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| ### GUIDANCE NOTE ON AUDIT OF INVESTMENTS The following is the text of the Guidance Note on Audit of Investments issued by the Auditing Practices Committee of the Council of the Institute of Chartered Accountants of India. This Guidance Note should be read in conjunction with the Statements on Standard Auditing Practices (SAPs) issued by the Institute.1 1. Para 2.1 of the "Preface to the Statements on Standard Auditing Practices" issued by the Institute of Chartered Accountants of India states that the, "main function of the APC is to review the existing auditing practices in and to develop Statements on Standard Auditing Practices (SAPs) so that may be issued by the Council of the Institute. " Para 2.4 of the Preface states the "APC will issue Guidance Notes on the issues arising from the SAPS wherever necessary." 2. The Auditing Practices Committee has also taken up the task viewing the Statements on auditing matters issued prior to the formation of the Committee. It is intended to issue, in due course of time, SAPs or Guidance Notes, as appropriate, on the matters covered by such Statements which then stand withdrawn.2 With the issuance of this Guidance Note on Audit of Investments, Chapter 4 of the Statement on Auditing Practices, titled "Investments", shall stand withdrawn. In due course of time, the entire Statement on Auditing Practices shall be withdrawn. INTRODUCTION 3. Investments are assets held by an entity for earning income by way of dividends, interest and rentals, for capital appreciation, or for other benefits to the investing entity.3. Investments are classified as 'current investments' and 'long term investments'. A current investment is an investment that is by its nature readily realisable and is intended to be held for not more than one year the date on which such investment is made. A long term investment is an investment other than a current investment.4 4. The following features of investments have an impact on the related auditing procedures: (a) Investments constitute a significant portion of the total assets of certain entities like banks, insurance companies, investment companies, trusts, etc. In other cases, the nature, quantum and type of investments may vary from case to case. (b) Documentary evidence is generally available for audit verification. A detailed record of acquisition, disposal, etc., of the investments is usually maintained. (c) The market values of investments may keep on fluctuating. While in the case of some investments, such fluctuations may not be wide, in the case of others, they may be significant. (d) Physical location of documents of title to investments may be different from the one where the acquisition disposal and recording thereof take place. (e) Many investments are readily marketable or can be converted into cash. INTERNAL CONTROL EVALUATION 5. The auditor should study and evaluate the system of internal control relating to investments to determine the nature, timing and extent of his other audit procedures. He should particularly review the following aspects of internal control relating to investments.5 (a) Control over acquisition, accretion and disposal of investments: There should be proper authority for sanction, acquisition and disposal of investments (including renunciation of rights). It should also be ensured that investments are made in accordance with the legal requirements governing the entity as also with its internal regulations, e.g., the provisions of the articles of association, rules and regulations, trust deed, etc. (b) Safeguarding of investments: The investments should be in the name of the entity as far as possible. The legal requirements in this behalf, if any, should be complied with. There should exist a proper system for the safe custody of all scrips or other documents of title to the investments belonging to the entity. (c) Controls relating to title to investments: It should be ensured that in cases where the title does not pass on to the entity immediately on acquisition, the same is transferred to the entity in due course of time, along with the benefits that might have accrued since the acquisition of the investments. It should be ensured that there is no undue time‑lag in the execution of various stages of the transactions. (d) Information controls: These controls should ensure that reliable information is available for recording acquisitions (including by way of conversion of securities, right issues or other entitlements, under schemes of amalgamation, acquisition, etc.), accretions and disposals, and for ascertaining the market values etc. Detailed records regarding acquisition, disposal etc. of the investments should be maintained along with proper documentation. VERIFICATION 6. The auditor's primary objective in audit of investments is to satisfy himself as to their existence and valuation. Verification of investments may be carried out by employing the following procedures: (a) Verification of transactions; (b) physical inspection; (c) examination of valuation and disclosure; and (d) analytical review procedures. The nature, timing and extent of audit procedures to be performed is, however, matter of professional judgment of the auditor. 