8

C H A P T E R
CARO, 2020

8.1 Applicability of Companies (Auditor Report) Order, 2020

Application of CARO, 2020 shall apply to every company including a foreign company as defined in Sec.
CARO, 2020 2(42) of the Companies Act, 2013, except:
(i) a banking company;
(ii) an insurance company;
(iii) a company licensed to operate u/s 8 of the Companies Act;
(iv) a One-Person Company as defined in Sec. 2(62) of the Companies Act and a Small
Company as defined in Sec. 2(85) of the Companies Act; and
(v) a private limited company, not being a subsidiary or holding of a public company,
u having a Paid-up capital & Reserves & Surplus not more than ` 1 Cr. as on the
balance sheet date, and
u which does not have total borrowings exceeding `  1 Cr.  from any bank or

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financial institution at any point of time during the financial year, and
u which does not have a total revenue as disclosed in Schedule III to the Companies
Act, 2013 (including revenue from discontinuing operations) exceeding ` 10
Cr. during the financial year as per the financial statements.
Every report made by the auditor u/s 143 of the Companies Act, 2013 on the accounts
of every company examined by him to which this Order applies for the financial
years commencing on or after 1st April, 2019, shall contain the matters specified in
paragraphs 3 and 4, as may be applicable.
The Order shall not apply to the auditor’s report on consolidated financial statements
except Para 3(xxi).
Points to remember
(a) Provisions of CARO are equally applicable in case of branches also, because under
sec, 143(8), a branch auditor has same duties as of company auditor.
(b) A company is covered under the definition of small company, it will remain exempted
from the applicability of the Order even if it falls under any of the criteria specified
for private company.
(c) Paid up capital includes equity as well as preference.
(d) Amount originally paid up on forfeited shares should be added to the figure of paid
up capital.
(e) Share Application money should not be considered as part of paid up capital.

8.1
 8.2 MODULE III : COMPANY AUDIT

(f) Reserves includes Capital reserves, revenue reserves as well as Revaluation Reserves.
(g) Credit Balance of Profit and Loss Account will form part of reserve.
(h) In case of debit balance of profit or loss, same shall be netted for computing reserves
& surplus.
(i) Loans from banks and financial institutions are to be considered in aggregate.
Financial Institutions will include NBFC.
(j) Loans may be in any form like term loan, demand loans, cash credit overdraft, export
credit, bill purchased/discounted.
(k) Non-fund-based credit facilities have devolved and have been converted into fund
based credit facilities should also be considered as outstanding loan.
(l) Long term loans as well as short term loans, secured as well as unsecured will be
considered.
(m) Outstanding dues in respect of credit cards will also be considered.
(n) Interest accrued as well as due does form part of outstanding loan, whereas interest
accrued but not due is not considered as loan.
(o) Total revenue as disclosed in Schedule III comprises of Revenue from operations
and Other Income.
(p) In respect of a company other than a finance company revenue from operations
shall consists of revenue from (a) Sale of products; (b) Sale of services; and (c) Other
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operating revenues, as reduced by Excise duty.

(q) In respect of a finance company, revenue from operations shall consists of revenue
from (a) Interest; and (b) Other financial services.
(r) Other income shall consist of the followings:
u Interest Income (in case of a company other than a finance company);
u Dividend Income;
u Net gain/loss on sale of investments;
u Other non-operating income (net of expenses directly attributable to such
income).

IMPORTANT QUESTIONS
Q. No. 1: ABC Pvt. Ltd. is a holding company of XYZ Ltd. Whether CARO is applicable to ABC Pvt. Ltd.?
HINT: CARO is applicable.
Q. No. 2: Astha Pvt. Ltd. has fully paid capital of ` 140 lakhs. During the year, the company had borrowed
` 15 lakhs each from a bank and a financial institution independently. It has the turnover (Net
of excise ` 50 lakhs which is credited to a separate account) of ` 475 lakhs. Will Companies
(Auditor’s Report) Order, 2020 be applicable to Astha Pvt. Ltd.?
HINT: CARO is applicable as paid up capital exceeds ` 1 Cr.
Q. No. 3: E-Tech Pvt. Ltd., which has an aggregate outstanding loan of ` 20 lakhs from Banks and ` 30 lakhs
from Financial Institutions, defaulted in repayment thereof to the extent of 50%. The company
holds that it being a private limited company, the Companies (Auditor’s Report) Order, 2020 is
not applicable.
You are required to state the list of companies to which CARO is not applicable and state how
would you deal with the given situation as an auditor of the company.
 CH. 8 : CARO, 2020 8.3

HINT: Contention of the E Tech Pvt. Ltd., is correct that CARO, 2020 will not be applicable on it as
outstanding loan from banks and financial institution in aggregate does not exceeds ` 1 Cr.
Q. No. 4: A Pvt. Ltd. is incorporated on 1st July, 2020. During the year ended 31st March, 2021, it had
issued shares (fully paid up) of Rs. 80 lakhs, had borrowed Rs. 60 lakhs each from 2 financial
institutions and its turnover (Net of GST ` 100 lakhs which is credited to a separate account) is
` 950 lakhs. Will Companies (Auditors Report) Order, 2020 (CARO) be applicable to A Pvt. Ltd.?
HINT: Contention of the A Pvt. Ltd. is not correct as total borrowings exceeds Rs. 1 Cr., hence reporting
under CARO, 2020 will be required.
Q. No. 5: As an auditor, how would you deal with the following: L Private Ltd., which has outstanding
loan of more than Rs. 100 lakhs from Financial Institution defaulted in repayment thereof to
the extent of 50%. The company holds that it being a private limited company, the Companies
(Auditors Report) Order is not applicable.
HINT: Contention of L Pvt. Ltd. is not correct as borrowings from financial institution exceeds Rs. 1 Cr.,
and auditor is required to report the period and amount of default in repayment of dues under Para
3(viii) of CARO, 2020.
Q. No. 6: T Pvt. Ltd.’s paid up Capital & Reserves are less than ` 1 Cr. and it has no outstanding loan
exceeding ` 1 cr. from any bank or financial institution. Its sales are ` 12 Crores before deducting
Trade discount ` 20 lakhs and Sales returns ` 90 Cr. The services rendered by the company
amounted to ` 20 lakhs. The company contends that reporting under Companies Auditor’s
Reports Order (CARO) is not applicable. Discuss.
HINT: Contention of the company that CARO is not applicable is not correct, as revenue of the company

