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

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

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

Clause 4(v)(a)

whether particulars of contracts or arrangements referred to in section 301 of the Act have been entered in the register required to be maintained under that section.

1) This part of the clause requires that the auditor should report whether the transactions that need to be entered into a register in pursuance of particulars of contracts or arrangements referred to in section 301 of the Act have been so entered. Section 301 of the Act requires that every company shall keep one or more registers in which shall be entered separately, particulars of all contracts or arrangements to which sections 297 and 299 of the Act apply. The following are salient features of sections 301, 297 and 299 of the Act:

(i) Under section 301 of the Act, every company is required to maintain one or more registers which contain the particulars of all contracts or arrangements to which section 297 or section 299 of the Act applies. The particulars of contracts and arrangements required to be entered in the register maintained under section 301 include, among other things, names of the parties to the contract or arrangement.

(ii) Under section 297 of the Act, except with the consent of the Board of Directors of a company, a director of the company or his relative, a firm in which, a director or his relative is a partner or any other partner in such a firm,
or a private company of which the director is a member or director, shall not enter into any contract with the company–
 
(a) for the sale, purchase or supply of any goods, materials or services; or
 
(b) after the commencement of this Act, for underwriting the subscription of any shares in or debentures of, the company.
 
It may also be noted that in the case of a company having a paid-up capital of not less than rupees one crore, no such contract can be entered into without the previous approval of the Central Government. Whenever a contract, to which section 297 applies, is entered into, the board of directors accords its approval by a resolution passed at a meeting of the Board, before the date the contract is entered into or within three months of the date on which the contract was entered into. The particulars of such contracts or arrangements including names of the parties to the contract or arrangement are required to be entered into the register maintained under section 301 of the Act.

(iii) Under section 299 of the Act, every director of a company, who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, is required to disclose the nature of his concern or interest at a meeting of the Board of Directors. The disclosure required under section 299 of the Act can be made by a director either at a meeting of the Board under sub-section (2) or by way of giving a general notice for disclosure of interest to the Board of Directors under sub-section (3) of section 299 of the Act. The disclosure of interest is made in Form 24AA of Companies (Central Government’s) General Rules & Forms, 1956. Based on the disclosures made by directors in Form 24AA, particulars of contracts and arrangements including, among other things, the names of the parties concerned are entered into the register maintained under section 301 of the Act.
 
2) It is suggested that the auditor should acquaint himself with all the requirements of sections 297, 299 and 301 of the Act.
 
3) It should also be noted that according to section 299(6), section 301 is not applicable to situations where two companies having common directors enter into a transaction but none of the director, individually or together with the other directors, holds more than two percent of the paid up share capital of the company. Thus, the reporting under this clause pertains only to the loan transactions with the parties covered by section 301 of the Act and does not extend to such situations where loan transactions are entered into with another company where the directors are common but such directors do not hold more than two percent of the paid up share capital.

4) It may, however, be noted that as per section 299(6) of the Act, the requirements of section 301 of the Act do not apply to a contract or arrangement entered into or to be entered into between two companies where any of the directors of one of the company or two or more of them together holds or hold not more than two percent of the paid-up share capital in the other company. For example, the mere fact that a director is a shareholder in a public limited company will not mean that he is interested unless, of course he, together with other directors, holds more than 2% or more of the share capital.

5) Normally, particulars are entered in the register maintained under section 301 of the Act based on notices received (Form 24AA) from the directors of the company under section 299 of the Act. As mentioned earlier, the directors are required to make a disclosure of interest either at a meeting of the Board of Directors or by way of a general notice under subsection (3) of section 299 of the Act. Entries are also made in the register on the basis of the approval of the board of directors accorded in terms of section 297 of the Act. In case the company is required to obtain prior approval of the Central Government but has not so obtained, the auditor should state the fact in his report under the Order. A separate qualification may not be required in the main audit report provided the necessary provisions to meet the cost of noncompliance has been made and the fact of non-compliance (including the amounts involved) has been appropriately disclosed in the financial statements.

6) The auditor should obtain a list of companies, firms or other parties, the particulars of which are required to be entered in the register maintained under section 301 of the Act. The auditor should verify the entries made in the register maintained under section 301 of the Act from the declarations made by the directors in Form 24AA i.e., general notice received from a director under sub-section (3) of section 299 and on the basis of the approval of the board of directors under section 297 of the Act which would be evident from the minutes of the meetings of the board of directors. The auditor should also obtain a written representation from the management concerning the completeness of the information so provided to the auditor. While the auditor can verify the completeness of the entries in the register maintained under section 301 from Form 24AA in respect of transactions or contracts covered by section 297, the auditor should perform additional procedures to verify the completeness of the entries in the register to which section 297 of the Act applies. The auditor should review the information provided by the management. The auditor should also perform the following procedures in respect of the completeness of this information:

(i) review his working papers for the prior years, if any, for names of known companies, firms or other parties the particulars of which are required to be entered in the register maintained under section 301 of the Act; and

(ii) review the entity’s procedures for identification of companies, firms or other parties the particulars of which are required to be entered in the register maintained under section 301 of the Act.

7) The auditor should verify, on the basis of information provided by the management and on the basis of the results of the procedures performed by him, whether transactions that need to be entered into a register in pursuance of section 301 of the Act have been so entered or not. The auditor also evaluates whether the register under section 301 is updated and maintained properly. The auditor should also examine, wherever applicable, secretarial compliance certificate issued under section 383A of the Act in regard to the completeness of the register maintained under section 301 of the Act. The auditor may also rely upon such a certificate issued by a company secretary provided the auditor complies with the requirements of Auditing and Assurance Standard (AAS) 9, “Using the Work of an Expert”.
 
8) There may be situations where the company has not properly maintained the register required to be maintained by it under section 301 or has not updated the said register and the necessary declarations from the directors in Form 24AA are also not available on record. In such situations, the auditor should state the fact of non-maintenance/improper maintenance of the aforesaid register, while reporting under this clause. An example of such a reporting by the auditor could be:

“According to the information and explanation given to us, we are of the opinion that the company has not entered all the transactions required to be entered in the register maintained under section 301 of the Companies Act, 1956. The following are the particulars of two such transactions which needed to be entered into the register but were not so entered:
 
(i) purchase of plant and machinery costing Rs.2,00,000 from a firm in which one of the directors, Mr. X, is a partner.

(ii) sale of administrative block building of the company for Rs.1,00,000 to a relative of Mr. Y, one of the directors of the company.”



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