7. The investments of an entity may take various forms, e.g., they may be the form of Government Securities, shares and debentures, immovable properties, etc. The following paragraphs discuss the audit steps for verifying investments, with special reference to investments in the fo of shares, debentures and other securities. Verification of Transactions 8. The auditor should ascertain whether the investments made by the entity are within its authority. in this regard, the auditor should examine whether the legal requirements governing the entity, insofar as they relate to investments, have been complied with and the investments made by the entity are not ultra vires the entity. Apart from the above, the auditor should also ensure that any other covenants or conditions which restrict, qualify or abridge the right of ownership and/or disposal of investments, have been complied with by the entity. 9. The auditor should satisfy himself that the transactions for the purchase/sale of investments are supported by due authority and documentation. The acquisition/disposal of investments should be verified with reference to the broker's contract note, bill of costs, receipts and other similar evidence. The auditor should pay special attention to ascertaining whether the investments have been purchased or sold cum‑dividend/ex‑dividend, cum‑interest/ex-interest, cum‑right/ex‑right, or cum‑bonus/ex‑bonus. He should check whether proper adjustments in this regard have been made in the cost/sales value of securities purchased or sold. 10. In the case of a right issue, the offer to the entity contained in the letter of rights should be examined. Where the rights have been renounced or otherwise disposed of or not exercised, the auditor should examine the relevant decision of the appropriate authority in this behalf, as also that the sale proceeds, if any, have been duly accounted for. 11. As regards bonus shares, the intimation to the entity regarding such ;sue should be examined with a view to ascertaining the receipt and recording f the requisite number of shares by the entity. 12. Where the amounts of purchases or sales of investments are substantial, the auditor may cheek the prices paid/received with reference to the stock exchange quotations, where available, on or about the date of purchase or sale. Physical Inspection 13. The auditor should carry out a physical inspection of investments in the form of shares, debentures and other securities. (Special considerations apply in the case of investments in the form of immovable properties, as discussed in paragraph 24.) In the case of certain entities (e.g., insurance companies), physical inspection of investments is a statutory requirement. 14. The depository services and scripless trading are becoming increasingly popular in India. Depository services involve custody of documents of title to investments such as certificates, scrips and deeds and thus avoid their physical handling by the investor. The Public Debt Office of the Reserve Bank of India offers such services to facilitate trading in Government Securities. Authorised institutions such as banks, financial institutions etc. which have individual ledger accounts with the Public Debt Office can trade in government securities between themselves by issuing and accepting Bankers' Receipts. In case of such transactions, the auditor should verify the periodic reconciliation of balances as per the records of the entity and those as per the Public Debt Office. 15. Apart from the Public Debt Office, there are now a number of other custodial organisations whose services are being utilised by banks, large investors, institutional investors, mutual funds etc. The concept of the National Depository System (NDS) is also under development. This system is aimed at eliminating physical movement of securities for purchases and sales. Whenever the services of any of these custodial or depository organisations are being used by the entity under audit, the auditor should redesign his audit procedures to ensure that there is an effective system of periodic reconciliation of balances as per the records of the entity and those as per the records of the custodial or depository organisation. The auditor should also examine the certificates issued by such organisations confirming the holdings of the entity. The concept of scripless trading being introduced by the National Stock Exchange and the OTC Exchange of India also envisage elimination of movement of title deeds of securities. In such cases, the auditor should verify the interim and other acknowledgments issued by dealers as well as the year‑end confirmation certificates of the depository organisations. 