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

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

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

Clause 4(xiii)

whether the provisions of any special statute applicable to chit fund have been duly complied with? In respect of nidhi/mutual benefit fund/societies.

1) The clause requires the auditor to comment whether the provisions of any special statute applicable to chit fund have been complied with. It may be noted that clause is required to be commented upon by the auditor only in case of a chit fund company. Therefore, the auditor should determine whether the company is carrying on the chit fund business. It may be noted that the Order contains a single definition of the terms “chit fund company”, “nidhi company” or “mutual benefit company”. According to the Order, “chit fund company”, “nidhi company” or “mutual benefit company” means a company engaged in the business of managing, conducting or supervising as a foreman or agent of any transaction or arrangement by which it enters into an agreement with a number of subscribers that every one of them shall subscribe  to a certain sum of instalments for a definite period and that each subscriber, in his turn, as determined by lot or by auction or by tender or in such other manner as may be provided for in the agreement, shall be entitled to a prize amount, and includes companies whose principal business is accepting fixed deposits from, and lending money to, members.”

2) Though the Order defines the terms “chit funds”, “nidhis” and “mutual benefit society” using a single definition but these entities are governed by different laws and regulations and different meanings have been attached to these terms under the relevant laws and regulations. For example, a chit fund company is a company that carries on the business of chit funds within the meaning of the Chit Funds Act, 1982. Clause (b) of section 2 of the Chit Funds Act, 1982 defines the “chit” as a transaction whether called chit, chit fund, chitty kuri or by any other name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical instalments over a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount. Explanation to the clause provides that a transaction is not a chit within the meaning of this clause, if in such transaction:

(i) some, but not all, of the subscribers get the prize amount without any liability to pay future subscriptions; or

(ii) all the subscribers get the chit amount by turn with a liability to pay future subscriptions.
 
3) This is a very wide requirement and taken literally would mean that the auditor has to ensure that the company complies with all the requirements of the relevant special statutes. Obviously, this cannot be the intention. A more rational interpretation would, therefore, be that the auditor has to satisfy himself and report that the company has complied with all the provisions of the special statutes in so far as they are applicable to the accounts of the chit fund company. It is necessary that the audit report should clearly state the above interpretation. The following is an example of the report:

“According to the information and explanations give to us, the company has complied with the provisions of ..................... in so far as those provisions are applicable to the accounts under report.”

4) It may also be noted that special statutes applicable to chit fund companies vary from State to State. This is because of the fact that the Central Government enacted the Chit Funds Act, 1982 (Act No. 40 of 1982) which extends to the whole of India except the State of Jammu and Kashmir. According to section 1(3) of the Chit Funds Act, 1982, it comes into force on such date as the Central Government may, by notification in the official gazette, notify and also that different dates may be notified for different States. So far, the Central Government has notified the date of the Chit Funds Act, 1982 coming into force in respect of certain States and Union Territories only. In respect of States and Union Territories for which no date for the Chit Funds Act, 1982 coming into force has been notified, the respective States/Union Territories have either enacted relevant Act and rules in this regard or have adopted the Chit Funds Act, 1982 as it is. The auditor should obtain an understanding of the relevant Acts and the rules which are applicable to the company situated in a particular State/Union Territory. It may also happen that the company’s branches may be situated in more than one State, in which case, the provisions of different States’ Acts and rules may be applicable to the respective branches/offices.
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