1.29     Query

Qualifications in auditor’s report in case of violations

of the relevant statutory provisions

1In the conduct of audit of a warehousing corporation, an auditor found that there had been material contraventions of the Warehousing Corporation Act 1962 read with the Central Warehousing Corporation Rules, in the following respects:

(i)Rule 43(2) of the rules reads as under:

“All payment exceeding Rs. 1,000/- by or on behalf of the Corporation shall be made by cheque except

(i) Payment of wages to labourers and to employee other than officers and;

(ii) Any other payment in excepted cases, with the approval in writing of the Managing Director.”

However, number of instances were noticed, where payments in excess of Rs. 1,000/- without the approval of the Managing Director were made.

(ii)Rule 43(5) provides as under:

“All monetary transactions shall be entered in the cash book, as soon as they are conducted and attested by an officer of the Corporation duly authorized by the Managing Director in this behalf. The cash book shall be closed daily and completely checked by the managing director or by the officer authorized by him in this behalf. At the end of each month, the managing director or the officer so authorized shall verify the cash book and the cash in hand and record a signed and dated certificate to that effect”.

Even though the cash book is maintained on day to day basis, large number of transactions such as import adjustments, provisions for liabilities etc. were not recorded regularly. In the view of the querist these transactions are monetary transactions and should also be entered regularly and not after a lapse of considerable time. At times, such transactions are recorded at the close of the year or even much after the close of the year.

2. The querist has sought the opinion of the Expert Advisory Committee on the following matters in the context of above facts:

(i) Whether the full quantum of payments mentioned in para 1 (i) should be determined by the client and qualified by the auditors in their report to the shareholders or a general note of such contraventions will be adequate.

(ii)Whether monetary transactions which are to be recorded in the cash book as soon as they are conducted will cover only cash payments and receipts or shall also include other monetary transactions routed through journal or other subsidiary books which may be recorded much after they are conducted.

                                                                   Opinion                                                  October 15,1986

1.The Committee notes that para 3.17 of the Statement on Qualifications in Auditor’s Report, issued by the Institute of Chartered Accountants of India, states as below:

“In some cases the auditor’s objection may be of such a nature that it is his duty to bring it to the attention of shareholders, e.g., where there is a breach of law. It would not be sufficient in that case to merely state the facts leaving it to be inferred therefrom that a contravention of legal requirements has arisen. It is the auditor’s duty not only to state the facts which give rise to the legal contravention, but also to point out that, in his opinion, a contravention of the law has occurred. For example, if a company has not separately invested the provident fund moneys of its employees it would not be sufficient for the auditor in his report merely to state this fact. He should go further and point out that the facts as stated constitute, in his opinion, a contravention of the requirements of Section 418 of the Companies Act.”

2.  The Committee is of the opinion that as per facts given, payments in excess of Rs. 1,000 made by means other than cheques without the approval in writing of the Managing Director involve breach of law since the said transactions contravene Rule 43 (2) of Central Warehousing Corporation, 1963 framed by the Central Government in this behalf. The auditor should therefore qualify his report stating that in his opinion the said transactions constitute contravention of Rule 43 (2) of the Central Warehousing Corporation Rules, 1962. The auditor should also state the total amount of payments made by means other than cheques without the approval in writing of the Managing Director if the said amount has been determined by the Corporation. In case the amount has not been determined by the corporation, the auditor should state the fact in his report.

3.  With regard to recording of monetary transactions in the cash book, the Committee is of the opinion that the cash book by its very nature covers only payments and cash receipts. Thus, in case such cash transactions are recorded in the cash book it would be proper.

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