16. The investments held by the entity in its own custody should normally be examined at the close of business on the last day of the year. In case this is not possible, the auditor should carry out the inspection on a date as near to the balance sheet date as possible. In such a case, he should take into consideration any adjustments for subsequent transactions of purchase, sale, etc. Where a substantial number of investments are kept by the entity in its custody, the auditor should carry out a surprise inspection of the investments on hand at least once in the year in addition to his year‑end examination. He should take particular care to see that only the investments belonging to the entity are produccd to him. This aspect assumes special importance in the case of entities like banks which hold investments on their own account, in the form of securities lodged by the customers against loans and advances, and on behalf of the PMs clients. 17. Where investments are held by any other person on behalf of the entity, e.g. by banks, the auditor should examine the certificates received from them. Such certificates should preferably be received directly by the auditor. A suggested form of bank confirmation certificate is given in Appendix 11 to this Guidance Note. 18. In case investments are held by persons other than banks, the auditor should ensure that there is justification for it, e.g., securities in the custody of brokers or with the company concerned for transfer, consolidation, splitting up, conversion, etc. Evidence of securities held with others should be examined and, in appropriate cases, physical inspection of the relevant documents may be made, to the extent possible, in the course of audit. Where the investments are recorded at an office other than the one where the documents of title thereto are physically located, the local auditor may be requested to verify the same. 19. If the investments are held otherwise than in the name of the entity (e.g. in the name of nominees/trustees), the auditor should ascertain the reasons for the same and examine the relevant documentary evidence (e.g., written confirmations from from the nominees, trustees, etc.) supporting the real/beneficial interest of the entity in the investments. 20. The auditor should also examine any other aspects required to be examined or reported upon by the relevant statute. For example, in the case of a company, the auditor should also carry out the procedures outlined in paragraphs 21-23 below. 21. Where shares, are held not in the name of the company but in the name of a director, officer, etc., the auditor should examine whether the declaration referred to in section 187‑C of the Companies Act, 1956 has been properly made. 22. The auditor should keep in mind the provisions of section 227(1A)(c) which requires that the auditor of a company, not being an investment company within the meaning of section 372 of the Companies Act, 1956 or a banking company, should enquire whether so much of the assets of the company as consists of shares, debentures and other securities have been sold at a price less than that at which they are purchased by the company.6 23. In case the entity is a finance, investment, chit fund, nidhi or mutual benefit company and is dealing or trading in shares, securities, debentures or other investments, the auditor has to state in his report (by virtue of the requirements: of the Manufacturing and Other Companies (Auditor's Report) Order, 1988 issued under section 227(4A) of the Companies Act, 1956) whether proper 'records have been maintained of the transactions and contracts and whether timely entries have been made therein as also whether the shares, securities, debentures and other investments have been held by the company in its own name except to the extent of exemptions granted under section 49 of the Companies Act, 1956.7 Immovable Properties 24. Where immovable properties are held as investments, the auditor should verify them in the same manner as in the case of immovable properties held as fixed assets.8 Examination of Valuation and‑Disclosure 25. The auditor should satisfy himself that the investments have been valued and disclosed in the financial statements in accordance with recognised accounting policies and practices and relevant statutory requirements, if any.9 Appendix [1] to this Guidance Note discusses, by way of illustration, the disclosure requirements of some of the Acts. The auditor should also examine whether the method of valuation followed by the entity is consistently applied. 26. The auditor should examine whether, in computing the cost of investments, the expenditure incurred on account of transfer fees, stamp duty, brokerage, etc. is included in the cost of investments. 27. The auditor may ascertain the market value of the quoted securities from official quotations of the stock exchange, In case of unquoted securities, the auditor should ascertain the method adopted by the entity for determining the market value of such securities. He should examine whether the method adopted by the entity is one of the recognised methods of valuation of securities such as break‑up value method, capitalisation of yield method, yield to maturity method, etc. In the case of investments other than in the form of securities (e.g. rare paintings), the auditor should examine that the market value has been ascertained on the basis of authentic market reports. Analytical Review Procedures 28. As a measure of judging the overall reasonableness of the amounts attributed to investments, the auditor may relate the amount of income received from investments with the