Chapter 8 CARO 2016

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8
C H A P T E R
CARO, 2016
8.1 - APPLICABILITY OF COMPANIES AUDITOR REPORT ORDER, 2016

Application of CARO, CARO, 2016 shall apply to every company including a foreign company as defined in Sec.
2016 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.
The order would be applicable for unlimited companies irrespective of the size of
their paid up capital and reserves, turnover or borrowings.
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
year commencing on or after 1st April, 2015, 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.
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.
(f) Reserves includes Capital reserves, revenue reserves as well as Revaluation Reserves.
8.1
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8.2 MODULE III : COMPANY AUDIT
(g) Credit Balance of Profit and Loss Account will form part of reserve.
(h) In case of debit balance of profit or loss, the same shall be netted for computing
reserves and 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
operating revenues, as reduced by Excise duty.
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(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 lakh. During the year, the company had borrowed
` 15 lakh each from a bank and a financial institution independently. It has the turnover (Net of
excise ` 50 lakh which is credited to a separate account) of ` 475 lakh. Will Companies (Auditor’s
Report) Order, 2016 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, 2016 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, 2016 8.3
HINT: Contention of the E Tech Pvt. Ltd., is correct that CARO, 2016 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, 2019. During the year ended 31st March, 2020, it had issued
shares (fully paid up) of ` 80 lakhs, had borrowed ` 60 lakhs each from 2 financial institutions
and its turnover (Net of excise ` 100 lakhs which is credited to a separate account) is ` 950
lakhs. Will Companies Auditors Report Order, 2016 (CARO) be applicable to A Pvt. Ltd.?
HINT: Contention of the A Pvt. Ltd. is not correct as total borrowings exceeds ` 1 Cr., hence reporting
under CARO, 2016 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 ` 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 (CARO) is not applicable.
HINT: Contention of L Pvt. Ltd. is not correct as borrowings from financial institution exceeds ` 1 Cr.,
and auditor is required to report the period and amount of default in repayment of dues under Para
3(viii) of CARO, 2016.
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 ` 1.90 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
of the company as per Schedule III including value of service rendered, after deducting trade discount
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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 2020:

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, 2016 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 2016, 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 2016, 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 2020. 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 2020 was ` 6 crores. The management of the company is of the opinion
that CARO, 2016 is not applicable to it because turnover and paid up capital were within the
limits 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, 2016 will be required.
Q. No. 10: A Private Limited Company reports the following position as on 31st March, 2020:
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, 2016 is not applicable to it. Comment.
HINT: CARO, 2016 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

