under Section 619(3) (a) of
Companies Act, 1956.
(Applicable from the accounts of 2010-11)
Authority: CAG office circular
No.134-CA-IV/42-2001(III) dated 15th April 2010.
Annexure - 1
(List of indicative questions
under these heads is given as Annexure-1, which may be retained by the auditor
as working papers.)
Based on your audit of the enterprise please give
your impression/comments on following areas:
Governance and Audit Committee
of Accounts & Financial Control
& Execution of Contracts
Annexure - II
Company or Sector specific directions (To be
finalized by the respective MABs and issued as sub-directions to Auditors along
with general directions as in Annexure I)
Annexure - I
(I) Corporate Governance and Audit
Whether the Company has been listed on
the stock exchanges? If yes, the names of the stock exchanges may please be
indicated? If so, whether the provisions of listing agreement of SEBI are being
followed by the Company?
Whether the Company has 50%
independent directors on their Board as required under SEBI guidelines?
Whether the Company has formed an
Audit Committee in compliance with Section 292A of the Companies Act, 1956. If
not, indicate the extent of non-compliance?
Whether Audit Committee has discussed
the qualifications made in the Auditor’s report as well as important comments,
audit paras of Government Audit and has given recommendations for taking
appropriate corrective action in the next year’s accounts?
Whether the Audit Committee has
examined the replies to paragraphs, mini reviews, sectoral reviews,
comprehensive appraisals, etc included in various Audit reports of the C&AG
before their submission to Government Audit / Committee on Public Undertakings?
Whether the Audit Committee has
reviewed and discussed with the Management, and the internal and external
auditors, the adequacy and effectiveness of the accounting and financial
controls, including the Company’s financial and risk management policies?
Whether the Board of Directors (BOD)
has reported in the Director’s Report to the shareholders compliance to their
responsibility statement under section 217(2AA) of the Companies Act, 1956?
Whether CEO/CFO certificate has been
obtained in terms of listing agreement?
(1) Any new Statutory or Regulatory requirement or change in Government
policy that could impair the financial stability or profitability of the
(2) Unusually rapid growth if any, especially compared with that of
other companies in the same Industry.
(3) The process used for identification of business risks and steps
taken to mitigate it by the Management
(4) Unrealistically aggressive sales or profitability incentive
programs, if any.
(5) The system of making a business plan, short term/long term &
reviews of the same vis-à-vis the actual?
(6) The capital expenditure/capital invested not put to use.
(7) The cost benefits analysis of major capital expenditure/ expansion
including IRR and pay back period.
(8) The existence of Macro, Sector and Operation threats that could
drive fundamental changes in business model. Indicate in brief.
(III) Disinvestment (if applicable)
(1) What is the mode of disinvestment (i.e. Trade sale, Management &
Employees Buy Out, Mass privatization, Public auction, Flotation, Liquidation,
(2) What is the present stage of disinvestment process?
(3) If the company has been selected for disinvestment, please report:
(a) Has the company accounted for all its assets (including intangible
assets), liabilities, income, and expenditure as per the requirement of
relevant Accounting Standards and nothing is left out of books?
(b) Whether the assets of the company, especially land, valued at
nominal cost has been revalued keeping in view the fair market rate for
consideration of the net worth of the Company for the purpose of sale?
(c) Whether the committed reserves and general reserves created over the
years are disclosed distinctly? If utilization of general reserves is
substantial, specify the conditions of utilization and whether these conditions
are covered under the byelaws/articles of the Company and provisions of the
Companies Act, 1956?
(d) Whether any investment was made by the Company during the process of
Disinvestment? If so, whether such investments were in the interests of the
company or did they have the effect of extending undue advantage to the
of Accounts & Financial Control
Whether the allocation of duties and
responsibilities including the delegation of powers at various levels of
management is fair/proper/justifiable and the same have been adequately
Examine the systems of accounts &
Financial Control being followed by the company and give your views as regards
their deficiencies along with suggestions for remedial measures?
Please report which of the accounting
policies adopted by the Company are not in conformity with the accounting
policies applicable to the industry/companies in the same sector, particularly
the Government Companies. What is the impact of such policies on the accounts?