corresponding figures of investments and compare this ratio with the similar ratio for the previous years. For this purpose, investments may be classified into appropriate categories. Thus, in the case of fixed interest‑bearing securities, the auditor may relate the amount of interest earned with the face value of the related securities. In the case of other securities, the auditor may review the schedule of dividend and other returns and the schedule of investments prepared by the entity and judge their reasonableness. MANAGEMENT REPRESENTATIONS 29. The auditor should obtain from the management of the entity a written statement regarding classification and valuation of investments for balance sheet purposes. While such a representation letter serves as a formal acknowledgement of the management's responsibilities with regard to investments, it does not relieve the auditor of his responsibility for performing audit procedures to obtain sufficient appropriate audit evidence to form the basis for the expression of his opinion on the financial information. A sample management presentation letter regarding investments is given in Appendix IV to this ice Note. It may be mentioned that the representations made in the letter can alternatively be included in the composite representation letter usually issued by the management to the auditor. DOCUMENTATION 30. The auditor should maintain adequate working papers regarding audit of investments. Among others, he should maintain on his audit file the management representation letter concerning investments. APPENDIX I LEGAL REQUIREMENTS RELATING TO INVESTMENTS (Ref. Paragraph 2) This Appendix contains an illustrative description of the legal provisions regarding investments as contained in the Companies Act, 1956, Banking Regulation Act, 1949, Insurance Act, 1938, and the Cooperative Societies Act, 1912. It may be emphasised that this Appendix is only illustrative in nature and is not intended to give an exhaustive description of all the relevant legal requirements applicable to different types of entities. Moreover, the legal requirements may change from time to time and therefore, this Appendix should not be construed as representing the correct legal position at all points of time. PROVISIONS OF THE COMPANIES ACT, 1956 The main relevant sections are section 49, section 108, section 2~2, section 293(1)(c) and section 372, besides requirements of inquiry/reporting under sections 227(1A) and 227(4A). Section 49 provides that, subject to certain exceptions, investments made by a company on its own behalf shall be made and held by it in its own name. Section 108 lays down the mode of transfer of shares and debentures and prescribes the period of validity of blank transfers. Sections 108A‑1081 Jay down certain restrictions on acquisition and transfer of shares. Section 292 provides that the power to invest the funds of a company shall be exercised by its Board of Directors on behalf of the company only by means of resolutions passed at meetings of the Board. However, the Board may, by a resolution passed at a meeting, delegate this power to any of its committees, the managing director, the manager or any other principal officer of the company. In such'case, every resolution delegating the power to invest the funds of the company shall specify the total amount upto which the funds may be invested and the nature of the investments which may be made, by the committee or the person to whom the power to invest is so delegated. Section 293(1)(c) provides that the Board of Directors of a public company, or of a private company which is a subsidiary of a public company, shall not invest otherwise than in trust securities the amount of compensation received by it in respect of the compulsory acquisition of any undertaking or of any premises or properties used for any such undertaking except with the consent of the company in a general meeting. Section 372 provides that a company, whether by itself or together with its subsidiarics, shall not bc entitled to acquire, by way of subscription, purchase or otherwise, the shares of any other body corporate except to the extent and ex)t in accordance with the restrictions and conditions, specified in the section. PROVISIONS OF THE BANKING REGULATION ACT, 1949 Section 19 of the Act provides that no banking company shall hold shares in any company, whether as pledgee, mortgagee or absolute owner, of an amount exceeding 30% of the paid‑up share capital of that company or 30% of its own paid‑up share capital and reserves, whichever is less. The above restriction, however, does not apply to the holding by a banking company of shares in its subsidiary. A banking company is also prohibited from holding shares, whether as pledgee, mortgagee or absolute owner, in any company in the management of which any managing director or manager of the banking apany is in any manner concerned or interested. Section 24 of the Banking Regulation Act provides that every banking company shall maintain in India in cash, gold or unencumbered approved securities an amount which shall not, at the close of business on dry day, be less than twenty‑five per cent or such other percentage not exceeding