projects before the end of the next financial year. In case of
recurring sanction, utilisation certificate and report thereof shall be submitted before the
release of the next years final installment.
iii) The Office of the Auditor General shall have the power to review all the accounts of the
previous ten years and such power shall be exercised only:
a) If it is deemed necessary by the Office of the Auditor General; or
b) If it is required to do so by any of the Head Departments, or the Assembly of Tibetan
Peoples Deputies or the Standing Committee of the Assembly or the Cabinet or the
Supreme Justice Commission. In case the Review Report conflicts with the previous
Audit Report the later may be deemed void.

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 iv) The discrepancies or cases which ultra vires the principles of accounting revealed in the
course of review audit shall be reported to the Assembly of Tibetan Peoples Deputies
through the concerned Ministry within the stipulated time period.
v) The Office of the Auditor General shall also have the power to audit the annual accounts of
all the self-funded autonomous institutions under the jurisdiction of the Government. It
shall submit the Audit Report and Financial Statement of such institutions to the
Assembly of Tibetan Peoples Deputies within 3 months commencing from the date of
conclusion of such audit.

AUDIT PROCEDURES AND PRINCIPLES

AUDIT OBJECTIVES:
The auditor is to ensure that the prescribed standards of accounting are observed and that the
transactions are entered under proper heads. It is further required to see that:
i) The expenditures are incurred according to the budget sanctioned;
ii) The expenditures are in compliance with the objectives of the amount sanctioned;
iii) The purposes of the sanction are served;
iv) Efforts are made for judicious expenditure;
v) Price quotations, proper bills and receipts are obtained, quality control is maintained and
that the tax laws of the resident country are duly observed;
vi) Proper requisition for special sanction is complied with and that the expenditure so
incurred does not exceeds the amount so sanctioned.
AUDIT PROCEDURES:
Audit procedures as prescribed in the Rules and Regulation of the Office of the Auditor General
as given under shall strictly be observed.
i) The Office of the Auditor General shall standardize and prescribe the maintenance of books
of account, system of accounting, pro-forma of receipt & disbursement, income and
expenditure and balance sheet to all its units. For this purpose, it may train personnel if

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 so required. But no staff of the Office of the Auditor General shall write or help write the
books of account of any units.
ii) All accounts and other related documents after being verified by a competent authority
should be submitted to the Office of the Auditor General within following specified time.
a) Commencing from the month of April, the period to close every account of 1st quarter,
2nd quarter and 3rd quarter will be 30 days for the Departments in Dharamsala and
45 days for the units situated outside Dharamsala and 60 days for the office of
Representatives (Abroad)
b) For the 4th quarter, the period to close the accounts are 45 days for the Departments in
Dharamsala, 60 days for the units situated outside Dharamasala & 90 days for the
office of Representatives.
iii) In case of any units failing to submit the books of account and the other related documents
within the stipulated period of time, the Office of the Auditor General shall make inquiry
and issue notification to the concerned Department.
iv) In the course of audit, all the books of accounts relating to Receipts and Payments, Income
and Expenditure Account, Cash Balance, Bank Statement, Balance Sheet and other
related files and documents shall be produced before the auditor. If need be, even the
confidential documents should be produced before the Auditor General for scrutiny.
v) In the course of audit, the unit shall immediately give explanation and clarify all audit
queries or discrepancies raised by the auditor. Any unconvinced queries or errors shall
further be dealt with the competent head of the concerned unit. Still unconvinced and un-
clarified, such cases, shall finally be appended with the certified Statement of Account.3

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vi) The Office of the Auditor General shall, in consideration of the situation of any of its units,
execute Revenue Audit, Cost Audit, Administrative & Management Audit, System Audit,
Performance and Propriety Audit and Social Audit
vii) The Office of the Auditor General shall also execute test audit as and when circumstances
demand.
AUDIT PLANNING:
i) Planning of audit is very essential for an efficient conduct of audit. While planning audit
following aspects shall be taken into account.
a) Nature of business & its operation
b) Accounting policy & procedure and
c) Reliability of internal checks & control system
ii) As per annual audit allocation, after every three months, detailed information specifying the
units which were audited, being audited and remaining un-audited must be submitted to
the head office.
AUDIT PROGRAM:
Audit program is a blue print containing details about what should be done, by whom and how
much time it should take. It plays a vital role in an efficient and timely completion of the audit.
Audit program must be prepared as per annexure 1(A)+(B)
Following aspects must be highlighted in the audit program.
i) Procedure to be adopted during the course of examination.
ii) Distribution of work among the staff.
iii) An anticipated time for the completion of an audit work.
iv) Discussion of Audit Program with the head of a branch office or concerned Deputy/Under
Secretary in the head office is necessary. Auditor should execute audit work according to
the audit program and if any change is needed to the audit program, it has to be discussed
with the above concerned officers.

