02 - Caro 2020

ADVANCED AUDITING & PROFESSIONAL ETHICS CA C.V.SARMA, M.Com.
, FCA
3
COMPANIES (AUDITOR‟S REPORT) ORDER, 2020
In exercise of the powers conferred by Section 143 (11) of the Companies Act, 2013, the
Central Government, hereby makes the following Order, namely The Companies (Auditor‘s
Report) Order, 2020.
Applicability
CARO, 2020 is applicable to every company including a foreign company. According
to Section 2(42) of Companies Act, 2013, Foreign Company means any company or body
corporate incorporated outside India which –
a. has a place of business in India whether by itself or through an agent,
physically or through electronic mode; and
b. conducts any business activity in India in any other manner.
In respect of Foreign Companies, an established place of business in India would
include a Liaison Office.
Every report made by the auditor in pursuance with the provisions of section 143 of
Companies Act, 2013 for financial year commencing on or after 1st day of April,
2021 shall contain the matters specified in paragraphs 3 and 4 of the order, as may be
applicable. Hence CARO, 2020 is applicable from FY 2021-22 and the matters specified
therein shall be included in each report made by the auditor u/s.143 on the accounts of every
company to which CARO, 2020 is made applicable.
Here it is pertinent to mention that the Order specifies the applicability of the matters by the
words “as may be applicable”, hence reporting on the matters specified in paragraphs 3
and 4 of the Order are to be made only on those matters which are applicable to the
company.
APPLICABILITY IN RESPECT OF BRANCH AUDIT
The Order is also applicable to the audits of branch(es) of a company since sub-section
8 of section 143 of the Act read with Rule 12 of the Companies (Audit and Auditors) Rules,
2014 clearly specifies that a branch auditor has the same duties like that of the
company‟s auditor. It is, therefore, necessary that the report submitted by the branch
auditor (including auditor of a foreign branch) shall contain a statement on all
the matters specified in the Order, unless the company is exempted from the
applicability of the Order. This will enable the company‟s auditor to consider the
same while complying with the provisions of the Order.
NON-APPLICABILITY - COMPANIES NOT COVERED BY THE ORDER

CARO, 2020 is not applicable to audit of consolidated financial statements except
clause (xxi) of Paragraph 3. This means that the auditor will need to give a CARO report on
the consolidated financial statements with respect to clause (xxi) of the Order only and is not
required to report on rest of the clauses of paragraph 3.
This order is not applicable to Infrastructure Investment Trust and Real Estate
Investment Trust since they are trusts which are governed by SEBI.
CARO, 2020 is not applicable for the following types of companies also:
(i) a banking company
3.1
ADVANCED AUDITING & PROFESSIONAL ETHICS CA C.V.SARMA, M.Com., FCA
(ii) an insurance company
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company and a Small Company and
(v) a Private Limited company provided all the following conditions are
satisfied:
a. It should not be a subsidiary or holding company of a public company
and
b. The paid up capital and reserves and surplus of such a company
shall not be more than 1 Crore as on the balance sheet date and
c. The total borrowings shall not exceed 1 crore from any bank or
financial institution at any point of time during the financial year and
d. The Total Revenue including revenue from discontinuing operations
shall not exceed 10 crore during the financial year.
A private limited company, in order to be exempted from the applicability of the Order, must
satisfy all the above mentioned conditions. In other words, even if one of the
conditions is not satisfied, the Order is made applicable to the company.
In case a company converts into partnership/limited liability partnership or to
any other constitution (which is not governed by the Act) or converts to any
constitution which is exempted from application of the Order, in that situation,
the Order would not be applicable.
TERMS USED IN THE ORDER
1. Paid-up Capital and Reserves and Surplus
Paid-up share capital would include both equity share capital as well as the preference
share capital. While calculating the paid-up capital, amount of calls unpaid should be
deducted from the paid-up capital. The amount originally paid-up on forfeited shares
should be added to the figure of paid-up capital. Share application money received
should not be considered as part of the paid-up capital.