forty, as the Reserve Bank of India may from time to time specify, of‑the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight. The above provisions also apply to the State Bank of India and its subsidiaries and the nationalised banks, PROVISIONS OF THE INSURANCE ACT, 1938 Section 27(13) of the Insurance Act, 1938 provides that no insurer carrying on general insurance business can invest or keep invested any part of his assets otherwise than in any of the approved investments or in other investments which satisfy certain conditions or in certain prescribed assets which are deemed to be approved investments for the purposes of this section. A general insurance company can invest any part of its assets in investments other than the investments mentioned above, provided that (i) the total amount of all such investments does not exceed 25 per cent of its assets and (ii) the making or the continuance of the investment is with the consent of all the directors, present and eligible to vote, at a meeting special notice of which has been given to all directors, then in India. All such investments including investmerits in which any director is interested must be reported without delay to the Controller of Insurance with full details of the investments and the extent of any director's interest in any such investment. An insurer cannot invest or keep invested any part of his assets in the shares of any one banking company or investment company more than (a) ten cent of his assets, or (b) two per cent of the subscribed share capital and debentures of the banking company concerned, whichever is less. Further, an insurer cannot invest or keep invested any part of his assets in the shares of debentures of any one company other than a banking corn any or investment company more than (a) ten per cent of his assets, or (b) ten per cent of the subscribed share capital and debentures of the company, whichever is less. Where an investment is in partly paid‑up shares, the uncalled liability on such shares shall be added to the amount invested, for the purpose of determining whether such investment exceeds the limits referred to above. However, an insurer can subscribe to the right shares notwithstanding the limits specified above. These limits do not apply to an investment made by an insurer in the shares of any other insurance company business in India. The Controller of Insurance can waive for a specified period and with certain conditions, the limits specified above if, on an application from the insurer, he is satisfied that special grounds exist warranting such waiver. An insurer cannot invest or eep inve shares or debentures of any private company. PROVISIONS OF THE COOPERATIVE SOCIETIES ACT, 1912 Section 32 of the Cooperative Societies Act, 1912 provides that a registered society can invest or deposit its funds only: (a) in Government Savings Banks; (b) in any of the securities specified in section 20 of the Indian Trusts Act, 1882; (c) in the shares or on the security of any other registered society; (d) with any bank or person carrying on the business of banking, approved for this purpose by the Registrar; or (e) in any other mode permitted by the rides. APPENDIX II ILLUSTRATIVE LETTER OF CONFIRMATION - INVESTMENTS HELD BY BANKS (Ref. Paragraph 17) [Letterhead of Entity] [Date] ............... {Bank) ............... ..... Dear Sirs, For audit purpose, kindly send directly to our auditors (name and address the auditors) a certificate regarding all the shares, debentures.and other securities belonging to us but lying with you as (i) security against loans and advances to us, or (ii) in safe custody account at the close of business on ......... For your convenience, we enclose in duplicate a form in which the certificate may be sent. Please send one copy to our auditors, retaining the other for your records. Should you find the space on the form insufficient to contain all the relevant information, please attach a separate statement. We would request you to state NIL wherever applicable. Yours faithfully, (to be signed by person authorised to operate accounts) APPENDIX III DISCLOSURE REQUIREMENTS RELATING TO INVESTMENTS (Ref. Paragraph 25) To illustrate the manner of disclosure of investments in the financial statements, this Appendix discusses the requirements of the Companies Act, 1956, the Banking Regulation Act, 1949, and the Insurance Act, 1938, insofar as they relate to disclosure of information regarding investments in the financial statements prepared and presented in accordance with the provisions of these statutes. As regards the co‑operative societies, the form and content of their financial statements are governed by the rules framed by the State Government concerned. It may be emphasised that, in every case, there should be an adequate disclosure of all relevant information to facilitate proper understanding of the financial statements by the users. REQUIREMENTS OF THE COMPANIES ACT, 1956 Schedule V1 to the Companies Act, 1956 requires the disclosure of investments in the balance sheet as below: (1) Investments in Government or Trust Securities. (2) Investments in shares, debentures or bonds (showing separately shares fully