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of the company as per Schedule III including value of service rendered, after deducting trade discount
and sales returns amounts to ` 10.10 Cr. (i.e.12 - 0.20 – 1.90 + 0.20 crore).
Q. No. 7: A Private limited company reports the following position as on 31st March 2021:
Paid up capital 60 Lacs
Revaluation reserves 20 Lacs
Capital reserves 22 Lacs
P & L A/c (Dr. Balance) 4 Lacs.
The management of the company contends that CARO, 2020 is not applicable to it.
HINT: CARO is not applicable as paid up capital and reserves does not exceed ` 1 cr. (60 Lacs + 20 Lacs
+ 22 Lacs – 4 Lacs).
Q. No. 8: Under CARO, 2020, how as a statutory auditor would you comment on the following: X Pvt. Ltd.
is a subsidiary of a listed entity. The management of the company believes that since X Pvt. Ltd.
is a private company and satisfies all conditions under CARO, 2020, reporting under CARO is
not applicable.
HINT: CARO is applicable as exemption is not available to a private company which is a subsidiary or
holding of a public company.
Q. No. 9: H Private Ltd. had taken overdrafts from two banks with a limit of ` 40 lacs each against the
security of fixed deposit it had with those banks and an unsecured overdraft from a financial
institution of ` 36 lacs. The said loans were outstanding as at 31st March, 2021. The paid-up
capital and reserves of the company as at that date was ` 80 lacs and its revenue for the financial
year ended on 31st March 2021was ` 6 crores. The management of the company is of the opinion
that CARO, 2020 is not applicable to it because turnover and paid up capital were within the limits
 8.4 MODULE III : COMPANY AUDIT

prescribed and loans taken against the fixed deposits cannot be considered. The company
further contended that loan limit is to be reckoned per bank or financial institution and not
cumulatively. Comment.
HINT: The contention of the company is not correct as total borrowings exceeds ` 1 cr., hence
reporting under CARO, 2020 will be required.
Q. No. 10: A Private Limited Company reports the following position as on 31st March, 2021:

Paid up Capital ` 70 Lacs

Revaluation Reserve ` 24 Lacs
Capital Reserve ` 20 Lacs
Profit & Loss (Dr.) Balance ` 24 Lacs
The Management of the Company contends that CARO, 2020 is not applicable to it. Comment.
HINT: CARO, 2020 is not applicable to the Company, as paid up capital and reserves amounts to ` 0.90
Cr.

8.2 Matters to be included in Auditor’s Report

Property, Plant and Adequacy of u Whether the company is maintaining proper records showing
Equipment [Para Records full particulars, including quantitative details and situation of
3(i)] Property, Plant and Equipment.
u Whether the company is maintaining proper records showing
full particulars of intangible assets.
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Points to remember
The Order does not define as to what constitutes ‘proper
records’. Thus, what constitutes proper records is a matter of
professional judgment made by the auditor after considering
the facts and circumstances of each case.
Physical u Whether these Property, Plant and Equipment have been
verification physically verified by the management at reasonable intervals;
u whether any material discrepancies were noticed on such
verification and if so,
u whether the same have been properly dealt with in the books
of account.
Points to remember
u What constitutes “reasonable intervals” depends upon
the circumstances of each case.
u The factors to be taken into consideration in this regard
include the number of assets, the nature of assets, the
relative value of assets, difficulty in verification, situation
and geographical spread of the location of the assets, etc.
u The management may decide about the periodicity of
physical verification of fixed assets considering the above
factors. While an annual verification may be reasonable, it
may be impracticable to carry out the same in some cases.
Even in such cases, the verification programme should be
such that all assets are verified at least once in every three
years.
 CH. 8 : CARO, 2020 8.5

u Where verification of all assets is not made during the year,

it will be necessary for the auditor to report that fact, but
if he is satisfied regarding the frequency of verification
he should also make a suitable comment to that effect.
Title Deeds u Whether the title deeds of all the immovable properties (Other
than properties where the company is the lessee and the
lease agreements are duly executed in favour of the lessee)
disclosed in the financial statements are held in the name of
the company.
u If not, provide details thereof in the below mentioned format:
Descrip- Gross Held in Whether Period Reason
tion of carrying name of promoter, held – for not
Property value director indicate being held
or their range, in name
relative or where ap- of compa-
employee propriate ny*

*also indicate if in dispute.

Points to remember
u The Order is silent as to what constitutes ‘title deeds’.
In general, title deeds mean a legal deed or document

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constituting evidence of a right, especially to the legal
ownership of the immovable property.
u Title deeds of the immovable property may be:
(a) Registered sale deed/transfer deed/conveyance
deed, etc. of land, land & building together, etc.
purchased, allotted, transferred by any person
including any government, government authority/
body/agency/corporation, etc. to the company.
(b) In case of leasehold land and land & buildings
together, covered under the head fixed assets, the
lease agreement duly registered with the appropriate
authority.
Revaluation of u Whether the company has revalued its Property, Plant and
Property, Plant Equipment (including Right of Use assets) or intangible assets
and Equipment or both during the year and,
u if so, whether the revaluation is based on the valuation by a
Registered Valuer; specify the amount of change, if change is
10% or more in the aggregate of the net carrying value of each
class of Property, Plant and Equipment or intangible assets;
Proceedings for u Whether any proceedings have been initiated or are pending
holding Benami against the company for holding any benami property under
Property the Benami Transactions (Prohibition) Act, 1988 and rules
made thereunder,
u if so, whether the company has appropriately disclosed the
details in its financial statements.
 8.6 MODULE III : COMPANY AUDIT

IMPORTANT QUESTIONS
Q. No. 11: X Ltd. closed its manufacturing operations and sold all its property, plant and equipment
relating to manufacturing operations during the financial year ended 31st March, 2021. However,
it intends continue its operations as a trading company. In respect of other fixed assets, the
company carried out a physical verification as at the end of 31st March, 2021 and found a
material discrepancy to the tune of ` 1 lac, which was written off and is disclosed separately in
the profit and loss account. Kindly incorporate the above in your audit report.
HINT: Reporting required w.r.t. Property, Plant and Equipment:
“The property, plant and equipment have been physically verified by the management at
reasonable intervals; material discrepancies were noticed on such verification and the same
have been properly dealt with in the books of account;”
Auditor is also required to perform procedures covered in SA 570 so as to ensure appropriateness
of use of Going concern basis of accounting.
Q. No. 12: Under CARO, 2020, as a statutory auditor, how would you report: NSP Limited has its factory
building, appearing as property, plant and equipment in its financial statements in the name
of one of its director who was overlooking the manufacturing activities.
HINT: Auditor shall report under Clause (i)(c) of Para 3 of the CARO, 2020.
Q. No. 13: ABC Ltd. owns a piece of Land and Building situated at IP road, Mumbai which was purchased
before 30 years. The title deeds for the same are deposited with State Bank of India for obtaining
credit facilities by the company.
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As the statutory auditor of the company for the year ended 31st March, 2020, what are the audit
procedures to be followed and what is the reporting under CARO, 2020?
HINT: Auditor shall report under Clause (i)(c) of Para 3 of the CARO, 2020.
Q. No. 14: The Property, Plant and Equipment of Amir Ltd. included `  25.75 crores of earth removing
machines of outdated technology which had been retired from active use and had been kept for
disposal after knock down. These assets appeared at residual value and had been last inspected
ten years back. As an Auditor, what may be your reporting concern in view of CARO, 2020 on
matters specified above?
HINT: Auditor shall report under Clause (i)(b) of Para 3 of the CARO, 2020.