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 AUDIT OBSERVATION NOTE:
All observations made during the course of an audit should be properly recorded. This would
serve as an important tool to the auditor for future references and evidence of the work done.
All observations shall be recorded, with all the necessary information, in the manner as
prescribed in the Annexure II.
AUDIT MEMO:
The provision in the Article 6 of the Regulations of the office of the Auditor General, In the
course of audit the unit shall immediately give explanation and clarify all audit queries or
discrepancies raised by the auditor. Any unconvinced queries or errors shall further be dealt
with the competent head of the concerned unit. Still unconvinced and un-clarified cases, if any,
shall finally be appended with the certified statement of account must be complied with. For
this, an audit memo has to be issued.
Audit memo is an audit query on audit observation, in written, to the competent authority
whereby an explanation/clarification in written is sought. (refer Annexure III)
AUDIT DIARY:
Every audit team must maintain a diary to record daily activities undertaken during the course
of an audit including proceedings of any meeting/discussion held, verbal explanations and
clarifications given etc.
INTIMATION TO THE AUDITEE:

Before commencement of any audit, it is important to inform the auditee concerned well in
advance about the audit.

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 APPLICATION OF CARO 2003

INTRODUCTION

The Companies Act, 1956, under Section 227(4-A) stipulates that the The Central
Government
may, by general or Special Order, direct that, in the case of such class of companies as may be
specified in the order, the auditors report shall also include a statement on such matters as
specified therein.
In exercise of this provision the Central Government vide GSR no: 480(E) has issued the
Companies (Auditors Report) Order, 2003. The matters referred to in this order are to be
commented upon by the Statutory Auditors and hence assumes importance that the company
ensures adherence to the issues that are referred to in this order to escape adverse comment
in the Auditors Report. It is in this regard that this questionnaire has been drafted to act as
guidance document to ensure that the company complies with the CARO issues.
The CARO questionnaire needs to be applied at quarterly intervals and the adverse findings of
the same be reported to the Audit Committee to aid them in ensuring compliance with these
issues.
Auditors Report on the financial statements of a limited company
audited under the Companies Act, 1956, is gaining importance year after
year. That is the reason why, with changing environment in the commercial
world, amend-ments are being made in S. 227 of the Companies Act. The
auditor of a company is required to give his report in accordance with the
provisions of S. 227 of the Companies Act. S. 227(1A) requires him to make
certain specific enquiries during the course of audit and report if there are
any adverse comments on the matters listed in that section. It is proposed
to enlarge the scope of this enquiry by amendments proposed by
Companies (Amendment) Bill, 2003, recently introduced in the Rajya Sabha.
S. 227(3) lays down certain matters necessarily required to be reported
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upon by the auditor in his report. Recently this requirement has been
enlarged, and there is also a proposal in the Companies (Amendment) Bill,
2003, to further enlarge its scope. S. 227(4A) authorises the Central
Government to specify certain matters on which the auditor has to report
along with his report u/s.227(3). The Central Government can pass an order
u/s.227(4A) in consultation with the Institute of Chartered Accountants of
India.

2. Under the powers conferred by S. 227(4A), the Central Government first issued an
order called the manufacturing and other companies (auditors report) order, 1975,
(MAOCARO-1975). This order came into force from 1-1-1976 and applied to all companies
engaged in manu-facturing, service, trading and finance activities.