As per Schedule III (Division I) to the Act (Financial statements for a company whose
financial statements are required to comply with the Companies (Accounting Standards)
Rules, 2006), ―Reserves & Surplus‖ consists of:-
a. Capital Reserves
b. Capital Redemption Reserve
c. Securities Premium Reserve
d. Debenture Redemption Reserve
e. Revaluation Reserve
f. General Reserve/Revenue Reserve
g. Surplus (Debit or Credit balance in P&L)
Different items were included under the heading Reserves under Division II and
Division III. The auditor shall keep in mind those provisions while calculating
the amount of Reserves and Surplus.
2. Borrowings
Borrowings can be long term or short term. They include Secured as well as
Unsecured borrowings. Borrowings made from even private bank and foreign bank is
3.2
also required to be considered. They also include all fund-based loans such as term loans,
demand loans, export credits, working capital limits, cash credits, overdraft facilities, bills
purchased or discounted etc. In case of Term Loans interest accrued and due is
considered as a borrowing whereas interest accrued but not due is not to be considered as
borrowing. However, this does not include non-fund based limit such as bank
guarantees. However, if the bank guarantee has been converted into fund-based limit, it
should also be considered.
Agregate Amount: For this purpose, ―Any Bank or Financial Institution (FI)‖, would refer
to the aggregate to all Loans and not with reference to each Bank or Financial Institution.
Where the Company is granted an Overdraft Facility against Fixed Deposits of the concerned
Bank, the amount Outstanding in Overdraft Facility (and not net of FD) is considered for
the purpose of CARO.
Outstanding Dues in respect of Credit Cards would also be considered while
calculating the limit of 1 Crore in respect of ―Borrowings‖ from a Bank or Financial
Institution.
The term ―Banks‖ refers to a Bank as defined under Banking Regulation Act, 1949. Therefore,
even
3. Financial Institution
It includes a non-banking financial company (NBFC).
4. REVENUE
According to Part II of Schedule III of the Companies Act, 2013 ―REVENUE‖ means
aggregate amount of sales affected by the company. The term ―sales affected‖ include
sale of goods as well as services rendered by the company. For determination of turnover, the
following points should be considered:
1. Taxes collected should not be taken into account if they are credited
separately.
2. Trade discounts should be deducted from the figure of turnover;
3. Commission allowed to third parties should not be deducted from the figure of
turnover; and
4. Sales returns should be deducted from the figure of turnover even if the returns
are from the sales made in the earlier years.
5. Date of determination of limits
If at any point of time during the financial year covered by the audit report, the company
defeats any of the conditions mentioned for a private company for its exclusion from the
order, the order is made applicable.
General Provisions regarding Auditor‟s Report
This order is supplemental to the directions given by the Comptroller and
Auditor General of India under section 143(5) of the Act in respect of government
companies. These directions continue to be in force. Therefore, in respect of government
companies, the matters specified in the Order will form part of the auditor‘s report submitted
to the members and the replies to the aforesaid questionnaire issued by the Comptroller and
Auditor General of India will be governed by the requirements of section 143(5) of the Act.
3.3
This order is not intended to limit the duties and responsibilities of auditors but only
requires a statement to be included in the audit report in respect of the matters specified
therein.
MATTERS TO BE INCLUDED IN THE AUDITOR‟S REPORT
Paragraph 3(i)(a)(A)
PROPER RECORDS - PPE
Whether the company is maintaining proper records showing full particulars,
including quantitative details and situation of property, plant and equipment;
Maintenance of Proper Records
The auditor has to verify whether the company is maintaining proper records with respect to
property, plant and Equipment. What constitute “proper record” is not defined in the
order. Where the company is maintaining a “PPE Register” showing therein full
particulars of Property, Plant and Equipment including their quantitative details, the auditor
can satisfy that the company is maintaining proper records. This register may be maintained
either manually or in electronic mode.
They also include assets acquired through finance lease.
Investment Property and non-current assets held for sale shall also be
considered for reporting under this clause.
The auditor should also consider PPE that have been fully depreciated or retired
from active use as well as assets impaired during the period covered by the audit
report.
Where PPE register is not maintained by the company, it is to be considered as a serious
documentation and control problem and hence this should be mentioned by the auditor
while reporting under this clause.
