1 We have audited the attached Balance Sheet of Kandagiri Spinning
 Mills Limited (the Company) as at March 31,2012, the Statement of
 Profit and loss and the Cash Flow Statement for the year ended on that
 date, both annexed thereto, (collectively referred to as the financial
 statements), signed by us under reference to this report. These
 financial statements are the responsibility of the company''s
 management. Our responsibility is to express an opinion on these
 financial statements based on our audit.
 
 2 We have conducted our audit in accordance with auditing and assurance
 standards generally accepted in India.  The said Standards require that
 we plan and perform the audit to obtain reasonable assurance about
 whether the financial statements are free of material misstatement. An
 audit includes examining, on a test basis, evidence supporting the
 amounts and disclosures in the financial statements. An audit also
 includes assessing the accounting principles used and significant
 estimates made by the management, as well as evaluating the overall
 financial statement presentation. We believe that our audit provides a
 reasonable basis for our opinion.
 
 3 We have obtained all the information and explanations, which, to the
 best of our knowledge and belief, were necessary for the purposes of
 our audit.
 
 4 In our opinion, proper books of account, as required by law, have
 been kept by the Company so far as appears from our examination of
 those books.
 
 5 The financial statements dealt with by this report are in agreement
 with the books of account. .
 
 6 In our opinion, the aforesaid financial statements comply in all
 material respects with the applicable Accounting Standards referred to
 in section 211(3C) of the Companies Act, 1956 (the Act).
 
 7 On the basis of written representation received from the directors as
 on March 31,2012, and taken on record by the Board of Directors, we
 report that none of the directors is prima facie disqualified as on
 March 31, 2012 from being appointed as a director in terms of section
 274(l)(g) of the Act.
 
 8 In our opinion and to the best of our information and according to
 the explanations given to us, the aforesaid financial statements read
 with the Statement on Significant Accounting Policies and Notes to the
 Accounts, give the information required by the Act, in the manner so
 required and also give a true and fair view, in conformity with the
 accounting principles generally accepted in India:
 
 8.1 in the case of the Balance sheet, of the state of affairs of the
 Company as at March 31, 2012;
 
 8.2 in the case of the Statement of Profit and loss, of the loss for
 the year ended on that date; and
 
 8.3 in the case of the Cash flow statement, of the cash flows for the
 year ended on that date.
 
 9 As required by the Companies (Auditor''s Report) Order, 2003 (CARO)
 issued by the Government of India in terms of section 227(4A) of the
 Companies Act, 1956, and on the basis of such checks as considered
 appropriate and according to the information and explanations
 furnished, it is reported that:
 
 9.1 the company is maintaining proper records showing full particulars
 including quantitative details and situation of fixed assets. These
 fixed assets are being physically verified by the management under a
 phased programme of verification, which, in our opinion, is reasonable
 having regard to the nature and value of its fixed assets.  However no
 material discrepancies have been noticed on such verification. The
 company has not disposed off substantial part of its fixed assets
 during the year.
 
 9.2 physical verification of inventory has been conducted at reasonable
 intervals by the management. T h e procedures of physical verification
 of inventory followed by the management are reasonable and adequate in
 relation to the size of the company and the nature of its business. The
 company is maintaining proper records of its inventories and no
 material discrepancies were noticed on such physical verification.
 
 9.3 the company has neither granted nor taken any loans, secured or
 unsecured, during the year, to/from companies, firms or other parties
 covered in the register maintained under section 301 of the Act.
 
 9.4 there is an adequate internal control system commensurate with the
 size of the company and the nature of its business for the purchase of
 inventory and fixed assets and for the sale of goods and services.
 Further, on the basis of our examination of the books and records of
 the company, we have neither come across nor have been informed of any
 continuing failure to correct major weaknesses in the aforesaid
 internal control system.
 
 9.5 0) the particulars of contracts or arrangements that need to be
 entered into a register under section 301 of the Act have been entered.
 
 (ii) in our opinion, each of the transactions exceeding the value of
 Rs.5,00,000 pursuant to the aforesaid contracts/arrangement have been
 made at prices which are reasonable having regard to the prevailing
 market prices at the relevant time.
 
 9.6 the company has complied with the provisions of sections 58A and
 58AA or any other relevant provisions of the Act and the Companies
 (Acceptance of Deposit) Rules, 1975 with regard to deposits accepted
 from public.
 
 9.7 the company has an internal audit system commensurate with its size
 and nature of its business.
 
 9.8 on the basis of the records produced, we are of the opinion that
 prima facie, the cost records as per the Companies (Cost Accounting
 Records) Rules,2011 prescribed by the Central Government under section
 209(l)(d) of the Companies Act, 1956 have been maintained by the
 company. We have, however, not made a detailed examination of the cost
 records with a view to determine whether they are accurate or complete.
 
 9.9 (i) the Company is regular in depositing undisputed statutory dues
 including provident fund, investor education and protection fund,
 employees'' state insurance, income tax, sales tax, wealth tax, service
 tax, customs duty, excise duty, cess and other material statutory dues,
 as applicable, with the appropriate authorities during the year.
 
 (ii) no undisputed amounts payable in respect of income tax, wealth
 tax, sales tax, customs duty, excise duty and cess were in arrears, as
 at the balance sheet date for a period of more than six months from the
 date they became payable.
 
 (iii) There are no dues of Income tax/wealth tax, excise duty, service
 tax, customs duty which have not been deposited on account of any
 dispute. Details of dues towards sales tax that have not been deposited
 on account of any dispute, for which stay has been obtained, are
 (Nature of dues, dues, forum where dispute is pending) - Sales tax,
 Rs.35,909, Sales tax Appellate Tribunal.
 
 9.10 the company does not haves any accumulated losses as at March
 31,2011 and has incurred cash loss of Rs.12,05,17,177 during the
 financial year ended March 31, 2012 and has not incurred any cash
 losses in the immediately preceding financial year.
 
 9.11 the company has not defaulted in repayment of dues to any
 financial institution, bank or debenture holders during the year. ''
 
 9.12 the company has not granted any loans and advances on the basis of
 security by way of pledge of shares, debentures and other securities
 during the year.
 
 9.13 the provisions of any special statute applicable to a chit fund,
 nidhi, mutual benefit fund/societies are not applicable to the Company.
 
 9.14 the company is not dealing or trading in shares, securities,
 debentures and other investments. Accordingly the provisions of clause
 4(xiv) of the CARO are not applicable to the company.
 
 9.15 the company has not given any guarantees for loans taken by others
 from banks or financial institutions.
 
 9.16 the term loans availed by the company during the year, were, prima
 facie, applied for the purpose for which they were obtained.
 
 9.17 based on an overall examination of the financial statements of the
 company, funds raised on short-term basis have, prima facie, not been
 used for long term investment.
 
 9.18 the company has not made any preferential allotment of shares
 during the year to any party.
 
 9.19 the company has not issued any debentures during the year.
 
 9.20 the company has not raised any money by public issues during the
 year.
 
 9.21 considering the size and nature of the company''s operations, no
 fraud of material significance on or by the company has been noticed or
 reported during the year.
 
                                       For M.S. Krishnaswami & Rajan
 
                                          Chartered Accountants 
 
                                          Registration NO.01554S
 
 Salem                                    M.K. Rajan-Partner
 
 May 30,2012                              Membership No.4059