3. Applicability :

3.1 CARO came into force on 1-7-2003. It applies to all Companies, including foreign
companies defined u/s.591 of the Companies Act (Act). It is, however, provided that this order
shall not apply to follow-ing companies :

(i) A banking company

(ii) An insurance company

(iii) A company registered

u/s.25 of the Act

(iv) A private limited company which satisfies the following conditions :

(a) Its paid up capital and reserves do not exceed Rs.50 lacs;

(b) It has not accepted any public deposits;

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(c) Its turnover does not exceed Rs.5 crores; and

(d) Its outstanding loan from any bank or financial institution does not exceed Rs.10 lacs.

If any of the above conditions are not satisfied, the above order will apply to the private limited
company.

3.2 It may be noted that MAOCARO-1988, did not apply to banking, insurance and S. 25
companies. However, CARO gives relief to small private limited companies which satisfy the
above conditions. If we analyse the above conditions, the following conclusions can be
drawn :

(i) The term Reserves is not defined. Therefore, revaluation reserves, capital reserves,
etc. will have to be included. However, the credit balance of Profit & Loss Account will not be
included.

4. Fixed assets :

4.1 The reporting requirement under CARO with reference to maintenance of proper records
showing particulars and location of fixed assets, physical verifica-tion by management at
reason-able intervals and treatment of material discrepancies in the books of accounts is the
same as in MAOCARO.

4.2 MAOCARO required the auditor to state about revalua-tion and basis of revaluation of the
fixed assets during the year. This requirement is now deleted.

5. Inventories :

5.1 The reporting requirement under CARO in respect of following matters relating to
inventories is the same as in MAOCARO :

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(i) Whether physical verification of inventories is conducted by the management at reasonable
intervals.

(ii) Whether procedure for physical verification of inventories is reasonable and adequate. If
not, inadequacies to be reported.

(iii) Whether material discrepancies noticed on physical verification are properly dealt with in
the books of accounts.

5.2 CARO requires the auditor to report whether the company is maintaining proper records of
inventories. This is a new require-ment. Hitherto, the auditor was required to examine
whether proper records for inventories were maintained as part of his audit procedure. Now he
will have to make a specific mention about adequacy of these records in his audit report.

6. Loans given or taken by company :

6.1 The reporting requirement under this head according to MAOCARO and CARO in respect
of the following items is more or less the same :

(i) Secured or unsecured loans granted or taken by the company to or from companies, firms or
other parties in which directors are interested and are covered by S. 301 of the Act.

(ii) Whether rate of interest and other terms and conditions of such loans are prima facie
prejudicial to the interest of the company.

6.2 CARO requires the auditor to now report on the following items relating to the above
loans :

(i) The auditor has to give the number of persons and the amount involved in the transactions
required to be entered in the register maintained u/s.301. It appears that this information is to be
given in respect of all such parties even if the rate of interest and other terms and conditions are
prima facie not prejudicial to the interest of the company.

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(ii) Whether payment of the principal amount and interest are also regular. In this clause the
word payment is used. It appears that the intention is for reporting the regularity of
repayment of the principal and payment of interest on loan.

(iii) Whether the company has taken reasonable steps for recovery or payment of principal and
interest if any loan granted or taken is overdue and the amount exceeds Rs.1 lakh.

(iv) The above information is to be given in respect of loans granted or taken by the company
separately.

7. Internal control

procedures :

The requirements of reporting on the existence of internal control procedures commen-surate

with the size of the company and the nature of business, for purchase of inventory and fixed
assets and for sale of goods is the same in CARO as in MAOCARO. In addition, CARO
provides that the auditor should report whether there is continuing failure to correct major
weaknesses in internal control procedures.

8. Internal audit system :

MAOCARO provided that the auditor should report whether the company has an internal
audit system commensurate with its size and nature of business. This requirement applied in
respect of a company having paid up capital exceeding Rs.25 lacs as at the commencement of
the financial year or having an average turnover exceeding Rs.2 crores for a period of three
consecutive financial years immediately preceding the relevant financial year. CARO now
provides that this reporting requirement about internal audit system will apply to any of the
following companies :

(i) Listed company

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(ii) Any other company with paid up capital and reserves exceeding Rs.50 lacs as at the
commencement of the financial year, or

(iii) Any company having an average turnover exceeding Rs.5 crores for a period of 3
consecutive financial years immediately preceding the relevant financial year.