Inventories [Para (a) whether physical verification of inventory has been conducted at reasonable intervals
3(ii)] by the management and whether, in the opinion of the auditor, the coverage and
procedure of such verification by the management is appropriate; whether any
discrepancies of 10% or more in the aggregate for each class of inventory were noticed
and if so, whether they have been properly dealt with in the books of account;
(b) whether during any point of time of the year, the company has been sanctioned
working capital limits in excess of ` 5 crores, in aggregate, from banks or financial
institutions on the basis of security of current assets; whether the quarterly returns
or statements filed by the company with such banks or financial institutions are in
agreement with the books of account of the Company, if not, give details.
Points to remember
u Physical verification of inventory is the responsibility of the management of
the company which should verify all material items at least once in a year and
more often in appropriate cases.
 CH. 8 : CARO, 2020 8.7

u What constitutes “reasonable intervals” depends on circumstances of each

case. The periodicity of the physical verification of inventories depends upon
the nature of inventories, their location and the feasibility of conducting a
physical verification. The management of a company normally determines the
periodicity of the physical verification of inventories considering these factors.
Normally, wherever practicable, all the items of inventories should be verified
by the management of the company at least once in a year.

IMPORTANT QUESTIONS
Q. No. 15: What are the reporting requirements for closing stock in the CARO, 2020.
HINT: Refer Para 3(ii) of CARO, 2020.
Q. No. 16: As the statutory auditor of B Ltd. to whom CARO, 2020 is applicable, how would you report in
the following situations: Physical verification of only 50% (in value) of items of inventory has
been conducted by the company. The balance 50% will be conducted in next year due to lack of
time and resources.
HINT: Procedure of physical verification followed by management is not reasonable and hence the
auditor should point out the inadequacies in physical verification procedures, under Para 3(ii) of CARO,
2020.

Investments, Whether during the year the company has made investments in, provided any guarantee
Guarantee/ or security or granted any loans or advances in the nature of loans, secured or unsecured,
Security, Loans or to companies, firms, Limited Liability Partnerships or any other parties, if so,

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Advances [Para (a) whether during the year the company has provided loans or provided advances in
3(iii)] the nature of loans, or stood guarantee, or provided security to any other entity [not
applicable to companies whose principal business is to give loans], if so, indicate—
(A) the aggregate amount during the year, and balance outstanding at the balance
sheet date with respect to such loans or advances and guarantees or security
to subsidiaries, joint ventures and associates;
(B) the aggregate amount during the year, and balance outstanding at the balance
sheet date with respect to such loans or advances and guarantees or security
to parties other than subsidiaries, joint ventures and associates;
(b) whether the investments made, guarantees provided, security given and the terms and
conditions of the grant of all loans and advances in the nature of loans and guarantees
provided are not prejudicial to the company’s interest;
(c) in respect of loans and advances in the nature of loans, whether the schedule of
repayment of principal and payment of interest has been stipulated and whether
the repayments or receipts are regular;
(d) if the amount is overdue, state the total amount overdue for more than 90 days,
and whether reasonable steps have been taken by the company for recovery of the
principal and interest;
(e) whether any loan or advance in the nature of loan granted which has fallen due during
the year, has been renewed or extended or fresh loans granted to settle the overdues
of existing loans given to the same parties, if so, specify the aggregate amount of
such dues renewed or extended or settled by fresh loans and the percentage of the
aggregate to the total loans or advances in the nature of loans granted during the
year [not applicable to companies whose principal business is to give loans];
 8.8 MODULE III : COMPANY AUDIT

(f) whether the company has granted any loans or advances in the nature of loans either
repayable on demand or without specifying any terms or period of repayment, if
so, specify the aggregate amount, percentage thereof to the total loans granted,
aggregate amount of loans granted to Promoters, related parties as defined in
Sec. 2(76) of the Companies Act, 2013.

IMPORTANT QUESTIONS
Q. No. 17: In the course of audit of Y Ltd., as the auditor of the company you observe the following: The
company has advanced a loan to a firm in which a director was interested at a rate lower than
the prevailing market rate as well as there was no agreement on terms of repayment.
How auditor will report in CARO, 2020?
HINT: Reporting required under Para 3(iii) of CARO, 2020. Auditor should also ensure compliance of
disclosure requirements of AS 18 and perform procedures as prescribed under SA 550.
Q. No. 18: H Ltd. granted unsecured loan of `  1 crore @ 15% p.a. to two of its subsidiaries during
the Financial Year 2020-21. Before the year end both the companies repaid the loan. The
management of H Ltd. is of the opinion that since no balance is outstanding as on 31st March,
2021, these loans are not required to be reported in CARO, 2020. Comment and draft a suitable
report.
HINT: Draft Report: “The Company has granted loan of ` 1 Crore @ 15% p.a. to 2 of its subsidiaries
during the Financial Year 2020-21. The maximum amount involved during the year was ` 1.00 crore
and the year-end balance of such loans was Nil”.
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Q. No. 19: ABC Ltd. has granted a loan of ` 20 crores to its associate XYZ (P.) Ltd. at the beginning of the
financial year and it remain outstanding at the year end. How the auditor should report the
fact?
HINT: Reporting required under Para 3(iii) of CARO, 2020. Auditor should also ensure compliance of
disclosure requirements of AS 18 and perform procedures as prescribed under SA 550.

Compliance of In respect of loans, investments, guarantees, and security whether provisions of Sections
provisions of Secs. 185 and 186 of the Companies Act, 2013 have been complied with. If not, provide details
185 & 186 – (Para thereof.
3(iv)) Points to remember
u For this purpose of ensuring compliance of Sec. 185, the auditor should carry out the
following procedures:
(i) Obtain from the management the details of the directors or any other person in
whom the director is interested. He may also check the details of the persons
covered under this clause from Form MBP-1 and from the Register maintained
u/s 189 of the Act.
(ii) Obtain and check the details of the transactions carried out with such persons,
including of any guarantee given and security provided.
(iii) Further examine the details to find out whether any of the transaction is
attracting the provisions of section 185 of the Act.
(iv) In case of transactions that are covered under the exceptions as provided under
section 185, the auditor should obtain the necessary evidence in support of
such exception.
 CH. 8 : CARO, 2020 8.9

u The auditor should report the nature of non-compliance of Sec. 185, the maximum
amount outstanding during the year and the amount outstanding as at the balance
sheet date in respect of—
(i) the Directors; and
(ii) persons in whom directors are interested (specify the relationship with the
Director concerned).
u For this purpose of ensuring compliance of Sec. 186, the auditor should:
1. Obtain the details of, loans given to any person or other body corporate,
guarantee given or security provided in connection with a loan to any other
body corporate or person and securities acquired of any other body corporate
by way of subscription, purchase or otherwise, made during the year as well
as the outstanding balances as at the beginning of the year.
2. Check whether, at any point of time during the year in case of aforesaid
transactions, the company has exceeded the limit of 60% of its paid-up share
capital, free reserves and securities premium account or 100% of its free
reserves and securities premium account, whichever is more. If it exceeds the
limits specified above, whether prior approval by means of a special resolution
passed at a general meeting has been obtained.
3. Check whether the company has made investments through more than two
layers of investment companies.