Fixed Assets [Para Adequacy of u Whether the company is maintaining proper records showing
3(i)] Records full particulars, including quantitative details and situation
of fixed assets;
Physical u Whether these fixed assets have been physically verified by
verification 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
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of account.
Title Deeds u Whether title deeds of immovable properties are held in the
name of the company. If not, provide details thereof.
Important Points to remember (As covered in Guidance Note on CARO, 2016)
u 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.
u What constitutes “reasonable intervals” depends upon the circumstances of each case.
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. 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. 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.
u The Order is silent as to what constitutes ‘title deeds’. In general, title deeds mean
a legal deed or document 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.
CH. 8 : CARO, 2016 8.5
(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.
u Reporting under this clause, where the title deeds of the immovable property are
not held in the name of the Company, may be made incorporating following details,
in the form of a table or otherwise:
(a) In case of land:
u total number of cases,
u whether leasehold/freehold,
u gross block and net block, (as at Balance Sheet date), and
u remarks, if any.
(b) In case of Buildings:-
u total number of cases,
u gross block & net block, (as at Balance Sheet date) and
u remarks, if any.
IMPORTANT QUESTIONS
Q. No. 11: X Ltd. closed its manufacturing operations and sold all its manufacturing fixed assets during the
financial year ended 31st March, 2020. 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, 2020 and found a material discrepancy to the tune of ` 1 lac, which was
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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. Fixed Assets:
“The fixed assets have been physically verified by the management at reasonable intervals; material
discrepancies were noticed on such verification and the same 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 assumption.
Q. No. 12: Under CARO, 2016, as a statutory auditor, how would you report: NSP Limited has its factory
building, appearing as fixed assets in its financial statements in the name of one of its director
who was overlooking the manufacturing activities. [RTP-Nov. 19]
HINT: Auditor shall report under Clause (i)(c) of Para 3 of the CARO, 2016.
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.
As the statutory auditor of the company for the year ended 31st March, 2018, what are the audit
procedures to be followed and what is the reporting under CARO 2016? [May 17 (4 Marks)]
HINT: Auditor shall report under Clause (i)(c) of Para 3 of the CARO, 2016.
Q. No. 14: The Property, Plant and Equipment of Amir Ltd. included Rs.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, 2016 on
matters specified above? [MTP-Aug. 18, May 20]
HINT: Auditor shall report under clause (i)(b) of Para 3 of CARO, 2016.
Inventories [Para (a) whether physical verification of inventory has been conducted at reasonable intervals
3(ii)] by the management; and
(b) whether any material discrepancies were noticed on physical verification and if so,
whether the same have been properly dealt with in the books of account.
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.
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, 2016.
HINT: Refer Para 3(ii) of CARO, 2016.
Q. No. 16: As the statutory auditor of B Ltd. to whom CARO, 2016 is applicable, how would you report in
the following situations: Physical verification of only 50% (in value) of items of inventory has
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been conducted by the company. The balance 50% will be conducted in next year due to lack of
time and resources. [MTP-Oct. 19]
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,
2016.
Loans and Whether the company has granted any loans, secured or unsecured to companies, firms,
Advances [Para LLPs or other parties covered in the register maintained under section 189 of the Act. If so,
3(iii)] (a) Whether the terms and conditions of the grant of such loans are not prejudicial to
the company’s interest;
(b) Whether the schedule of repayment of principal and payment of interest has been
stipulated and whether the repayments or receipts are regular;
(c) 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.
u Clause 3(iii)(a) covers determination of terms and conditions at the time of the grant
of the loan. In this regard it may be noted that though the clause uses the term “grant”
which would ordinarily be understood to mean loans granted/given during the year,
however, it may be appropriate to include such loans also that were renewed during
the year.
u Clause 3(iii)(b) and 3(iii)(c) cover the loans granted during the year and also all
loans having opening balances.
CH. 8 : CARO, 2016 8.7
u In case of non-stipulation of schedule of repayment of principal & payment of Interest,

the auditor should state the fact and may report that he is unable to make specific
comment on the regularity of repayment of principal & payment of interest, in such
cases.
u In case where the schedule of repayment of principal & payment of interest is
stipulated but repayment of principal or payment of interest is not regular then the
auditor may report the fact and may give no. of cases and remarks, if any.
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 2016? [May 14 (6 Marks)]
HINT: Reporting required under Para 3(iii) of CARO, 2016. 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 2019-20. 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 2020, these loans are
not required to be reported in CARO 2016. 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
covered in the register maintained u/s 189 of the Companies Act, 2013 during the Financial Year 2019-
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20. The maximum amount involved during the year was ` 1.00 crore and the year-end balance of such
loans was Nil”.
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, 2016. 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) Important Points to remember (As covered in Guidance Note on CARO, 2016)
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.
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.
4. Check whether the company has disclosed the full particulars of the loan given,
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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 year 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:-
S. Non-compliance of Section 186 Remarks,
No. if any
Name of Amount Balance as
Company/ Involved at Balance
Party Sheet Date
1 Investment through
more than two layers
of investment com-
panies
CH. 8 : CARO, 2016 8.9
S. Non-compliance of Section 186 Remarks,

No. if any
Name of Amount Balance as
Company/ Involved at Balance
Party Sheet Date
2 Loan given or guar-
antee given or se-
curity provided or
acquisition of secu-
rities 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 QUESTION
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? [Nov. 18-Old Syllabus (4 Marks)]
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HINT: Reporting required under Para 3(iv) of CARO, 2016.
Public Deposits u In case the company has accepted deposits from the public, whether the directives
[Para 3(v)] 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 there under, where applicable,
have been complied with. If not, the nature of 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?
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.