It may be noted that in (ii) above, the reserves will include all reserves but will not include
credit balance of profit and loss account.

9. Acceptance of public deposits :

The reporting by the auditor with regard to public deposits accepted by a

company u/s.58A/58AA or any contravention, is the same under MAOCARO and under
CARO. There is one additional requirement under CARO, under which the auditor has to report
whether the company has complied with any order passed by the Company Law Board in
respect of such public deposit.

10. Maintenance of cost records :

The reporting requirements with regard to maintenance of cost records by the company as
prescribed u/s.209(1)(d) of the Act are the same under MAOCARO and CARO.

11. Statutory dues :

11.1 The requirement of report-ing whether undisputed statutory dues such as Provident
Fund, Investor Education and Protection Fund, ESIC, Income-tax, Wealth tax, Sales Tax,
Customs Duty, Excise Duty, Cess, etc. with various statutory authorities have been deposited
regularly, and the extent of outstanding dues in arrears as on the last day of the financial year for
a period exceeding six months, as in MAOCARO, has been retained in CARO more or
less in the same form. Items of Investor Education Protection Fund, Cess and other statutory
dues, if any, have been added in CARO.

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12. Accumulated losses :

12.1 MAOCARO required the auditor to report whether the company was a Sick Company
u/s.3(1)(o) under SICA-1985. This requirement is deleted in CARO.

12.2 However, CARO provides that the auditor should report, in the case of a company which
has been registered for a period of not less than 5 years, whether the accumulated losses of the
company at the end of the relevant financial year are not less than 50% of its net worth and
whether it has incurred cash losses in that financial year and immediately preceding such
financial year. This is a new requirement which will give signal about the impending financial
sickness of the company. The terms Net Worth and Cash Losses have not been
defined in CARO and we will have to give them the normal meaning as understood by
accountants. It is possible that ICAI will explain the meaning of these terms when it issues a
statement on CARO to bring uniformity in our approach

13. Repayment of dues of banks, etc. and creation of securities :

13.1 CARO has put additional responsibilities on auditors who will now have to report about
defaults in repayment of dues to a financial institution, bank or debenture holders. If there is any
default, the period and amount involved in the default should be reported. This report-ing
requirement will require the auditor to ascertain the due dates for repayment of loans taken from
the banks and financial institutions as well as loans taken against debentures.

13.2 The auditors now have to report whether the company has created securities required to be
created in respect of debentures issued by the company.

14. Transactions prejudicial to the interest of the company :

14.1 CARO now requires the auditor to report whether the company has given any guarantee
for loans taken by others from a bank or financial institution where the terms and conditions are
prejudicial to the interest of the company. In other words, if any loan taken by a staff member or
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an associate concern is guaranteed by the company, the auditor will have to examine whether
any counter guarantee is taken by the company and whether such counter guarantee gives
sufficient comfort against any liability that may arise if the lender invokes the guarantee.

15. End use of borrowed funds :

CARO has placed additional responsibility on the auditor who will now have to report about
end use of the borrowed funds in the following cases. For this purpose, the auditor will have to
examine the cash flow statement in greater detail so that any diversion of funds can be
ascertained.

(i) If any term loan is taken by the company, whether such loan is used for the purpose
for which it is taken. For this purpose, the loan documents, sanction letters and other relevant
correspondence will have to be studied by the auditor.

(ii) When the management has disclosed about the end use of money raised by a public issue,
the auditor will have to report that he has verified such end use.

16. Reporting about frauds :

CARO requires the auditor to report whether during the financial year any fraud on the
company is noticed. Similarly, he has also to report whether he has noticed that the company
has committed any fraud on others. If the auditor has not noticed any such fraud, but the same is
reported to the company or by the company, he will have to refer to such report in the audit
report. The reporting of the fraud may be in the media. It appears that the auditor will have to
take note of such media reports also and refer to the same in his audit report, if such reports are
found to be authentic.

The auditor has to state in the audit report the nature of such fraud and the amount involved.
There is no requirement to report about the steps taken by the company in respect of such fraud.

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17. Some of the MAOCARO items deleted :

17.1 In the MAOCARO, various reporting items in Para 4 were divided in four parts, viz.,

(A) Manufacturing and

processing companies,

(B) Service companies,

(C) Trading companies and

(D) Finance, investment, chit fund, nidhi or mutual benefit companies.

