Statement On The Companies Auditor’s Report Order, 2003
Whether in case of a company which has been registered for a period not less than five
years, its accumulated losses at the end of the financial year are not less than fifty per cent of its
net worth and whether it has incurred cash losses in such financial year and in the immediately
preceding financial year.
[Paragraph - 4(x)]
(a) The clause is applicable to all the companies, whether manufacturing, trading or service, that have been in existence for five years or more from the date of registration till the last day of the financial year covered by the auditor’s report. The clause requires the auditor to report:
whether the accumulated losses at the end of the financial year are not less than 50% of its net worth; and
whether the company has incurred cash losses during the period covered by the report and in the immediately preceding financial year covered by the report.
(b) The auditor should compute the accumulated losses and the net worth to verify whether the accumulated losses at the end of the financial year are more than 50% of the company’s net worth.
(c) A question arises about the exact connotation of the term “loss” for ascertaining the amount of accumulated losses. More specifically, the issue is whether, for the purpose of reporting by the auditor, the net loss shown by the profit and loss account should be taken as the loss or whether any adjustments need to be made in the figure of such net profit/loss. The term “loss” should be construed to mean the net profit/loss shown by the profit and loss account of the company as adjusted after taking into account qualifications in the audit report to the extent the qualifications are quantified.
(d) Section 2(29A) of the Act defines the term “net worth” as “sum total of the paid-up capital and free reserves after deducting the provisions or expenses as may be prescribed”. The explanation to the definition further provides that for the purpose of this definition, “free reserves” means all reserves created out of profits and share premium account but does not include reserves created out of revaluation of assets, write back of depreciation provisions and amalgamation. The provisions or expenses to be deducted from the paid-up capital and reserves for calculating net-worth have not yet been prescribed. It, therefore, implies that the ‘net worth’ is the sum total of the paid-up capital and free reserves until the provisions or expenses to be deducted therefrom are prescribed under section 2(29A) of the
Act. The figure of net worth computed from the balance sheet of the company should also be adjusted for the effect of qualifications in the audit report to the extent the qualifications are quantified.
(e) The auditor is also required to report whether the company has incurred cash losses during the period covered by the report and in the financial year immediately preceding the period covered by the report. In order to determine the figure of cash loss for the financial year, the figure of profit/loss shown by the profit and loss account is adjusted for the effects of transactions of a non-cash nature such as depreciation, amortisation, deferred tax expenses, etc.
(f) The figure of cash loss of the company for the financial year covered by the audit report and the immediately preceding financial year should also be adjusted for the effect of qualifications in the respective audit reports to the extent the qualifications are quantified.
(g) The auditor while reporting on this clause should indicate that his opinion on the matters specified in the clause has been arrived at after considering the effect of the qualifications on the figures of accumulated losses, net worth and cash losses. Where any of the qualifications in the audit report is not capable of being quantified, the auditor should state that the effect of such unquantified qualification(s) has not been taken into consideration for the purpose of making comments in respect of this clause.
(h) Further, a situation may be there where the company has suffered cash losses in only one of the years referred to in the clause. In such a situation, the auditor is well advised to comment on the two years separately. Thus, for example, it would be proper to report that the company has incurred cash losses only during the preceding year but has not incurred any cash loss during the current financial year.