Page 196 - CA Final PARAM Digital Book.

Part 7 - Provisions of Companies Act 2013

QNO Sec 143--Inquiry Multiple Cases Old Course – (N10E, M15R, PM17, N19E)
324.000 TITANIUM CNO—CA.020

While doing the audit, X, the Statutory Auditor of ABC Ltd. observes that certain loans and advances
were made without proper securities, certain trade receivables and trade payables were adjusted inter

se, and personal expenses were charged to revenue. Comment
Answer Part I -- Relevant Section & Laws
▪ Section 143(1) of the Companies Act, 2013

Part II -- Requirements of Relevant Section & Laws
➢ Section 143(1) of the Companies Act, 2013
It requires the auditor to make an enquiry in respect of specified matters during the course of his
audit. Since the law requires the auditor to make an enquiry, the Institute opined that the auditor
is not required to report on the matters specified in sub-section (1) unless he has any special
comments to make on any of the items referred to therein.

If the auditor is satisfied as a result of the enquiries, he has no further duty to report that he is so
satisfied. It is to be noted that the auditor is required to make only enquiries and not investigate
into the matters referred to therein.

➢ Section 143(1), Clause (a) requires the auditor to inquire:
“Whether loans and advances made by the company on the basis of security have been properly
secured and whether the terms on which they have been made are prejudicial to the interests of
the company or its members”.

If the auditor finds that the loans and advances have not been properly secured, he may enter an
adverse comment in the report but cannot probably doubt the true view of the accounts by
reference to this fact so long the loans and advances are properly described and presented in
terms of Part I of Schedule III to the Companies Act.

Further the auditor to inquire whether or not the terms on which the loans or advances have been
made are prejudicial to the interests of the company or its members. If it is, he should qualify his
report.

➢ Section 143(1),Clause (b), requires the auditor should enquire:
“Whether transactions of the company which are represented merely by book entries are
prejudicial to the interests of the company”.

If trade receivables and trade payables are adjusted inter se, this amounts to merely book entries.
This proposition has got to be inquired into by reference to the effects of the book entries,
unsupported by transactions, on the legitimate interests of the company. The auditor has to
exercise his judgment based on certain objective standards”.

➢ Section 143(1), Clause (e) requires the auditor to inquire:
“Whether personal expenses have been charged to revenue account”.
The charging to revenue of such personal expenses, either on the basis of the company’s
contractual obligations, or in accordance with accepted business practice, is perfectly normal and
legitimate or does not call for any special comment by the auditor.

Where, however, personal expenses not covered by contractual obligations or by accepted
business practice are incurred by the company and charged to revenue account, it would be the
duty of the auditor to report thereon. It suffices to say that if the auditor finds that personal
expenses have been charged to revenue and if the amounts are material, he should qualify his
report also.
Part III – Case Discussion
➢ In the instant case, X, the Statutory Auditor of ABC Ltd. observes that certain loans and advances
were made without proper securities, certain trade receivables and trade payables were adjusted
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