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4. Check whether the company has disclosed the full particulars of the loan given,
investment made or guarantee given or security provided in the financial
statement including the purpose for which the same is proposed to be utilized
by the recipient.
5. Check whether the company has passed the board resolution as prescribed
and obtained the prior approval, wherever required, from the public financial
institution concerned where any term loan is subsisting.
6. Check whether rate of interest is not lower than the prevailing yield of one year,
three-year, five years or ten-year government security closest to the tenor of
the loan granted.
7. Check if the company is in default in the repayment of any deposits accepted
or in payment of interest thereon, then the company is not allowed to give any
loan or guarantee or any security or an acquisition till such default is subsisting.
8. Check whether the company has maintained a register (as per Form MBP-2) in
the manner as prescribed and also check the compliances of other provisions
and relevant rules.
u Non-compliance of Sec. 186 may be reported incorporating following details:
 8.10 MODULE III : COMPANY AUDIT

Sl. Non-compliance of Section 186 Remarks,

No. Name of Amount Balance as if any
Company/ Involved at Balance
Party Sheet Date
1 Investment through more
than two layers of investment
companies
2 Loan given or guarantee given or
security provided or acquisition
of securities exceeding the
limits without prior approval
by means of a special resolution
3 Loan given at rate of interest
lower than prescribed
4 Any other default

IMPORTANT QUESTIONS
Q. No. 20: As a Company auditor you noticed that there is an inter-corporate loan granted by the company.
What are the reporting requirements as regard the matters concerning terms of interest on the
inter-corporate loan?
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HINT: Reporting required under Para 3(iv) of CARO, 2020.

Public Deposits u In respect of deposits accepted by the company or amounts which are deemed to be
[Para 3(v)] deposits, whether the directives issued by the RBI and the provisions of sections 73
to 76 or any other relevant provisions of the Companies Act and the rules framed
thereunder, where applicable, have been complied with. If not, the nature of such
contraventions be stated;
u If an order has been passed by Company Law Board or National Company Law
Tribunal or Reserve Bank of India or any Court or any other Tribunal, whether the
same has been complied with or not?
Points to remember
u It may be difficult for the auditor to ascertain that deposits accepted by the company
are within the limits on each day of the accounting year. He would, therefore, be
justified in making a reasonable test check to ensure that the company has not
accepted deposits during the year in excess of the limits.
u In case where the auditor is of the view that any kind of contravention of sections 73
to 76 or any other relevant provisions of the Act or relevant rules or directives from
Reserve Bank of India, if any, has taken place, the auditor should state in his report
that the provisions of that section(s) and/or relevant rules, as the case may be, have
not been complied with. The auditor should also report the nature of contraventions.
Cost Records [Para Whether maintenance of cost records has been specified by the CG u/s 148(1) of the
3(vi)] Companies Act, 2013 and whether such accounts and records have been so made and
maintained.
 CH. 8 : CARO, 2020 8.11

Points to remember
u The word “made” applies in respect of cost accounts (or cost statements) and the
word “maintained” applies in respect of cost records relating to materials, labour,
overheads, etc.
u The auditor has to report under the clause irrespective of whether a cost audit has
been ordered by the Central Government.
u The auditor should obtain a written representation from the management stating:
(a) whether cost records are required to be maintained for any product(s) or
services of the company u/s 148 of the Act, and the Companies (Cost Records
and Audit) Rules, 2014; and
(b) whether cost accounts and records are being made and maintained regularly.
u The auditor should also obtain a list of books/records made and maintained in this
regard.
u The Order does not require a detailed examination of such records. The auditor should,
therefore, conduct a general review of the cost records to ensure that the records as
prescribed are made and maintained. He should, of course, make such reference to
the records as is necessary for the purposes of his audit.
u It is necessary that the extent of the examination made by the auditor is clearly
brought out in his report. The following wording is, therefore, suggested:
“We have broadly reviewed the books of account maintained by the company pursuant

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to the Rules made by the Central Government for the maintenance of cost records
under section 148 of the Act, and are of the opinion that prima facie, the prescribed
accounts and records have been made and maintained.”

IMPORTANT QUESTIONS
Q. No. 21: CARO, 2020 requires the auditor of the company to report whether maintenance of cost records
has been specified by the Central Government under section 148 of the Companies Act, 2013
and whether such accounts and records have been so made and maintained.
You are required to briefly explain the audit procedure to be followed by the auditor and suggest
the reporting pattern.
HINT: Refer Clause (vi) of Para 3 of CARO, 2020 and related points of Guidance Note on CARO.

Statutory Dues (a) Whether the company is regular in depositing undisputed statutory dues including
[Para 3(vii)] Goods and Services Tax, provident fund, employees’ state insurance, income-tax, sales-
tax, service tax, duty of customs, duty of excise, value added tax, cess and any other
statutory dues to the appropriate authorities and if not, the extent of the arrears
of outstanding statutory dues as at the last day of the financial year concerned for a
period of more than 6 months from the date they became payable, shall be indicated.
(b) Where statutory dues referred above have not been deposited on account of any
dispute, then the amounts involved and the forum where dispute is pending shall be
mentioned.
(A mere representation to the concerned Department shall not be treated as a dispute).
 8.12 MODULE III : COMPANY AUDIT

Points to remember
u “Any other statutory dues” indicates that the clause covers all type of dues under
various statues which may be applicable to a company having regard to its nature of
business.
u With reference to regularity, the auditor should clearly understand the nature of
each statutory due payable by the company before commenting on the same. For
instance, the regularity is a normal feature in case of certain statutory dues such as,
provident fund, employees’ state insurance, sales tax, etc., but this is not the case in
respect of, say, duty of custom on import of goods or demands arising on account of
assessment orders etc., Such dues should be construed to have been paid regularly
if the company deposits them as and when they become due.
u In respect of goods imported earlier and placed in a bonded warehouse the interest
and rent that are required to be incurred under section 61 of the Customs Act, 1962
would come under other statutory dues and the auditor would have to examine and
comment upon the regularity of the company in depositing such interest and rent.
u Non-payment of advance income tax would constitute default in payment of statutory
dues.
u In cases where there are no arrears on the balance sheet date but the company has
been irregular during the year in depositing the statutory dues, the auditor should
state this fact while reporting under this clause.
u For the purpose of this clause, the auditor should consider a matter as “disputed”
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where there is a positive evidence or action on the part of the company to show that
it has not accepted the demand for payment of tax or duty, e.g., where it has gone
into appeal.
u The auditor should obtain a written representation with reference to the date of the
balance sheet from the management:
(i) specifying the cases and the amounts considered disputed;
(ii) containing a list of the cases and the amounts in respect of the statutory dues
which are undisputed and have remained outstanding for a period of more than
six months from the date they became payable; and
(iii) containing a statement as to the completeness of the information provided by
the management.
u Statement of Arrears of Statutory Dues Outstanding for More than 6 Months can be
in following format:

Name Nature of Amount Period to Due Date of Remarks,

of the the Dues (`) which the Date Payment if any
Statute amount relates

u Statement of Disputed Dues can be in the following format:

Name Nature of Amount Period to which Forum where Remarks,

of the the Dues (`) the amount dispute is if any
Statute relates pending
 CH. 8 : CARO, 2020 8.13

IMPORTANT QUESTIONS
Q. No. 22: As a statutory auditor, how would you deal with the following case: During the course of audit
of ABC Ltd. it is noticed that out of ` 12 Lacs of provident fund contribution accounted in the
books, only ` 2 Lacs has been remitted to the authorities during the year. On enquiry the Chief
Accountant informed that due to financial problems they have not remitted but will remit the
same as and when the position improves.
Or
During the course of Audit of M/s CT Ltd. for the financial year 2020-21, it has noticed that ` 2.00
lakhs of employee contribution and ` 9.50 lakhs of employer contribution towards employee
state insurance contribution have been accounted in the books of account in respective heads.
Whereas, it was found that ` 4.00 lakhs only have been deposited with ESIC department during
the year ended 31st March, 2021. The Finance Manager informed that auditor that due to
financial crunch they have not deposited the amount due, but will deposit the amount overdue
along with interest as and when financial position improves. Comment as a statutory auditor.
HINT: Non-payment of PF/ESI contribution needs to be disclosed by the auditor in his audit report
as per requirement of Para 3(vii)(a) of CARO, 2020. Auditor should also perform the procedures as
covered in SA 250.
Q. No. 23: As a Statutory Auditor, how would you deal with the following: PQR Ltd. has not deposited
Provident Fund contribution of ` 10 lakhs with the authorities till the year-end.
HINT: Non-payment of provident fund of ` 10 Lacs needs to be disclosed by the auditor in his audit
report as per requirement of Para 3(vii)(a) of CARO, 2020. Auditor should also perform the procedures

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as covered in SA 250.
Q. No. 24: Comment on the following: Is the company regular in depositing undisputed statutory dues
including Provident Fund, Employees State Insurance, Income Tax, Sales Tax, Wealth Tax, Customs
duty, Excise duty, Value added Tax, Cess and any other statutory dues with the appropriate
authorities and if not, the extent of arrears of outstanding statutory dues as at the last day of
the financial year concerned for a period of more than six months from the date they became
payable shall be indicated by the auditor.
HINT: Refer Para 3(vii)(a) of CARO, 2020. Auditor should also perform the procedures as covered in
SA 250.
Q. No. 25: Big and Small Ltd. received a show cause notice from GST department intending to levy a
demand of ` 25 lakhs in December 2020. The company replied to the above notice in January
2021 contending that it is not liable for the levy. No further action was initiated by the GST
department upto the finalization of the audit for the year ended on 31st March, 2020. As the
auditor of the company, what is your role in this?
HINT: The auditor needs not to report on this, as required under Para 3(vii) of CARO, 2020. Auditor
should also perform the procedures as covered in SA 250.
Q. No. 26: XYZ Pvt. Ltd. has submitted the financial statements for the year ended 31-3-2021 for audit. The
audit assistant observes and brings to your notice that the company’s records show following
dues:
u Income Tax relating to Assessment Year 2015-16 ` 125 lacs – Appeal is pending before
ITAT since 30-9-2016.
u Customs duty ` 85 lakhs – Demand notice received on 15-9-2019 but no action has been
taken to pay or appeal.
As an auditor, how would you bring this fact to the members?
 8.14 MODULE III : COMPANY AUDIT

HINT:
(a) Matter related with Income Tax: In the present case an appeal relating to income tax is pending
with the ITAT, which need to be reported as under:

Sl. Name of the Statute Nature of Amount (in Period to Forum where
No. Dues Lacs) which amount dispute is
relates pending
1 Income-tax Act, 1961 Income Tax 125.00 AY 2015-16 ITAT
(b) Matter related with Custom Duty: Demand Notice has been received for ` 85 Lacs but the
company has not taken any action yet. Auditor may state the fact accordingly.

Auditor should also perform the procedures as covered in SA 250.

Unrecorded Income u Whether any transactions not recorded in the books of account have been surrendered
(Para 3(viii)) or disclosed as income during the year in the tax assessments under the Income-tax
Act, 1961,
u if so, whether the previously unrecorded income has been properly recorded in the
books of account during the year;
Repayment of (a) Whether the company has defaulted in repayment of loans or other borrowings or
Dues– (Para 3(ix)) in the payment of interest thereon to any lender, if yes, the period and amount of
default to be reported as per the format below:

Nature of Name of Amount Whether No. of days Remarks,

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borrowing, lender* not paid principal delay or if any

including debt on due or interest unpaid
securities date

*Lender wise details to be provided in case of defaults to banks, financial institutions
and Government.
(b) whether the company is a declared wilful defaulter by any bank or financial institution
or other lender;
(c) whether term loans were applied for the purpose for which the loans were obtained;
if not, the amount of loan so diverted and the purpose for which it is used may be
reported;
(d) whether funds raised on short term basis have been utilised for long term purposes,
if yes, the nature and amount to be indicated;
(e) whether the company has taken any funds from any entity or person on account of or
to meet the obligations of its subsidiaries, associates or joint ventures, if so, details
thereof with nature of such transactions and the amount in each case;
(f) whether the company has raised loans during the year on the pledge of securities held
in its subsidiaries, joint ventures or associate companies, if so, give details thereof
and also report if the company has defaulted in repayment of such loans raised.
Points to remember
u Auditor should report the period and amount of all defaults existing at the balance
sheet date irrespective of when those defaults have occurred.
 CH. 8 : CARO, 2020 8.15

u Financial Institution includes all Banks, Public Financial Institutions, as well as Non–
Banking Institutions and also includes Non- Banking Financial Companies.
u Submission of application for re-schedulement/restructuring does not mean that no
default has occurred.
u Terms loans are generally provided by banks and financial institutions for acquisition
of capital assets which then become the security for the loan, i.e., end use of funds is
normally fixed.
u The Order is silent as to term loans obtained from entities/persons other than banks/
financial institutions. A strict interpretation of the clause would mean that the term
loan obtained from entities/persons other than banks/financial institutions would
also have to be examined.
u In case of term loans, raised against title deeds, long term FDRs, NSCs etc., where
the lender is not concerned with the purpose for which it is being obtained, the
auditor should clearly mention the fact that in absence of any stipulation regarding
the utilization of loans from the lender, he is unable to comment as to whether the
term loans have been applied for the purposes for which they were obtained.
u Sometimes, companies, may, temporarily invest the surplus funds pending utilization
for the purpose for which funds were arranged. In such cases, the auditor should
mention the fact that pending utilisation of term loans for the stated purpose, the
funds were temporarily used for the purpose other than for which they were raised
but were ultimately utilised for the stated end-use.