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 QUESTION
Q. No. 21: CARO, 2016 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, 2016 and related points of Guidance Note on CARO, 2016.
Statutory Dues (a) Whether the company is regular in depositing undisputed statutory dues including
[Para 3(vii)] 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 six
months from the date they became payable, shall be indicated.
(b) Where dues of income tax or sales tax or service tax or duty of customs or duty of
excise or value added tax 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).
u “Any other statutory dues” indicates that the clause covers all type of dues under
various statutes which may be applicable to a company having regard to its nature
of business.
CH. 8 : CARO, 2016 8.11
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”
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
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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 Six Months can
be in following format:
Name Nature Amount Period to Due Date of Remarks,
of the of the (` ) which the Date Payment if any
Statute Dues amount
relates
u Statement of Disputed Dues can be in the following format:

Name Nature Amount Period to Forum where Remarks,
of the of the (` ) which the dispute is pending if any
Statute Dues amount
relates
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 2019-20, 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, 2020. 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.
[May 16 (4 Marks), MTP-April 18, Aug. 18]
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, 2016. 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.
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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, 2016. Auditor should also perform the procedures
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, 2016. Auditor should also perform the procedures as covered in
SA 250.
Q. No. 25: Big and Small Ltd. received a show cause notice from central excise department intending to levy
a demand of ` 25 lakhs in December 2019. The company replied to the above notice in January
2020 contending that it is not liable for the levy. No further action was initiated by the central
excise 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, 2016. 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 31-03-20 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 2014-15 ` 125 lacs - Appeal is pending before
ITAT since 30-9-16.
u Customs duty ` 85 lakhs - Demand notice received on 15-9-19 but no action has been
taken to pay or appeal.
CH. 8 : CARO, 2016 8.13
As an auditor, how would you bring this fact to the members? [MTP-Oct 18, MTP-April 19]
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:
S. Name of the Nature of Amount Period to which Forum where

No. Statute Dues (in Lacs) amount relates dispute is
pending
1 Income Tax Act, Income Tax 125.00 AY 2014-15 ITAT
1961
(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.
Repayment of Dues u Whether the company has defaulted in repayment of loans or borrowings to a financial
- Para 3(viii) institution, bank, government or dues to debenture holders?
u If yes, the period and amount of default to be reported (In case of defaults of banks,
financial institutions and government, lender wise details to be provided).
u Auditor should report the period and amount of all defaults existing at the balance
sheet date irrespective of when those defaults have occurred.
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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 Lender wise details may be provided in the following format:
Particulars Amount of default as Period of Remarks,

at balance sheet date default if any
(i) Name of the Lenders:
In case of: Bank
Financial Institution
& Government
(ii) Debentures
IMPORTANT QUESTIONS
Q. No. 27: OK Ltd. has taken a term loan from a nationalized bank in 2015 for ` 200 lakhs repayable in
five equal instalments of ` 40 lakhs from 31st March, 2016 onwards. It had repaid the loans
due in 2016 & 2017, but defaulted in 2018, 2019 & 2020. 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(viii) of CARO, 2016.
Q. No. 28: R Ltd. as at 31st March 2020 defaulted in the repayment of interest and principal due to a financial
institution. The due date was 28th February 2020. However the defaulted amount was paid on
5th April 2020. 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, 2016. Comment & draft a
suitable report.
Or
C Limited has defaulted in repayments of dues to a financial institution during the financial
year 2019-20 and the same remained outstanding as at March 31, 2020. However, the Company
settled the total outstanding dues including interest in April, 2020 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.
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”.
Application of u Whether moneys raised by way of initial public offer or further public offer (including
Money raised by debt instruments) and term loans were applied for the purposes for which those are
public issue & term raised.
Loan - Para 3(ix) u If not, the details together with delays or default and subsequent rectification, if any,
as may be applicable, be reported.
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
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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.
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 the funds raised through IPO or FPO
(including debt instruments) or 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.
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) and the term loans during the year for the purposes for which they
were raised, except for:
CH. 8 : CARO, 2016 8.15
Nature of the Details of default Amount (` ) Subsequently rectified