Paragraph 3(i)(a)(B)
PROPER RECORDS – INTANGIBLE ASSETS
Whether the company is maintaining proper records showing full particulars of
intangible assets;
Under this heading, the auditor should verify, whether the company is maintaining proper
records with respect to intangible assets. What constitute “proper record” is not
defined in the Order. However, if the records being maintained by the company
contain all the details required, such as description, situation, original cost, year of
purchase, date put to use, useful life etc., it can be deemed that the company is
maintaining proper records relating to its intangible assets.
Paragraph 3(i)(b) – PHYSICAL VERIFICATION OF PPE
Whether these property, plant and equipment have been physically verified by
the management at reasonable intervals; whether any material discrepancies
were noticed on such verification and if so, whether the same have been
properly dealt with in the books of account;
Physical Verification and material discrepancies:
3.4
It is the primary responsibility of the management to physically verify the assets at
reasonable intervals. Therefore, the auditor has to inquire whether the PPE were physically
verified by the management at reasonable intervals. What constitute reasonable interval
again is not defined in the Order. Reasonable interval in respect of physical verification of
PPE may be one, two or three years depending upon the circumstances of the case.
If material discrepancies were noticed by the management on such physical verification,
the auditor has to verify, whether such discrepancies were properly dealt with/adjusted in
the books of account by the management.
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.
Paragraph 3(i)(c) – TITLE DEEDS OF IMMOVABLE PROPERTIES
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) are held in the name of the company. If not, provide the
details thereof in the format given below;
Description Gross Carrying Held in Whether Period held Reason for

Of property value name of promoter, indicate not being
Director or range, where held in name
their appropriate of company
relative or
employee
Where the title deeds of the immovable property have been mortgaged with the
banks/financial institutions, etc., for securing the borrowings and loan raised by the
company, a confirmation about the same should be sought from the respective
institution to this effect. The auditor may also consider verifying this information from the
online records, if available, of the relevant State.
The auditor need not report in respect of other immovable properties not
classified as property, plant and equipment, as they are outside the scope covered
under this clause. Such items may relate to inventories of immovable property for a
real estate company.
Paragraph 3(i)(d) - REVALUATION
Whether the company has revalued its Property, Plant and Equipment
(including Right of Use assets) or intangible assets or both during the year and,
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;
AS 10(Revised), ―Property, Plant and Equipment‖ and Ind AS 16, ―Property, Plant and
Equipment‖ require property, plant and equipment (PPE) to be initially recorded at
cost but they allow two models for subsequent accounting for PPE, namely the cost
model and the revaluation model. The difference between the cost model and the
revaluation model is that the revaluation model allows both downward and upward
adjustment in value of an asset while cost model allows only downward adjustment
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due to impairment loss. Hence, for the purpose of reporting under this clause, there may be
cases of:
 Upward revaluation; or
 Downward revaluation.
Reporting under this clause would be limited to revaluation model since under cost
model revaluation is not permitted. For the purpose of reporting under this clause,
revaluation shall not include:
 Fair valuation of PPE upon first time adoption of Ind AS.
 Re-measurement (i.e., changes in value due to interest or foreign exchange rates).
DUTIES OF THE AUDITOR
1. Ascertain whether the company under audit has made revaluation of their tangible or
intangible assets during the year under audit.
2. Ensure that such revaluation has been carried out by a Registered Valuer.
3. Ensure that the entire asset class has been revalued.
4. Consider the requirements of SA 500/SA 620 while evaluating the work carried out
by the Registered Valuer (Expert).
5. When a change in the value of the asset on account of revaluation (Upward or
Downward) is 10% or more in the aggregate of the net carrying value of each
class of Property, Plant and Equipment or intangible assets, specify the
amount of change in the Auditor‟s Report.
6. Ensure that proper disclosures were made in the Financial Statements in respect of
revaluation of assets as per the applicable financial reporting framework.
Paragraph 3(i)(e) – BENAMI PROPERTY
Whether any proceedings have been initiated or are pending against the
company for holding any benami property under the Benami Transactions
(Prohibition) Act, 1988 (45 of 1988) and rules made there under, if so, whether
the company has appropriately disclosed the details in its financial statements;

1. Check whether any proceedings have been initiated or pending against the
company for holding any Benami property of any kind, whether movable or
immovable, tangible or intangible etc.