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u Reporting Format:
“In our opinion and according to the information and explanations given to us, the
Company has utilized the term loans during the year for the purposes for which they
were raised, except for:
Nature of the fund Details of default Amount (`) Subsequently rectified
Raised (Reason/Delay) (Yes/No) and details

IMPORTANT QUESTIONS
Q. No. 27: OK Ltd. has taken a term loan from a nationalized bank in 2016 for ` 200 lakhs repayable in
five equal instalments of ` 40 lakhs from 31st March, 2017 onwards. It had repaid the loans
due in 2017 & 2018, but defaulted in 2019, 2020 & 2021. As the auditor of OK Ltd. what is your
responsibility assuming that company has sought reschedulement of loan?
HINT: The auditor has to report in his audit report that the Company has defaulted in its repayment
of dues to the bank to the extent of ` 120 lakhs, as required under Para 3(ix) of CARO, 2020.
Q. No. 28: R Ltd. as at 31st March, 2021 defaulted in the repayment of interest and principal due to a
financial institution. The due date was 28th February, 2021. However, the defaulted amount
was paid on 5th April, 2021. The company’s management is of the opinion that since the default
is set right before the audit completion these need not be reported in CARO, 2020. Comment
& draft a suitable report.
Or
C Limited has defaulted in repayments of dues to a financial institution during the financial
year 2020-21 and the same remained outstanding as at March 31, 2021. However, the Company
settled the total outstanding dues including interest in April, 2021 subsequent to the year end
and before completion of the audit. Discuss how you would deal with this matter and draft a
suitable Auditor’s Report.
 8.16 MODULE III : COMPANY AUDIT

HINT: Draft Report:

“The company has defaulted in repayment of principal and interest to the financial institution amounted
to ` ………, that become due on _________________. Also the period of default is ________days”.
Q. No. 29: Under CARO how, as a statutory auditor how would you comment on the following: A Term Loan
was obtained from a bank for ` 75 lakhs for acquiring R&D equipment, out of which ` 12 lakhs
were used to buy a car for use of the concerned director, who was overlooking the R&D activities.
HINT: As per requirement of Para 3 (ix) of CARO, 2020, auditor is required to report the fact that out
of the term loan obtained for R & D equipment, ` 12 Lacs was not utilized for the purpose of acquiring
the R & D equipment.
Q. No. 30: As a Statutory Auditor, how would you deal with the following: LM Ltd. had obtained a Term
Loan of ` 300 lakhs from a bank for the construction of a factory. Since there was a delay in the
construction activities, the said funds were temporarily invested in short term deposits.
HINT: Auditor is required to report the fact that the pending utilisation of term loan, the funds are
temporarily invested in short term deposits, in his audit report as per requirement of Para 3 (ix) of
CARO, 2020.
Q. No. 31: During the financial year ended on 31-03-2021, LM Private Limited had borrowed from a
Nationalized Bank, a term loan of `  120 lakhs consisting of `  100 lakhs for purchase of a
machinery for the new plant and `  20 lakhs for erection expenses. As on the date of 31st March,
2021, the total of capital and free reserves of the Company was `  50 lakhs and turnover for the
year 2020-21 was ` 750 lakhs. The Bank paid ` 100 lakhs to the vendor of the Company for the
supply of machinery on 31-12-2020. The machinery had reached the yard of the Company. On
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28-02-2021, the Company had drawn the balance of loan viz. ` 20 lakhs to the credit of its current
account maintained with the Bank and utilized the full amount for renovating its administrative
office building. The machinery had been kept as capital stock under construction. Comment
as to reporting issues, if any, that the Auditor should be concerned with for the financial year
ended on 31-03-2021, in this respect.
HINT: As per requirement of Para 3 (ix) of CARO, 2020, auditor is required to report the fact that out of
the term loan obtained for machinery purchase and erection, ` 20 Lacs was not utilized for the purpose
of erection of machinery.

Application of (a) Application of Whether moneys raised by way of initial public offer or further public
Money raised Money raised offer (including debt instruments) during the year were applied for
by public issue by public issue the purposes for which those are raised, if not, the details together
and preferential with delays or default and subsequent rectification, if any, as may
allotment – be applicable, be reported.
(Para 3(x)) Points to remember
u Currently, there is no legal requirement under the Act to disclose
the end use of money raised by IPO or FPO in the financial
statements. The companies, however, make such a disclosure
in the Board’s Report. Schedule III to the Act requires that only
unutilized amount of any IPO or FPO made by the company
should be disclosed in the financial statements of a company.
In the absence of any legal requirement of such disclosure, it
appears that the clause envisages that the companies should
disclose the end use of money raised by the IPO or FPO
(including debt instruments) in the financial statements by
way of notes and the auditor should verify the same.
 CH. 8 : CARO, 2020 8.17

u Sometimes, companies, may, temporarily invest the surplus

funds pending utilization for the purpose for which funds
were arranged. In such cases, the auditor should mention the
fact that pending utilisation of the funds raised through IPO
or FPO (including debt instruments) for the stated purpose,
the funds were temporarily used for the purpose other than
for which they were raised but were ultimately utilised for the
stated end-use.
u Reporting Format:
“In our opinion and according to the information and
explanations given to us, the Company has utilized the money
raised by way of IPO/FPO (including debt instruments) during
the year for the purposes for which they were raised, except
for:

Nature of Details of Amount Subsequently

the fund default (`) rectified (Yes/
Raised (Reason/Delay) No) and details

(b) Preferential whether the company has made any preferential allotment or private
allotment placement of shares or convertible debentures (fully, partially
or optionally convertible) during the year and if so, whether the

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requirements of section 42 and section 62 of the Companies Act,
2013 have been complied with and the funds raised have been used
for the purposes for which the funds were raised, if not, provide
details in respect of amount involved and nature of non-compliance;
Points to remember
The auditor may report the non-compliances incorporating
the following details:
Nature of Purpose Total Amount Unutilized Remark,
Securities for Amount utilized balance if any
viz. Equity which Raised/ for the as at
shares/ funds opening other Balance
Preference raised unutilized purpose sheet
shares/ balance Date
Convertible
debentures

Fraud [Para 3(xi)] (a) Whether any fraud by the company or any fraud on the Company has been noticed or
reported during the year; If yes, the nature and the amount involved is to be indicated.
(b) whether any report u/s 143(12) of the Companies Act has been filed by the auditors
in Form ADT-4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules,
2014 with the Central Government;
(c) whether the auditor has considered whistle-blower complaints, if any, received during
the year by the company;
 8.18 MODULE III : COMPANY AUDIT

Points to remember
u The scope of auditor’s inquiry under this clause is restricted to frauds ‘noticed or
reported’ during the year.
u The use of the words “noticed or reported” indicates that the management of the
company should have the knowledge about the frauds.
u This clause does not relieve the auditor from his responsibility to consider fraud
and error in an audit of financial statements. In other words, irrespective of the
auditor’s comments under this clause, the auditor is also required to comply with
the requirements of SA 240.
u The auditor should obtain written representations from management that:
(i) it acknowledges its responsibility for the implementation and operation of
accounting and internal control systems that are designed to prevent and detect
fraud and error;
(ii) it believes the effects of those uncorrected misstatements in financial
statements, aggregated by the auditor during the audit are immaterial, both
individually and in the aggregate, to the financial statements taken as a whole.
A summary of such items should be included in or attached to the written
representation;
(iii) it has disclosed to the auditor all significant facts relating to any frauds or
suspected frauds known to management that may have affected the entity; and
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(iv) it has disclosed to the auditor the results of its assessment of the risk that the
financial statements may be materially misstated as a result of fraud.
u For reporting under this clause, the auditor may consider the following:
(i) This clause requires all frauds noticed or reported during the year shall be
reported indicating the nature and amount involved.
(ii) Of the frauds covered under section 143(12) of the Act, only noticed frauds
shall be included here and not the suspected frauds.
(iii) While reporting under this clause with regard to the nature and the amount
involved of the frauds noticed or reported, the auditor may also consider the
principles of materiality outlined in Standards on Auditing.

