Ushering in a stricter framework to curb corporate frauds, the government has asked auditors to highlight any lapses of companies on multiple areas, including those related to frauds, internal control, inventories and outstanding dues.
As part of measures to strengthen overall corporate governance standards in the country, the Corporate Affairs Ministry has come out with elaborate directions for auditors to follow while auditing companies.
The order comes amid enhanced efforts by the government as well as regulators to prevent instances of financial and accounting frauds.
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As per the elaborate directions, auditors would have to mention in detail various aspects about the functioning and management of a company in their audit reports.
Auditors are required to mention about internal control systems, records of fixed assets, undisputed statutory dues, and default in repayment of loans, among other factors related to a corporate whose books they audit.
In the order, dated April 10, the Ministry said an auditor should mention whether there is "an adequate internal control system commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods and services".
Further, any continuing failure to correct major weaknesses in internal control system should be flagged off.
With regard to outstanding statutory dues, the Ministry said auditors have to mention about the same in their reports. This would be applicable on dues related to provident fund, employees' state insurance, income, sales, wealth and service taxes, customs and excise duties, among others.
"... The extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they became payable, shall be indicated by the auditor," it said.
Tax disputes should also be mentioned by the auditors.
Besides, the auditor is required to report whether a firm is maintaining proper records, including quantitative details and situation of fixed assets.
The auditor has to mention whether the company's management physically verifies fixed assets at reasonable intervals and about any material discrepancies. Also, it has to be mentioned whether lapses have been properly dealt with in the books of account.
The order would be applicable on audits of banking, insurance, foreign and one-person companies. It would also be applicable on certain private companies, which among other criteria, whose turnover is not more than Rs 5 crore at any point of time during the financial year.
Auditors are now required to report "any fraud on or by the company" along with its nature and amount involved. The latest directions would be applicable from the financial year starting on or after April 1, 2014.