Notes to Accounts, qualifications in
Auditor’s Report and comments of the C&AG may be reviewed for the last 3
years and state whether the Management has taken rectificatory action?
Whether the Company has a clear credit
policy, policy for providing for doubtful debts/write offs & liquidated
damages? Analyse the reasons such as non-completion of performance tests,
litigation, retention sale, etc. for significant sundry debtors and report
Please report whether the system of
giving discount to promote sales is fair? Whether the instructions for allowing
discount are issued in writing and communicated properly to sales outlets?
Examine and indicate whether the
company has a system of monitoring the timely recovery of outstanding dues?
Highlight the significant instances of failure of the system, if any.
What is the system of obtaining
confirmation of balances from debtors/ creditors and other parties? Indicate
separately the amount of balances remained unconfirmed from Government
Departments/PSUs and Private parties and their percentage to total amount under
Please report whether there are any
cases of waiver of debts/loans/interest etc., if yes, the reasons therefor and
the amount involved.
Is there an adequate system of timely
lodging of claims with outside parties? Whether the claims are properly
Whether the credit obtained (including
overdrafts) is monitored regularly and the terms of loans are not such that
they have a negative impact on the earnings of the company. Examine the system
of effective utilization of loans & the system of obtaining statutory
Whether any incidence involving
improper use or wastage of funds was noticed
Examine and comment upon the
reasonableness of assumptions made by the Actuary in providing for employee
benefits as per Accounting Standard 15.
Whether work flow and document flow is
in place to ensure proper controls and systems commensurate with the delegation
Whether the company has an effective
and delineated fraud policy consistent with regulatory requirements as well as
the entity’s business needs?
Whether the Company has formulated
‘code of conduct’ for senior management?
How the company has dealt with
reported frauds and what are the remedial measures taken for preventing
Are there any cases of violation of
delegated Financial Powers during the period under report, which warrants
"in-depth audit"? If yes please give a list of such cases.
Does the Company have separate
Vigilance Department/Wing? To what extent is it effective in its duty and
whether its reports are submitted to the Board?
Whether the Management has designed
and put in place an adequate Prevention and Detection Controls to prevent,
reduce and discover the fraud and other irregularities?
Whether the Company has ‘whistle
Whether the fraud policy has been
periodically reviewed and evaluated to determine whether it was designed and
implemented to achieve optimal effectiveness?
(VI) Assets (including Inventory)
What is the position regarding maintenance
of records such as fixed assets register, etc.?
Whether the company has prescribed the
following in regard to the management of stores:
(a) Maximum and minimum limits of stores and spares etc.
(b) Economic order quantity for procurement of stores.
Whether ABC analysis has been adopted
to control the inventory? If not, impact on inventory may be analysed.
Whether regulations made for the
purposes of control over stores, including stock taking and valuation of stock,
stores, & work-in progress at the end of the financial year are adequate
and duly enforced?
Whether the work in progress contains
any item, which has remained under work in progress, for an unduly long time?
Attach a list of such items indicating amount, period of pendency and reasons.
Examine and comment on the system of
physical verification, valuation, treatment of non-moving & slow moving
items, their disposal & abnormal excess & shortages in respect of
closing stock items.
Examine and comment on the system of
valuation of fixed assets, survey-off procedure & provision for assets
& specific capital spares surveyed-off.
List out the surplus/obsolete/
non-moving items of stores, raw material, finished goods lying unused at the
end of last 3 years.
Whether proper records are maintained
for inventories lying with third parties & assets received as gift from
Govt. or other authorities?
Are there any lapses in the internal
control system right from ordering till the consumption of stores? If yes, the
same may be highlighted.
List out the assets and Plant &
Machinery items, which have not been in use over a considerable period of time
(say 5 years) and the reasons thereof.
Whether there are instances of huge
losses incurred due to sale of goods at prices lower than the prevailing market
prices, citing poor quality as a reason, immediately subsequent to the balance
Whether the norms for storage losses
have been fixed? What is the basis on which storage losses are regularized?
Indicate the abnormal storage losses suffered during the year under audit and
amount realized there against.
Demurrage/Wharf age incurred during
the year and reasons thereof.