2. If any proceedings have been initiated or pending, check whether the company has
appropriately disclosed the details in its financial statements. The details to be
disclosed in the financial statements includes:
a. Nature of the Property
b. Carrying Value of the Property
c. Status of Proceeding
d. Its impact on FS
3. Ensure that any liability that may arise in case of proceedings has been disclosed as
contingent liability. Alternatively, if the auditor is of the view that a provision
3.6
is required to be created in respect of such anticipated liability, verify whether the
same has been created and disclosed in the FS.
It may be noted that reporting is to be done by the auditor when proceedings are initiated
treating the company as a benamidar (means a person or a fictitious person, in whose
name the benami property is transferred or held). The reporting is not applicable where
the notice is received by the company as a beneficial owner.
Parag raph 3(ii)(a) – PHYSICAL VERIFICATION OF INVENTORY:
Whether physical verification of inventory has been conducted at reasonable
intervals 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;
Duties of the Auditor
1. It is the primary responsibility of the management to physically verify all the
inventories at reasonable intervals. The auditor has to check whether management
has made physical verification of all items of inventory at reasonable intervals.
2. Ensure that the coverage of verification and procedure adopted for verification is
appropriate. The coverage and procedure of such verification is considered as
inappropriate when it is not reasonable and adequate considering the size of
the company and nature of its business.
3. Where the discrepancies between book quantities and quantities as per physical
verification accounted for 10% or more in value, for any class of inventory,
check whether such discrepancies have been properly dealt with in the books of
account. Even where such discrepancy results in a net excess of 10% for any
class of inventory, reporting would still be required.
4. It may be noted that for the purpose of reporting under this clause,
materiality threshold as may be applicable for the auditee is not relevant.
What is of relevance is discrepancy of 10% or more in value, for any class
of inventory, in which case reporting is required.
Paragraph 3(ii)(b) – WORKING CAPITAL LIMITS
Whether during any point of time of the year, the company has been sanctioned
working capital limits in excess of five crore rupees, 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;
Working capital limits could be in the form of credit facilities which are fund based,
wherein immediate flow of funds is available to the borrowers, which includes cash credit,
bank overdraft, trade credit, working capital loans, purchase/discount of bills, factoring, etc.
Working capital limits could also be non-fund based where there is no immediate outflow
of funds from the lender which includes letter of credit, bank guarantees, etc.
3.7
For the purpose of reporting under this clause, the auditor should consider the working
capital sanctioned limit and not its utilisation. The utilisation may be less than the
sanctioned limit of more than five crore rupees but such cases will also be covered for
the purpose of reporting.
Sometimes, the sanctioned limit may be less than Rs. 5 crore but the balance may
exceed Rs. 5 crores. This may be due to excess withdrawals/ levy of interest/ temporary
overdrawings. Such cases are beyond the scope of reporting under this clause.
The term "sanction" includes fresh sanction during the year as well as limits
renewed or due for renewal during the year.
The threshold of five crore rupees should be examined for any day during the year for
which the reporting is to be made, and not as at the end of the financial year.
1. The auditor should obtain a list of statements or returns to be submitted by the
company to the lenders and should examine whether the book balances agree with
such quarterly returns/statements. Such returns/statements would normally
include stock statements, book debt statements, credit monitoring arrangement
reports, statements on ageing analysis of the debtors/other receivables, and other
financial information in stipulated format etc.
If the auditor identifies any discrepancy in such returns/statements, the
same is required to be reported. Instances of such differences may be relating to
difference in value of stock, amount of debtors/creditors, ageing analysis of
debtors, etc., between the books of account and the returns/statements submitted to
banks/financial institutions.
However, the auditor is not required to audit such quarterly returns/ statements,
but only required to compare the same with the books of account.
Reporting under this clause is confined to Quarterly returns/statements
only although company may be submitting monthly returns/ statements to
the lenders. Therefore, the auditor is required to verify returns/
statements as at the end of each quarter and not for other months of the
same quarter. For instance, if the company submits returns/ statements
on a monthly basis say for the months of April, May and June, the auditor
in this case would be required to verify the returns/ statements solely for
the month of June, being the relevant return as at the end of a quarter.