This classification is absent in CARO and therefore all items in Para 4 of CARO will apply to
all companies to the extent applicable.

17.2 The following reporting items contained in MAOCARO do not find place in CARO :

(i) The unserviceable or damaged stores, raw materials or finished goods whether determined
and adequately provided in the accounts. This deletion is because this item is now covered in
AS-2 (Valuation of Inventories).

(ii) Maintenance of reasonable records about sale and disposal of realisable by-product and
scrap. This deletion is also in view of AS-2 which is now mandatory.

18. Finance, investment, chit fund, nidhi or mutual benefit companies :

As stated earlier, separate classification for such companies made in Para 4(D) of
MAOCARO has now been deleted. But the following reporting require-ments contained in Para
4(D) of MAOCARO have been retained more or less in the same manner and will apply to
other companies also to the extent applicable :

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(i) Whether adequate documents and records are maintained in cases where the company has
granted loans and advances on the basis of security by way of pledge of shares, debentures and
other securities. Under CARO, apart from the above, it is necessary to point out in the report the
deficiencies in the maintenance of above documents and records.

(ii) Whether the provisions of any special statute applicable to chit fund have been duly
complied with.

(iv) If the company is dealing or trading in shares, securities, debentures and other
investments, whether proper records have been maintained, timely entries are made and
such investments are in the name of the company.

19. Form of Audit Report :

CARO requires that the auditor should make a statement on the matters contained in the order.
This requirement applies even where the answers to any of the questions are unfavourable or
qualified. In such cases, the auditor should state his unfavour-able or qualified answers
and the reasons for the same. If the auditor is not able to express his opinion about any of the
items contained in the order, he should indicate such fact, and give reasons as to why he is
unable to express an opinion.

20. To sum up :

From the above comparison of the provisions of MAOCARO and the new CARO, it is
evident that the responsibilities of auditors in the coming years will be tremendously increased.
It may be noted that the above order dealing with the auditors report u/s.227(4A) has been
issued by the Government in consultation with our Institute. It appears that such a major step
increasing the responsibilities of our members has been taken by the Institute without taking
into confidence some senior members of the profession who are concerned with audits of
large companies and corporations on a day-to-day basis. The first reading of this order shows

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that many of our members will find it difficult to comply with some of the new reporting
require-ments.

EXAMPLE FOR COMPANY AUDIT (WIPRO LTD)

goods, materials or services have been made with the other parties.
(xii) As explained to us, the Company has a regular procedure for determination of
unserviceable or damaged stores and rawmaterial.
In our opinion adequate provision has been made in the accounts for the estimated loss on the
items so determined.
(xiii) In our opinion and according to the information and explanations given to us, the
Company has complied with the provisions
of Section 58A of the Companies Act, 1956 and the Companies (Acceptance of Deposits) Rules,
1975 and directives issued
by the Reserve Bank of India with regard to the deposits accepted from the public.
(xiv) In our opinion, the Company has maintained reasonable records for the sale and disposal
of realisable by-products and scrap.
(xv) The Company has a system of internal audit which is commensurate with its size and
nature of business.
(xvi) We have broadly reviewed the books of account maintained by the Company pursuant to
the rules made by the Central Government for maintenance of Cost records in respect of the
Vanaspati, Soaps and Lighting products under Section 209(1)(d) of the Companies Act, 1956
and are of opinion that, prima facie, the prescribed accounts and records have been maintained.
We have not, however, made a detailed examination of the records with a view to determining
whether they are accurate or complete.
(xvii) The Company has been generally regular in depositing Provident Fund and Employees
State Insurance dues with the appropriate authorities, except that in a few cases there were
minor delays in depositing the dues.