Whether the company has conducted
physical verification of Fixed Assets during the year and a formal report is
being prepared for the same?
Whether there is a policy to review
and implement impairment of assets?
Whether the company has laid down an
investment policy duly approved by the competent Authority? If yes, please
indicate the following:
Is it in accordance with the
provisions of Section 292 of the Companies Act, 1956 and other laws, rules and
regulations, Government directives applicable to the company?
(b) Whether the investments made were judicious and in accordance with
the investment policy?
(c) Is the shortfall in market value of the current investment and
permanent diminution in the value of long-term investments reflected in the
books? If not, describe the failure.
Whether the deposits with
banks/financial institutions and others have been in accordance with laws,
rules, regulations, Government directives, etc., as applicable.
Whether there has been grant of large
loans to or placement of deposits with other PSUs or enterprises not related
with the business of the Company.
Whether the company has significant
investment in an industry or product line noted for rapid change?
Whether the investments made in the
subsidiaries have been valued properly keeping in view the financial position
of the subsidiary? If not, extent of diminution in the value of investments.
Whether any surplus funds are
invested? Is there any effect on availability of funds for working capital
because of investments leading to borrowings at higher rates?
How often market value is reviewed and
whether profits are made on sale of investments?
(VIII) Liabilities and Loans
(1) Give the total amount of
loans (including interest, penal interest, & commitment charges separately) where defaults were made
in repayment as at the end of the accounting
(2) Whether guarantee fee payable to the Government of India as per terms of loan agreement had been accounted for
(3) Whether any part or whole of the Loans from Government and/or
interest accrued thereon have been either converted into equity or waived by
the Government; if so, its impact on the financial position of the Company.
(4) Are the terms of the loan agreements such that they make the entity
especially vulnerable to changes in the interest rates?
(5) Check the loan profile of the Company to find out whether the high
cost debts were swapped with low cost market borrowings.
(6) Whether there have been receipts of large loans from other PSUs or
enterprises not related with the business of the Company.
(7) Whether any study was conducted to avail any other instruments or
derivatives instead of high cost loans?
(IX) Award & Execution of Contracts
Whether company has devised a proper
system of tendering for awarding of various contracts?
Whether the company has an efficient
system for monitoring and adjusting advances to contractors/suppliers.
Whether the Company has settled all
the issues viz. Performance Guarantee (PG) Tests, recovery of Liquidity Damages
(LDs) and final payments etc. soon after the commissioning of the Project? Are
there any cases of inordinate delay without sufficient justification?
Whether there are any disputes/claims
unsettled for a long time?
What is the procedure followed by the
Company for purchasing proprietary items? What is the procedure for
ascertaining the authenticity of the propriety items certificate given by an
official based on which tendering is not resorted to and goods are purchased
from a particular supplier?
(X) Costing Systems
Whether the Company has any cost
Are the cost accounts being reconciled
with financial accounts?
Whether the company is computing the
cost of major operations, jobs, products, processes and services regularly? If
not, describe the failures.
Whether the company has an effective
system for identification of idle labour-hours and idle machine-hours?
Was cost audit ordered in the case of
the company? If so, highlight the major deficiencies pointed out in the latest
cost audit report.
Examine the accounting treatment of
rejects & scraps for determination of cost of production. State the impact
of bye products and joint products in determining costs.
Whether there is any system to
evaluate the abnormal losses and taking remedial measures to control such
What is the method being followed by
the company to charge overheads? How is
the overhead rate being arrived at? In
case of cost plus contracts, are the overheads being recovered completely or
(XI) Internal Audit System
Whether the Company is having Internal
Audit section manned by staff of their own or whether the Company has hired the
services of CAs as Internal Auditors?
Give your comments on the Internal Audit System stating whether its
reporting status, scope of work, level of competence, etc, are adequate? If
not, describe the shortcomings thereof. Is there an adequate compliance
mechanism on internal audit observations?
Whether internal audit
standards/manual/ guidelines have been prescribed and they are in practice?
Whether Internal Audit Reports were
discussed by Audit Committee?
Whether internal audit is independent
and reports directly to the Chairman/Head of the Company?
If internal audit is outsourced then
whether the selection process is fair and transparent?
