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

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

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

Clause 4(v)(b)

whether transactions made in pursuance of such contracts or arrangements have been made at prices which are reasonable having regard to the prevailing market prices at the relevant time.

1) This clause requires the auditor to comment upon the reasonableness of the prices of all the transactions which have been entered in pursuance of contracts or arrangements covered in the register(s) maintained under section 301 of the Act if such transactions in respect of any party and in any one financial year exceed the value of rupees five lakhs. The auditor is required to determine the reasonableness of prices having regard to the prevailing market prices at the relevant time. It is clarified here that the scope of the auditor’s inquiry under this clause is restricted to such transactions to which sections 297 and 299 of the Act apply and thereby required to be entered in the register maintained under section 301 of the Act.

2) The auditor should, while reporting on this clause of the Order, in the first instance, determine whether the aggregate value of all the transactions entered into with any of the companies/firms/parties covered in the register maintained under section 301 of the Act exceed the value of rupees five lakhs. If so, the auditor has to examine whether each of the transactions entered into with such a company/firm/party have been made at prices which are reasonable having regard to the prevailing market prices at the relevant time.

3) The auditor has to examine whether the prices paid for the transactions examined by him are reasonable, having regard to the prevailing market prices at the relevant time. The auditor is not expected to make a roving market inquiry to determine the market prices prevailing at the time the transactions were entered into. However, he may examine information such as price lists, quotations, and records relating to prices at which similar transactions have been entered into with other parties, etc., at the relevant time. The auditor has to satisfy himself, taking into account all the relevant information as well as any explanations given by the management, whether the prices at which various transactions have been made are reasonable. In determining the reasonableness of the prices, the auditor should take into account all the factors surrounding the transactions such as the delivery period/schedule of implementation, the quality and the quantity of the product/service, the credit terms, the previous record of supplier/buyer/client, etc. For example, a company may decide to buy the goods (not necessarily at the lowest prices) from parties required to be listed in the register maintained under section 301 of the Act on account of the fact that the company finds such parties more reliable in terms of quality and/ or supply of goods. In a transaction of purchase, it is not necessary that purchases be made in all cases at the lowest rates. When the rates paid are higher than the prevailing market prices, the auditor has to use his judgement to determine whether the difference in rates is reasonable having regard to the other factors mentioned
above. This may often be the case where the company wishes to have more than one source of supply or where there is limit to the manufacturing capacity of the supplier who quotes a lower price. Thus, the intention of the clause is to require the auditor to examine and comment on the reasonableness of the prices at which the transactions have been entered into.

4) A difficulty in judging the reasonableness of prices may also arise in cases where transactions are entered with sole suppliers. In such cases, the auditor may examine the reasonableness of prices paid with reference to list prices of the supplier concerned, other trade terms of the supplier, etc.

5) The auditor while reporting under this clause in circumstances outlined in paragraph (3) and (4) above should clearly bring out the reasons as to why no adverse comment was considered necessary.
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