1.18     Query

System for determination of unserviceable or damaged

stores for the purpose of Section 227(4A) of the

Companies Act, 1956.

1.  A company conducted physical verification of its stores and spares only at the end

of the accounting year i.e. on 31.3.1981. In the opinion of the statutory auditors, the frequency of physical verification of stores and spare parts was not reasonable. In view of this, they included the following statement in their report regarding determination of unserviceable or damaged stores pursuant to the provisions of Section 227(4A) of the Companies Act, 1956:

“As explained to us, the company has a regular procedure for determination of unserviceable or damaged raw materials. In our opinion, since the physical verification of stores has been conducted only on 31.3.1981, there could not have been adherence to a regular procedure for determination of unserviceable or damaged stores.”

2. The company, however, maintains that it had technically qualified personnel who were competent to decide whether the stores purchased/held in stock were fit to be used or not, and it had a regular procedure for determining damaged and or unserviceable stores and raw materials. There were no unserviceable or damaged stores or raw materials as on 31.3.1981. These facts were explained to the auditors.

3. The querist sought the opinion of the Expert Advisory Committee on (i) whether there was any justification for the surmise on the part of the auditors that “there could not have been any adherence to a regular procedure for determination of unserviceable or damaged stores”, while, according to the querist, the facts in evidence are otherwise; and (ii) whether frequency of physical verification of stocks has any relevance to it.

                                                           Opinion                                                          August 13,1982

1. Regarding the first question, the Committee is of the opinion that the auditor has to satisfy himself, from the explanations and information made available to him and by carrying out such tests as he may consider necessary, that the system for determination of unserviceable or damaged stores is appropriate. In case the auditor is not satisfied, he is justified in including appropriate comments in his report.

2. Regarding the relevance of appropriateness of the system to the frequency of physical verification of stocks, the Committee notes that according to para 29(b) of the ‘Statement on the Manufacturing and Other Companies (Auditor’s Report) Order, 1975’, published by the Research Committee of the Institute, the “essential features of such a system would be the ascertainment of non-moving items of stores and raw materials and the periodic physical inspection of the items” (emphasis ours). In view of this, the Committee is of the opinion that the frequency of physical verification of stocks has relevance in this context.

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