fund Raised (Reason/Delay) (Yes/No) and details
IMPORTANT QUESTIONS
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
was 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, 2016, 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, 2016.
Q. No. 31: During the financial year ended on 31/03/2020, LM Private Limited had borrowed from a
Nationalized Bank, a term loan of Rs. 120 lakhs consisting of Rs. 100 lakhs for purchase of a
machinery for the new plant and Rs. 20 lakhs for erection expenses. As on the date of 31st March,
2020, the total of capital and free reserves of the Company was Rs. 50 lakhs and turnover for the
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year 2019-20 was Rs. 750 lakhs. The Bank paid Rs. 100 lakhs to the vendor of the Company for
the supply of machinery on 31/12/2019. The machinery had reached the yard of the Company.
On 28/02/2020, the Company had drawn the balance of loan viz. Rs. 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 31/03/2020, in this respect. [Nov. 18-New Syllabus (5 marks)]
HINT: As per requirement of Para 3 (ix) of CARO, 2016, 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.
Fraud [Para 3 (x)] u Whether any fraud by the company or any fraud on the Company by its officers/
employees has been noticed or reported during the year;
u If yes, the nature and the amount involved is to be indicated.
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
(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. As specified the fraud by
the company or on the company by its officers or employees are only covered.
(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
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involved of the frauds noticed or reported, the auditor may also consider the
principles of materiality outlined in Standards on Auditing.
IMPORTANT QUESTION
Q. No. 32: As a statutory auditor, how would you report on the following under CARO: ABC Pvt. Ltd. is an
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, 2016, there is no implication for
misstatement in the financial statements. Hence, no reporting is necessary for improper disclosure of
purity of gold on the jewelry.
Q. No. 33: What are the reporting requirements in the audit report under the Companies Act, 2013/CARO,
2016 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.
(d) A fraud has been reported in the cost audit report but not noticed by statutory auditors
in his audit. [Nov. 18-Old Syllabus (4 Marks)]
HINT: Refer Sec. 143(12) read with Rule 13 of Companies (Audit & Auditor’s) Rules, 2014 and Para
3(x) of CARO, 2016.
CH. 8 : CARO, 2016 8.17
Managerial u Whether managerial remuneration has been paid or provided in accordance with
Remuneration - the requisite approvals mandated by the provisions of Sec. 197 read with Schedule
Para 3(xi) V to the Companies Act?
u If not, state the amount involved and steps taken by the company for securing refund
of the same.
u Section 197 of the Act prescribes that the maximum ceiling for payment of managerial
remuneration by a public company to its directors, including managing director and
whole-time director and its manager which shall not exceed 11% of the net profit of
the company in that financial year, computed in accordance with section 198 of the
Act, except that the remuneration of the directors shall not be deducted from the
gross profits.
u The overall managerial remuneration and requisite approval is summarized as under:
S. Person entitled for Maximum If remuneration

No remuneration Remuneration in any exceeds maximum
financial year remuneration in
any financial year
as provided under
column (b)
(a) (b) (c)
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1 Directors including man- 11% of the net profits Company in general
aging director, whole of the company for that meeting subject to provi-
time director and man- financial year sions of Schedule V may
agers of public company pay remuneration in
(for all such directors and excess of 11% of the net
manager together) profits of the company.
2 One managing Director/ 5% of the net profits of With the approval of
Whole time director/ the company for that the company in general
manager financial year meeting by special reso-
lution, this limit may be
exceeded.
3 More than one M.D./ 10% of the net profits With the approval of
Whole time director/ of the company for that the company in general
manager (for all such financial year. meeting by special reso-
directors & manager lution, this limit may be
together) exceeded.
4 Directors who are nei- 1% of the net profits of With the approval of
ther managing director the company, (if there is a the company in general
nor whole time direc- Managing or whole time meeting by special reso-
tors director or Manager) for lution, this limit may be
that financial year. exceeded.
In any other case 3% of
net profits.
u The default may be reported incorporating the following details:-

(i) Payment made to Director/Whole time Director/Managing Director/Manager.
(ii) Amount paid/provided in excess of the limits prescribed.
(iii) Amount due for recovery as at Balance Sheet date.
(iv) Steps taken to secure the recovery of the amount.
(v) Remarks, if any.
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 and
u Whether the Nidhi Company is maintaining 10% unencumbered term deposits as
specified in the Nidhi Rules, 2014 to meet out the liability.
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 QUESTION
Q. No. 34: CARO, 2016 has made several significant changes and has introduced many new reporting
requirements vis-à-vis CARO, 2015.
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?
[Nov. 16 (4 Marks)]
HINT: Refer Para 3(xii) of CARO, 2016
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.
CH. 8 : CARO, 2016 8.19