Whether entities which are not under
the jurisdiction of the professional institute are being given the work of
Does the Internal Audit report contain
any serious irregularity which needs immediate attention of
What is the total impact of all
shortcomings/deficiencies pointed out in the latest Internal Audit Report and
pending for compliance as on date?
Whether mistakes/shortcomings pointed
out in the latest report is of the same kind/type as pointed out in earlier
(XII) Legal/Arbitration Cases:
Number of pending legal/arbitration
cases indicating the age-wise analysis and reasons for their pendency.
Details of new cases and cases settled
during the year.
Whether any norms/procedures
exist/proposed to be laid down for large legal expenses (Foreign & Local)
incurred/to be incurred.
Is there any system to ensure proper
documentation (like maintaining minutes if the meetings, foreseeing
contingencies, foreign exchange fluctuations etc.) before Agreement with
foreign parties as well as Indian parties?
(XIII) EDP Audit
(1)Whether the organization has an
approved IT strategy or Plan?
(2)If the auditee has computerized
its operations or part of it, assess and report, how much of the data in the
company is in electronic format, which of the major areas such as Financial
Accounting, Sales Accounting, Personnel information, Payroll, Materials / Inventory Management, etc. have been
(3)Indicate how this impacts on
your work of auditing the Accounts and whether your audit is through or around
(4)Has the company evolved proper
security policy for Data/Software/Hardware?
(5)Identify the areas in which the
auditor is of the view that the built-in-checks and validations in the computer
environment are not adequate or were not being exercised with proper authority?
(6)Comment on any problem faced in
extracting information from computer files due to lack of backup of past
records or due to record corruption. Is there a document retention policy?
(7)Whether any software is
unutilized or underutilized due to lack of trained staff or any proper
operating manual/documentation etc?
(8)Comment whether changes made in the software have
the approval of Management and the same has been documented properly and the
lead time given to the staff to get accustomed to it before making it fully
(9)Whether the BOD is briefed
regularly about the new IT Strategy, if any, proposed to be incorporated for
the Company as a whole, for which large funds are sanctioned. This is
particu1ar1y re1evant to organizations where the entire IT activity is to be
made online in due course.
(10) Whether the systems department is responsible for both hiring/buying
EDP equipment Hardware & Software and also certifying their 'usability'
before final payment (both functions should be separate with the user
departments involved in the latter).
(11) Whether the
company has detailed/comprehensive list of all reports/statements which can be
generated by the system in use?
(12) Whether there is
an effective IT Steering Committee?
(13) Whether there
exists effective disaster recovery plan for EDP Department which is
periodically reviewed and evaluated?
(14) Whether any of
the findings and recommendations noted in the EDP Audit Report was considered
significant and whether the issues were satisfactorily resolved?
(XIV) Environmental Management
Compliance of the various Pollution Control Acts and the impact
thereof and policy of the company in this regard may be checked and commented
(XV) Corporate Social Responsibility
is the company discharging its Corporate Social Responsibility?
any Board approved policy is in place and is being properly followed?
there is a system of fixation of targets for CSR activities?
adequate mentoring mechanism exits for implementation of CSR activities?
Indicate whether the company has
entered into a Memorandum of Understanding with its administrative ministry? If
yes, have the targets in MOU been split unit-wise? If so, attach a unit-wise
statement of targets and achievements against the parameters in MOU.
Whether contribution of employer and
employee to Provident Fund is kept separately out of business and proper
safeguard of the same is taken care of?
Does the company present a case for
energy audit? If yes, has the audit been conducted by a specialised agency?
land acquisitions is involved in setting up new projects an enquiry as to
whether settlement of dues and rehabilitation of those affected are being done
expeditiously and in a transparent manner to ensure that the benefits go to the
really affected people and is not diverted to agents and intermediaries
including political parties
Whether the Company has done any
mergers and acquisitions during the year?
Whether a thorough need analysis was done before Merger or
acquisition? Whether shareholders
acceptance was taken before decision on merger/acquisition was arrived at? What was the impact thereof on the
profitability of the Company?
If test checking was applied by statutory
auditors, the manner in which areas of checking have been identified may be
specified. Extent of sample selected
and methodology of sampling adopted may also be specified.