IMPORTANT QUESTIONS
Q. No. 32: As a statutory auditor, how would you report on the following under CARO: ABC Pvt. Ltd. is a
manufacturer of jewellery. A senior employee of the Company informed you that the Company
does not properly disclose the purity of gold used on the jewellery.
HINT: From the view point of reporting on frauds under CARO, 2020, there is no implication for
misstatement in the financial statements. Hence, no reporting is necessary for improper disclosure of
purity of gold on the jewellery.
Q. No. 33: What are the reporting requirements in the audit report under the Companies Act, 2013/CARO,
2020 for the following situations?
(a) A fraud has been committed against the company by an officer of the company.
(b) A fraud has been committed against the company by a vendor of the company.
(c) The company has committed a major fraud on its customer and the case is pending in the
court.
 CH. 8 : CARO, 2020 8.19

(d) A fraud has been reported in the cost audit report but not noticed by statutory auditors
in his audit.
HINT: Refer Sec. 143(12) read with Rule 13 of Companies (Audit & Auditor’s) Rules, 2014 and Para
3(xi) of CARO, 2020.

Nidhi Companies – u Whether the Nidhi Company has complied with the Net Owned Fund to Deposits in
(Para 3(xii)) the ratio of 1: 20 to meet out the liability;
u Whether the Nidhi Company is maintaining 10% unencumbered term deposits as
specified in the Nidhi Rules, 2014 to meet out the liability.
u whether there has been any default in payment of interest on deposits or repayment
thereof for any period and if so, the details thereof;
Points to remember
u Section 406(1) of the Act defines “Nidhi” to mean a company which has been
incorporated as a Nidhi with the object of cultivating the habit of thrift and savings
amongst its members, receiving deposits from, and lending to, its members only, for
their mutual benefit, and which complies with such rules as are prescribed by the
Central Government for regulation of such class of companies.
u Ministry of Corporate Affairs on 31st March, 2014, vide its Notification No. GSR 258(E)
notified the ‘Nidhi Rules, 2014’, which came into force on the first day of April, 2014.
u As per Rule 3(d) Net Owned Funds are defined as the aggregate of paid up equity
share capital and free reserves as reduced by accumulated losses and intangible assets

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appearing in the last audited balance sheet. Provided that, the amount representing
the proceeds of issue of preference shares, shall not be included for calculating Net
Owned Funds.
u A Nidhi company can accept fixed deposits, recurring deposits and savings deposits
from its members in accordance with the directions notified by the Central Government.
The aggregate of such deposits is referred to as “deposit liability”.
u The auditor should ask the management to provide the computation of the deposit
liability and net owned funds on the basis of the requirements mentioned above.
This would enable him to verify that the ratio of deposit liability to net owned funds
is in accordance with the requirements prescribed in this regard.

IMPORTANT QUESTIONS
Q. No. 34: CARO, 2020 has made several significant changes and has introduced new reporting requirements
vis-à-vis CARO, 2016.
In view of the above, describe the relevant clause relating to Nidhi Companies – compliance
with net owned funds to deposit requirements and the relevant provisions.
What audit procedures are to be adopted for verification and reporting on the same?
HINT: Refer Para 3(xii) of CARO, 2020

Transactions with u Whether all transactions with the related parties are in compliance with Secs. 177
related Parties – and 188 of Companies Act, 2013 where applicable and
(Para 3(xiii)) u the details have been disclosed in the Financial Statements etc. as required by the
applicable accounting standards.
 8.20 MODULE III : COMPANY AUDIT

Points to remember
u The auditor is required to perform appropriate procedures to satisfy himself as
regards compliance with sections 177 and 188 of the Act so that auditor is able to
appropriately report under this clause.
u Auditor can refer SA 550, “Related Parties” which has prescribed auditor’s
responsibilities regarding related party relationships and transactions when
performing an audit of financial statements, including guidance on the procedures
to be performed by auditors.
u The auditor should obtain written representations from management and, where
appropriate, those charged with governance that:
(i) They have disclosed to the auditor the identity of the entity’s related parties
and all the related party relationships and transactions of which they are aware;
and
(ii) They have appropriately accounted for and disclosed such relationships and
transactions in accordance with the requirements of the framework.
u Based on the procedures performed by the auditor, if auditor comes across any
non-compliance, then, it should be duly reported. The following particulars may be
incorporated:

Nature of the related Amount Remarks (details of non-

party relationship and the involved (`) compliance may be given)
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underlying transaction

Internal Audit (a) whether the company has an internal audit system commensurate with the size and
System – nature of its business;
(Para 3(xiv)) (b) whether the reports of the Internal Auditors for the period under audit were
considered by the statutory auditor.
Non-cash u Whether the company has entered into any non-cash transactions with directors or
transactions with persons connected with him and
directors – (Para u if so, whether provisions of Section 192 of Companies Act, 2013 have been complied
3(xv)) with.
Points to remember
u Section 192 of the Companies Act, 2013 of the Act deals with restriction on non-
cash transactions involving directors or persons connected with them. The section
prohibits the company from entering into following types of arrangements unless it
meets the conditions laid out in the said section:
(i) An arrangement by which a director of the company or its holding, subsidiary
or associate company or a person connected with such director acquires or is
to acquire assets for consideration other than cash, from the company.
(ii) An arrangement by which the company acquires or is to acquire assets for
consideration other than cash, from such director or person so connected.
u Section 192(1) and (2) envisage the following compliances in respect of non-cash
transactions:
 CH. 8 : CARO, 2020 8.21

(i) The company should have obtained a prior approval for such arrangement by
a resolution in the General Meeting.
(ii) If the concerned Director or connected person is a director of the company’s
holding company, the latter too should have obtained a similar prior approval
for the arrangement by a resolution at its General Meeting.
(iii) Notice for approval of the resolution should contain details of the arrangement
along with the value of assets involved duly calculated by a registered valuer.
u The reporting requirements under this clause are in two parts. The first part requires
the auditor to report on whether the company has entered into any non-cash
transactions with the directors or any persons connected with such director/s. The
second part of the clause requires the auditor to report whether the provisions of
section 192 of the Act have been complied with. Therefore, the second part of the
clause becomes reportable only if the answer to the first part is in affirmative.
u Suggested paragraph on reporting:
“According to the information and explanations given to us, the Company has entered
into non-cash transactions with one of the directors/person connected with the
director during the year, by the acquisition of assets by assuming directly related
liabilities, which in our opinion is covered under the provisions of Section 192 of the
Act, and for which approval has not yet been obtained in a general meeting of the
Company”.

