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Home » » Companies (Auditor's Report)(Amendment) Order, 2004 - Clause 4(xiv)

Companies (Auditor's Report)(Amendment) Order, 2004 - Clause 4(xiv)

Written By Admin on Sunday, 1 April 2012 | Sunday, April 01, 2012

Clause 4(xiv)

if the company is dealing or trading in shares, securities, debentures and other investments, whether proper records have been maintained of the transactions and contracts and whether timely entries have been made therein; also whether the shares, securities, debentures and other investments have been held by the company, in its own name except to the extent of the exemption, if any, granted under section 49 of the Act.

1) The requirement applies to companies which deal or trade in shares, debentures and other securities. To deal or trade implies a purchase or sale with a view to make profit. Therefore, this requirement does not apply to companies which are not dealing or trading in investments but which purchase investments with a view to hold such investments and earn
income from dividend or interest thereon.
 
2) This requirement can be considered in three parts, namely:
 
(i) whether records regarding transactions and contracts are maintained;
 
(ii) whether timely entries have been made in such records; and
 
(iii) whether the investments are in the company’s own name.
 
3) Some of the factors that may be considered to determine whether the company is dealing or trading in investments or whether it is merely holding investments are as follows:
 
(i) The objects of the company as stated in the Memorandum of Association.
 
(ii) The period of time for which individual investments are held before they are sold.
 
(iii) The reasons, to the extent they can be determined, for purchase or sale of an investment. 

(iv) Internal procedure, orders or directives regarding purchase and sale of investments.
 
(v) Method of valuation of investments for balance sheet purposes. For example, if investments are treated as stock-in-trade for the purposes of valuation, the indication would be that the company is an investment company.

(vi) The status given to the company in its tax assessments, that is, whether it is treated as a dealer in investments (profits being subjected to tax as business profits) or whether it is treated as an investor (profits being subjected to tax as capital gains).

4) In deciding whether records have been properly maintained, the auditor has to examine both, whether the form in which records are maintained is adequate and also whether the records themselves are properly written up and preserved. The adequacy of the records has to be tested in the light of their ability to give details of (i) purchases and sales and the profit or loss arising on sale, (ii) the stock of investments and their valuation, and (iii) the amounts due for sales and payable for purchases. Some of the features to be examined in this connection would be the following:

(i) Details regarding the purchase and sale, that is, the particulars about the person from whom or to whom the purchase or sale was made, the rate at which the purchase or sale was made, the number of shares or other investments with full details regarding class, distinctive numbers, number of certificates, etc., and the document, for example, bought note or sale note evidencing the sale.

(ii) The adjustment, if any, necessary when securities are purchased or sold and whether the quotations are exclusive of interest accrued or, when shares are purchased or sold ex-dividend whether dividend has to be paid or received.
 
(iii) The details of holdings in individual companies, the classes of investments (e.g., equity shares, preference shares, debentures, etc.), the basis on which the closing stock is valued and the profit or loss on sale is to be computed.
 
(iv) The recording of shares received as bonus shares; the accounting of rights subscribed for or sold.

(v) The individual accounts of the parties from whom moneys are due for sale or to whom moneys are payable for purchases and the settlements made there against.

5) The auditor is also required to examine whether timely entries are made in the records. This may be done by one or more of the following methods:

(i) a surprise inspection of the records;

(ii) an examination of the system of internal control with particular reference to the manner in which and the time at which entries are made in the records; and

(iii) an examination of the internal audit reports to ensure if the programme of internal audit specifically covers an inspection of the records to determine whether entries are made in time.

6) Section 49 of the Act requires that all investments have to be made and held in the company’s own name. The exemptions provided by the section are:
 
(i) where a person is appointed as a nominee of the company on the board of directors of another company and such nominee is required to hold qualification shares, then to the extent of such qualification shares;

(ii) where a company has a subsidiary and it is necessary to ensure that the number of members of the subsidiary is not reduced below seven in the case of a public company and two in the case of a private company;

(iii) in the case of a company whose principal business consists of the buying and selling of shares or securities;

(iv) in the case of investments deposited with a bank for collection of dividend or interest or for transfer into such bank’s name to facilitate transfer; and

(v) in the case of investments pledged as security for loans or for performance of obligations.

7) The auditor is required to report whether the investments are held in the company’s own name in respect of companies which deal or trade in investments. However, section 49(4) specifically exempts companies whose principal business is the buying and selling of shares or securities from that requirement. It seems, therefore, that the requirement to report will arise when the buying and selling of shares or securities is not the principal business of the company but it does such business along with some other business.

8) When a company deals or trades in investments it is possible that investments which are intended or contracted to be sold immediately may not have been transferred to the company’s own name. The auditor should, therefore, use his discretion to ascertain whether, in the circumstances of each case, the failure to transfer the investments to the company’s name is understandable.
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