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 involved Remarks (details of

party relationship and the (` ) non-compliance may be
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underlying transaction given)
Preferential u Whether the company has made any preferential allotment or private placement of
Allotment - Para shares or fully or partly convertible debentures during the year under review and
3(xiv) u if so, as to whether the requirement of Sec. 42 of the Companies Act, 2013 have been
complied and the amount raised have been used for the purposes for which the funds
were raised. If not, provide details in respect of the amount involved and nature of
non compliance.
The auditor may report the non-compliances incorporating the following details:
Nature of Securities Purpose Total Amount Amount Unutilized Remarks,

viz. Equity shares/ for which Raised/ utilized balance as if any
Preference shares/ funds opening for the at Balance
Convertible raised unutilized other sheet Date
debentures balance purpose
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.
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:
(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:
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“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”
IMPORTANT QUESTION
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, 2016, as a statutory auditor, how would you report?
[RTP-Nov. 19]
Registration with Whether the company is required to be registered u/s 45-IA of the Reserve bank of India
RBI - Para 3 (xvi) Act, 1934 and if so, whether the registration has been obtained..
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.
CH. 8 : CARO, 2016 8.21
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, 2016 (AS PER GUIDANCE NOTE
ON CARO, 2016 ISSUED BY ICAI)
(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.
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, 2016:
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(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
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 kickbacks 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, 2016; (b) Reporting required under Para
3(1)(c) of CARO, 2016; (iii) Reporting required under Para 3(xiii) of CARO, 2016; (iv) Reporting required
under Para 3(x) of CARO, 2016
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
Nov. 2020
May 2021
Nov. 2021
May 2022
Nov. 2022
TAXMANN®

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8.1 - APPLICABILITY OF COMPANIES AUDITOR REPORT ORDER, 2016

8.2 MODULE III : COMPANY AUDIT

CH. 8 : CARO, 2016 8.3

8.4 MODULE III : COMPANY AUDIT

Paid up Capital ` 70 Lacs

8.2 - MATTERS TO BE INCLUDED IN AUDITOR’S REPORT

CH. 8 : CARO, 2016 8.5

8.6 MODULE III : COMPANY AUDIT

CH. 8 : CARO, 2016 8.7

u In case of non-stipulation of schedule of repayment of principal & payment of Interest,

8.8 MODULE III : COMPANY AUDIT

investment made or guarantee given or security provided in the financial

CH. 8 : CARO, 2016 8.9

S. Non-compliance of Section 186 Remarks,

8.10 MODULE III : COMPANY AUDIT

Important Points to remember (As covered in Guidance Note on CARO, 2016)

CH. 8 : CARO, 2016 8.11

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

8.12 MODULE III : COMPANY AUDIT

CH. 8 : CARO, 2016 8.13

S. Name of the Nature of Amount Period to which Forum where

Particulars Amount of default as Period of Remarks,

8.14 MODULE III : COMPANY AUDIT

CH. 8 : CARO, 2016 8.15

Nature of the Details of default Amount (` ) Subsequently rectified

8.16 MODULE III : COMPANY AUDIT

u The auditor should obtain written representations from management that:

CH. 8 : CARO, 2016 8.17

S. Person entitled for Maximum If remuneration

8.18 MODULE III : COMPANY AUDIT

u The default may be reported incorporating the following details:-

CH. 8 : CARO, 2016 8.19

Important Points to remember (As covered in Guidance Note on CARO, 2016)

Nature of the related Amount involved Remarks (details of

Nature of Securities Purpose Total Amount Amount Unutilized Remarks,

8.20 MODULE III : COMPANY AUDIT

(i) An arrangement by which a director of the company or its holding, subsidiary

CH. 8 : CARO, 2016 8.21

8.3 - REASONS TO BE STATED FOR UNFAVOURABLE OR QUALIFIED REMARKS (PARA 4)

8.22 MODULE III : COMPANY AUDIT

Summary of Examination Weightage

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