paid up and partly paid up and also distinguishing the different classes of shares and showing also in similar details investments in shares, debentures or bonds of subsidiary companies). (3) Immovable properties. (4) Investments in the capital of partnership firms. The above particulars have to be given showing the nature of investments and mode of valuation, for example, cost or market value. Further, the aggregate amount of the company's quoted investments and the market value thereof have to be shown. The aggregate amount of the company's unquoted investments is also required to be shown. A statement of investments (whether shown under 1nvestments" or under "Current Assets' as stock‑in‑trade, separately classifying trade investments and other investments) is required to be annexed to the balance sheet, showing the names of the bodies corporate (indicating separately the names of the bodies corporate under the same management) in whose shares or debentures investments have been made (including all investments whether existing on the balance sheet date or not, made subsequent to the date as at which the previous balance sheet was made out) and the nature and extent of the investments so made in each such body corporate. In the case of an investment company, i.e. a company whose principal business is the acquisition of shares, stock, debentures or other securities, it shall be sufficient if the statement shows only the investments existing on the date as at which the balance sheet has been made out. In regard to the investments in the capital of partnership firms, the names of the firms (with the names of all their Partners, total capital and the share of each partner) are required to be given in the statement. REQUIREMENTS OF THE BANKING REGULATION ACT, 1949 The Third Schedule to the Banking Regulation Act, 1949, requires the investments to be classified under the following heads for the Purpose of balance presentation: I . Investments in India in (i) Government securities (ii) Other approved Securities (iii) Shares (iv) Debentures and Bonds (v) Subsidiaries and/or joint ventures (vi) Others (to be specified) Total: II. Investments outside India in (i) Government securities (including local authorities) (ii) Subsidiaries and/or joint ventures abroad (iii) Other investments (to be specified) Total: Grand Total.. (I & II) REQUIREMENTS OF THE INSURANCE ACT, 1938 The First Schedule to the Insurance Act, 1938 requires the disclosure of investments of an insurer as below: § Deposit with the Reserve Bank of India (Securities to be specified) § Indian Government Securities § State Government Securities § British, British Colonial and British Dominion Government Securities § Foreign Government Securities. § Indian Municipal Securities § British and Colonial Securities § FForeign Securities § Bonds, Debentures, Stocks and other securities whereon interest is guaranteed by the Indian Government or a State Government. § Bonds, Debentures, Stocks and other securities whereon interest is guaranteed by the British or any Colonial Government § Bonds, Debentures, stocks and other securities whereon interest is guaranteed by any Foreign Government § Debentures of any railway in India § Debentures of any railway out of India § Preference or guaranteed shares of any railway in India § Preference or guaranteed shares of any railway out of India § Railway Ordinary Stocks (i) in India (ii) out of India § Other Debentures and Debenture stock of companies incorporated (i) in India (ii) out of India § Other guaranteed and preference stocks and shares ol'companies incorporated (i) in India (ii) out of India Other ordinary stocks and shares of India (ii) out of India § Holdings in Subsidiary companies The book value and the market value have to be shown in respect of the investments. Where the market value is ascertained on a basis other than the published quotations, the manner in which such value has been arrived at, is also required to be disclosed. Appendix IV REPRESENTATION LETTER FOR INVESTMENTS (Ref. Paragraph 29) Following is a sample representation letter for investments. It might be o supplement the general letter of representation or included therein. The should be modified where appropriate. (Letterhead of Entity) [Name and Address of the Auditor] Dear Sir, In connection with your audit of the financial statements of X limited as of ...., 19., and for the year then ended, we confirm to the best of our knowledge and belief, the following representations concerning investments. 1. The current investments as appearing in the balance sheet consist of only such investments as are by their nature readily realisable and intended to be held for not more than one year from the respective dates on which they were made. All other investments have been shown in the balance sheet as 'long‑term investments'. 2. Current investments have been valued at the lower of cost and fair value. Long‑term investments have been valued at cost, except that any permanent diminution in their value has been provided for in ascertaining their carrying amount. 