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IMPORTANT QUESTIONS
Q. No. 35: RNT Ltd. has entered into non-cash transactions with Mr. Ram, son of one of the directors of
the company, which is an arrangement by which the RNT Ltd. is in process to acquire assets for
consideration other than cash. Under CARO, 2020, as a statutory auditor, how would you report?

Registration with (a) Whether the company is required to be registered u/s 45-IA of the Reserve Bank of
RBI – (Para 3(xvi)) India Act, 1934 and if so, whether the registration has been obtained.
(b) whether the company has conducted any Non-Banking Financial or Housing Finance
activities without a valid Certificate of Registration (CoR) from the Reserve Bank of
India as per the Reserve Bank of India Act, 1934;
(c) whether the company is a Core Investment Company (CIC) as defined in the regulations
made by the Reserve Bank of India, if so, whether it continues to fulfil the criteria
of a CIC, and in case the company is an exempted or unregistered CIC, whether it
continues to fulfil such criteria;
(d) whether the Group has more than one CIC as part of the Group, if yes, indicate the
number of CICs which are part of the Group;
Points to remember
u The auditor is required to examine whether the company is engaged in the business
which attract the requirements of the registration. The registration is required where
the financing activity is a principal business of the company.
u The auditor’s report shall incorporate the following:
(a) Whether the registration is required under section 45-IA of the RBI Act, 1934.
(b) If so, whether it has obtained the registration.
(c) If the registration not obtained, reasons thereof.
 8.22 MODULE III : COMPANY AUDIT

Cash Losses – u Whether the company has incurred cash losses in the financial year and in the
(Para 3(xvii)) immediately preceding financial year,
u if so, state the amount of cash losses;
Considerations of u Whether there has been any resignation of the statutory auditors during the year,
issues raised by u if so, whether the auditor has taken into consideration the issues, objections or
outgoing auditor – concerns raised by the outgoing auditors
(Para 3(xviii))
Existence On the basis of the financial ratios, ageing and expected dates of realisation of financial
of Material assets and payment of financial liabilities, other information accompanying the financial
uncertainty as to statements, the auditor’s knowledge of the Board of Directors and management plans,
company ability to whether the auditor is of the opinion that no material uncertainty exists as on the date of the
meet its liabilities audit report that company is capable of meeting its liabilities existing at the date of balance
– (Para 3(xix)) sheet as and when they fall due within a period of one year from the balance sheet date.
Transfer of (a) whether, in respect of other than ongoing projects, the company has transferred
unspent CSR unspent amount to a Fund specified in Schedule VII to the Companies Act, within a
amount – period of 6 months of the expiry of the financial year in compliance with 2nd proviso
(Para 3(xx)) to Sec. 135(5) of the said Act;
(b) whether any amount remaining unspent u/s 135(5) of the Companies Act, pursuant
to any ongoing project, has been transferred to special account in compliance with
the provision of Sec. 135(6) of the said Act.
Points to remember
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The provisions of Sec. 135(5) and 135(6) as stated above are inserted by Companies
(Amendment) Act, 2019 and are not yet made effective.
Qualifications or u Whether there have been any qualifications or adverse remarks by the respective
adverse remarks auditors in the CARO reports of the companies included in the consolidated financial
in CARO Reports of statements,
group companies – u If yes, indicate the details of the companies and the paragraph numbers of the CARO
(Para 3(xxi)) report containing the qualifications or adverse remarks.

8.3 Reasons to be stated for Unfavourable or Qualified remarks (Para 4)

u Where, in the auditor’s report, the answer to any of the questions referred to in Para 3 is unfavourable or
qualified, the auditor’s report shall also state the basis for such unfavourable or qualified answer, as the
case may be.
u Where the auditor is unable to express any opinion on any specified matter, his report shall indicate such
fact together with the reasons as to why it is not possible for him to give his opinion on the same.

8.4 General Approach for compliance of requirements of CARO, 2020

(a) Submit to the company, a questionnaire on all important matters covered by the Order.
(b) Make specific inquiries in writing on all important matters not covered by the questionnaire.
(c) Insist that replies of the company are furnished in writing and are signed by a responsible officer of the
company.
(d) Where the explanations are not already separately recorded, maintain a record of the discussions with the
management.
(e) Prepare his own “check-list” in respect of the requirements of the Order and record the names of the
members of his staff who made the examination and the name of the company’s staff who provided the
information.
 CH. 8 : CARO, 2020 8.23

MISCELLANEOUS QUESTIONS
Q. No. 36: Whilst the Audit team has identified various matters, they need your advice to include the same
in your audit report in view of CARO, 2020:
(a) The long-term borrowings from the parent has no agreed terms and neither the interest
nor the principal has been repaid so far.
(b) The Company is in the process of selling its office along with the freehold land available
at Chandigarh and is actively on the lookout for potential buyers. Whilst the same was
purchased at ` 25 Lakhs in 2008, the current market value is ` 250 Lakhs,

This property is pending to be registered in the name of the Company, due to certain
procedural issues associated with the Registration though the Company is having a valid
possession and has paid its purchase cost in full. The Company has disclosed this amount
under Fixed Assets though no disclosure of non-registration is made in the notes forming
part of the accounts.
(c) An amount of ` 3.25 Lakhs per month is paid to M/s. WE CARE Associates, a partnership
firm, which is a ‘related party’ in accordance with the provisions of the Companies Act,
2013 for the marketing services rendered by them. Based on an independent assessment,
the consideration paid is higher than the arm’s length pricing by ` 0.25 Lakhs per month.
Whilst the transaction was accounted in the financial statements based on the amounts’
paid, no separate disclosure has been made in the notes forming part of the accounts
highlighting the same as a ‘related party’ transaction. [MTP-Oct. 19]
(d) The Internal Auditor of the Company has identified a fraud in the recruitment of employees

TAXMANN®
by the HR department wherein certain sums were alleged to have been taken as kick-back
from the employees for taking them on board with the Company. After due investigation,
the concerned HR Manager was sacked. The amount of such kick-backs is expected to be
in the range of ` 12 Lakhs. [MTP-March 19, RTP-May 19]
HINT: (a) Reporting required under Para 3(xiii) of CARO, 2020; (b) Reporting required under Para 3(1)
(c) of CARO, 2020; (c) Reporting required under Para 3(xiii) of CARO, 2020; (d) Reporting required
under Para 3(xi) of CARO, 2020

Summary of Examination Weightage

Attempt Marks Topics Covered
May 2018 0 -
Nov. 2018 5 Reporting under Para 3(ix) of CARO, 2016
May 2019 0 -
Nov. 2019 0 -
May 2020 - Exams cancelled due to Covid-19
Nov. 2020
May 2021
Nov. 2021
May 2022
Nov. 2022