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(xviii) There are no undisputed amounts in respect of Income Tax, Wealth Tax, Sales Tax,
Customs Duty and Excise Duty which, as at the Balance Sheet date, were outstanding for a
period of more than six months from the date they become payable.
(xix) On the basis of our examination of the books of account and the information and
explanations given to us, there are no personal expenses which have been charged to the
revenue account other than those incurred in terms of contractual
obligations or in accordance with generally accepted business practice.
(xx) The Company is not a sick industrial Company within the meaning of Section 3(1)(O) of
the Sick Industrial Companies (Special Provisions) Act, 1985.
(xxi) In respect of service activities, the Company has a reasonable system, commensurate with
its size and nature of business for:
a) recording receipts, issues and consumption of materials and allocating materials consumed to
the relative jobs/projects.
b) allocating man-hours utilised to the respective jobs/projects.
c) authorisation at appropriate levels and an adequate system of internal control on issue of
stores and allocation of stores and manpower to jobs/projects.
(xxii) The business activity carried on by the Company includes letting out immovable property
on rental basis. For such activit ies,
maintenance of records of materials, stores, man-hours etc., is not considered necessary.
(xxiii) As regards the trading activity of the Company during the year, damaged goods were
determined and suitable value adjustment was made in the books of account.
For N.M. Raiji & Co
Chartered Accountants
J.M. Gandhi
Partner
DIRECTORS REPORT
The Directors present the Annual Report of Wipro Welfare Limited for the year
ended March 31, 2000.

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Financial results
As the Company is yet to commence its operations, no Profit and Loss
account is prepared. All expenditure incurred during the year has been
classified as pre-operative expenses which now stands at Rs.675,620/-.
Change in name of the Company
The Board of Directors of your Company have approved the change in name
of the Company from Wipro Factors Limited to Wipro Welfare Limited during
the year.

Fixed deposits
The Company has not accepted any fixed deposits from the public during the
year under review.
Directors
Mr Azim H Premji resigned as a Director of the Company with effect from April
26, 2000. The Directors place on record their appreciation of the valuable
advice and guidance given by him while he was a Director of the Company.
Mr. Satish Menon, was appointed as an Additional Director of the Company with
effect from April 26, 2000. In accordance with the provisions of Section 260 of
the Companies Act, 1956, he retires at the ensuing Annual General Meeting
and offers himself for re-appointment.
Auditors
The Board of Directors appointed M/s N M Raiji & Co. as auditors of the
Company retire at the conclusion of the ensuing Annual General Meeting and
offer themselves for re-appointment.
Personnel
The Company has no employees in the category specified under Section 217
(2A) of the Companies Act, 1956.

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Conservation of Energy/Technology Absorption, Research and
Development/Foreign Exchange Earnings and Outgoings
The Company has nothing to report on the particulars required under Section
217(1)(A) of the Companies Act, 1956, read with Rule 2 of the Companies
(Disclosure of Particulars in the Report of Board of Directors) Rules 1988.
On behalf of the Board of Directors
Suresh C. Senapaty
Chairman
Bangalore, April 26, 2000
WIPRO WELFARE LIMITED (Formerly known as Wipro Factors Limited)
2. Further to our comments in the annexure referred to in paragraph
1 above:
(a) we have obtained all the information and explanations which to the best of our knowledge
and belief were necessary for the purpose of our audit;
(b) in our opinion, proper books of accounts as required by law
have been kept by the Company so far appears from our examination
of the books;
(c) The Balance Sheet dealt with by this report is in agreement with the books of account;
(d) In our opinion, the Balance Sheet dealt with by this report is in compliance with the
Accounting Standards referred to in Section 211(3C) of the Companies Act, 1956.
(e) in our opinion and to the best of our information and according to the explanations given to
us, the accounts give the information required by the Companies Act, 1956, in the manner so
required and gives a true and fair view, in case of the Balance Sheet, of the state of affairs of the
Company as at March 31, 2000.
ANNEXURE TO THE AUDITORS REPORT
Annexure referred to in paragraph 1 of the Auditors Report to the members of Wipro Welfare
Limited (Formerly known as Wipro Factors Limited) for the
year ended March 31, 2000.