3. In respect of offers of right issues received during the year, the rights have been either been subscribed to, or renunciated, or allowed to lapse. In no case have they been renunciated in favour of third parties without consideration which has been properly accounted for in the books of account. 4. All the investments produced to you for physical verification belong to the entity and they do not include any investments held on behalf of any other person. 5. The entity has clear title to all its investments including such investments which are in the process of being registered in the name of the entity or which are not held in the name of the entity. There are no charges against the investments of the entity except those appearing in the records of the entity. Yours faithfully, (Signature of responsible official of the entity) 1 With the formation of the Auditing Practices Committee in 1982, the Council of the has been issuing a series of Statements on Standard Auditing Practices (SAPs). Statements on Auditing Practices lay down the principles governing an audit. These principles apply when independent audit is carried out. Statements on Standard Auditing Practices become mandatory from the dates specified in the respective SAPs. Their mandatory status implies that, while discharging the auditing function, it will be the duty of the members of the Institute to ensure that the SAPs are followed from audit of financial information covered by their audit reports. If, for any reason, a member has not been able to perform an audit in accordance with the SAPs, his report should draw attention to the departures therefrom. The Auditing Practices Committee has also been issuing, from time to time, guidance notes issues arising from SAPs. The Guidance Notes provide guidance on procedures to be employed, auditor in order to comply with the principles laid down in SAPs. It is recognised that in deterrent nature, timing and extent of audit procedures to he employed in a specific situation, an auditor to exercise his professional judgment. The Guidance Notes, therefore, are recommendatory. A member should ordinarily follow the recommendations in a guidance note relating to an auditing mal where he is satisfied that, in the circumstances of the case, it may not he necessary to do so. 2This Guidance Note does not deal with special aspects of audit of investments of benefit plans, life insurance enterprises, mutual funds and/or the related asset management of banks and public financial institutions formed under a Central or State Government Act or s under the Companies Act, 1956. The special aspects of audit of investments of some of these institutions have been dealt with in other publications of the Institute, e.g., Guidance Note on Audit of Banks, Study on Audit of Companies Carrying on General Insurance Business. It may also be noted that of certain types of entities, e.g., companies, banks, insurance companies, co‑operative societies, etc the question of compliance with the legal requirements assumes special importance. Appendix I to this Guidance Note contains a brief description of the main provisions of the statutes governing of entities insofar as they relate to investments. It may be emphasised that the Appendix is only illustrative and not exhaustive. Moreover, the legal requirements may change from time to time and, therefore, this Appendix should not be construed as representing the correct legal position at all points of time. 3 It may be clarified that the term 'investments' covers only to such securities as are beneficially owned by the entity and not those held by it on behalf of others. 4 It may be clarified that inventories, as defined in Accounting Standard (AS) 2, Valuation of Inventories, issued by the Institute of Chartered Accountants of India are not investments. However. the recommendations of this Guidance Note also apply, to the extent relevant, to shares, debentures and other securities held as stock‑in‑trade. Fixed assets (other than investment properties), an defined in , Standard (AS) 10, Accounting for Fixed Assets, issued by the Institute, are also not investments. 5 The extent of review of controls would depend upon the facts and circumstances of each case. Reference may be made in this regard to the Internal Control Questionnaire, issued by the Institute of Chartered Accountants of India in 1976 which contains, inter alia, an illustrative list of internal controls in relation to investments. 6 For a detailed discussion on this aspect, reference may be made to the Statement on Qualifications in an Auditor's Report, issued by the Institute of Chartered Accountants of India. 7For a detailed discussion on this aspect, reference may he made to the Statement on the Manufacturing and Other Companies (Auditor's Report) Order, 1988 (Issued under Section 227(4A) of the Companies Act, 1956), issued by the Institute of Chartered Accountants of India. 8Reference may be made in this regard to the Guidance Note on Audit of Fixed Assets issued by the Auditing Practices Committee of the Institute of Chartered Accountants of India. 9Reference may he made in this regard to Accounting Standard 13, Accounting for Investments, issued by the Institute of Chartered Accountants of India. 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