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1. In our opinion, clauses of Manufacturing and Other Companies (Auditors Report) Order,
1988, (i), (ii), (iii), (iv), (v), (vi), (ix), (x), (xi), (xii), (xiii), (xiv), (xvi), (xvii), (xix), and (xx) of
para (A) and clauses (ii), (iii) and (iv) of para (D) of Manufacturing and Other Companies
(Auditors Report) Order are not applicable for the current year.
i) The Company has neither taken nor granted any loans, secured or unsecured, from /to
companies, firms or other parties listed in the register maintained under Section 301 and / or
from the Companies under the same management as defined under sub-section (1B) of Section
370 of the Companies Act, 1956.
ii) The Company has not given any loans or advances in the nature of loans to any party.
iii) In our opinion and according to the information and explanations given to us, no undisputed
amounts in respect of income tax, wealth tax, sales tax, customs duty and excise duty were
outstanding as on March 31, 2000 for a period of
more than six months from the date they became payable.
For N.M. Raiji & Co.
Chartered Accountants
J.M. Gandhi
Partner

AUDITORS REPORT
To the Members of Wipro Welfare Limited (Formerly known as Wipro Factors
Limited)
We have audited the attached Balance Sheet of Wipro Welfare Limited
(Formerly known as Wipro Factors Limited) as at March 31, 2000. No Profit
& Loss account has been prepared as the Company has not commenced
commercial activity. We report as follows:
1. As required by the Manufacturing and Other Companies (Auditors
Report) Order, 1988, issued by the Companies Act, 1956, we annex
hereto, a statement on the matters specified in paragraphs 4 and

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5 of the said Order.
64
BALANCE SHEET AS AT MARCH 31, 2000
As at As at
March 31, March 31,
2000 1999
Schedule Rupees Rupees
SOURCES OF FUNDS
Shareholders funds
(a) Share Capital 1 661,710 661,710
(b) Advance against equity 2,500 2,500
664,210 664,210
APPLICATION OF FUNDS
Current Assets, Loans and Advances
(a)Cash and bank balances 2 25,200 25,200
Less : Current Liabilites
(a)Sundry creditors 36,610 30,610
(b)Audit fees payable - 6,000
36,610 36,610
Net Current Assets (11,410) (11,410)
Miscellaneous expenditure 3 675,620 675,620
(to the extent not written off
or adjusted)
664,210 664,210
Notes to accounts 4
As per our report attached For and on behalf of the
Board of Directors
for N M Raiji & Co.

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Chartered Accountants Suresh C. Senapaty (Chairman)
J M Gandhi Satish Menon (Director)
Partner
Bangalore, April 26, 2000 Bangalore, April 26, 2000
WIPRO WELFARE LIMITED (Formerly known as Wipro Factors Limited)
SCHEDULE 1 SHARE CAPITAL 2000 1999
Rupees Rupees
Authorised
10,000,000 equity shares of Rs. 10 each 100,000,000 100,000,000
Issued, Subscribed and Paid-up
66,171 equity shares of Rs. 10 each 661,710 661,710
66,170 equity shares of Rs. 10 each held by
Wipro Limited, the holding Company
SCHEDULE 2 CASH AND BANK BALANCES
Cash on hand 200 200
Balance with schedule bank in current account 25,000 25,000
25,200 25,200
SCHEDULE 3 MISCELLANEOUS EXPENDITURE
(to the extent not written off or adjusted)
Preliminary expenses 16,245 16,245
Pre-operative expenses
Advertisement 79,339 79,339
Membership and subscription 19,134 19,134
Legal and professional charges 33,250 33,250
Printing and Stationery 3,980 3,980
Rate and Taxes 523,672 523,672
675,620 675,620

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 CONCLUSION

When we speak of the objective, we rationalize the thinking process to formulate a set of
attainable goals, with reference to the circumstances, feasibility and constraints. In money
matters, frauds and errors are common place of occurrence. Apart from this, the statements of
account have their own purpose and use of portraying the financial state of affairs. The
objective of audit, naturally, should be to see that what the statements of account convey is true
and not misleading and that such errors and frauds do not exists as to distort what the accounts
should really convey. Till recently, the principal emphasis was on arithmetical accuracy;
adequate attention was not paid to appropriate application of accounting principles and
disclosure, for ensuring preparation of accounting statement in such a way as to enable the
reader of the accounting statement to form a correct view of the slate of affairs.

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 BIBLIOGRAPHY

Books
Advanced Auditing M.com - II Manan Prakashan written by Dr. Varsha
Ainapure.

Web-Bibliography :

www.google.co.in
www.wikipedia.com

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