Paragraph 3(iii) – INVESTMENT, LOANS, GUARANTEE OR SECURITY
Whether during the year the company has made investments in, provided any
guarantee or security or granted any loans or advances in the nature of loans,
secured or unsecured, to companies, firms, Limited Liability Partnerships or
any other parties, If so,
a) whether during the year the company has provided loans or provided
advances in 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 -
3.8
(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;
This clause is not applicable to those companies whose principal business is to

give loans. Ex. Financial Institutions, NBFC etc.
The term “loan” includes all kinds of loan whether long term or short term,
whether secured or unsecured, whether given in cash or kind to any party.
While examining the loans, the auditor should also consider the loans/advances in
nature of loan transactions that have been squared-up during the year and should
report such transactions under this clause.
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;
Under this clause the auditor‘s duty is to determine whether, in his opinion, the terms
and conditions of the investments, guarantee, security, loans/advances in nature of
loans granted during the year are prejudicial to the interest of the company.
In relation to this clause it is suggested that the auditor should ensure
compliance with all the requirements of sections 179, 180, 185, 186, 187 of
the Act and rules there under.
Duties of the auditor in respect of Investments
In respect of investments made by the company, it is the duty of the auditor to assess
whether same are prejudicial to the company‘s interest by considering the following
factors:
a. Company‘s ability to make such investment
b. Financial standing of the investee company
c. Sources of fund
d. Valuation of the proposed investment
e. Covenant‘s attached and so on.
To explain with an example, it is not uncommon for a holding company to support the
financial position of its loss-making subsidiary by infusing equity and in such a
situation it would not be construed as prejudicial to the interest of the holding
company.
Duties of the auditor in respect of Loans and Advances
In respect of loans and advances made by the company, it is the duty of the auditor to
assess whether the terms and conditions of grant of loans and advances are
prejudicial to the company‘s interest.
3.9
Terms and conditions would primarily include:

• Rate of interest
• Security
• Terms and period of repayment and
• Restrictive covenants
• Nature of entity i.e. whether given to a start-up or an entity having established
track record etc.
In determining whether the terms of the loans are prejudicial to the company‘s
interest, the auditor would have to give due consideration to the following factors:
 Ability to lend
 Terms of lending
 Borrower‘s financial standing
 Credit rating
 Nature of the security
 Rate of interest, and so on.
Duties of the auditor in respect of Guarantees
In determining whether the guarantee is prejudicial to the interest of the company, the
auditor would have to give due consideration to the following factors:
 The financial standing of the party on whose behalf the company has given the
guarantee
 Party‘s ability to borrow
 The nature of the security offered by the party
 The availability of alternative sources of finance and
Manner of including an unfavourable comment in the auditor‟s report - An
example
“According to the information and explanations given to us and based on the
audit procedures performed by us, we are of the opinion that the guarantee
provided and the terms and conditions of loans granted by the company to its
associate, (guarantee provided during the year aggregating to Rs. _ total loan
amount granted Rs._ and balance outstanding as at balance sheet date Rs._ )
are prejudicial to the company‟s interest on account of the fact that the
guarantee provided without obtaining requisite approvals as required under
section 186 of the Companies Act 2013 and the loans have been granted at an
interest rate of X% per annum which is significantly lower than the cost of funds
to the company and also lower than the prevailing yield of government security
closest to the tenor of the loan”.
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;
3.10
Under this clause, the auditor shall go through the loan agreement to ensure that such
agreement contains a clause relating to schedule of repayment. The auditor should
also verity, whether receipt of principal amount and interest on loans granted by the
company is regular and is as per the schedule of repayment.
The word ―regular‖ should be taken to mean that the principal and interest should
normally be received whenever they fall due.
Suggested format for reporting under this clause:
Name of Amount Due date Extent of Remarks, if

the Entity delay any
d) if the amount is overdue, state the total amount overdue for more than
ninety days, and whether reasonable steps have been taken by the
company for recovery of the principal and interest;
Under this clause, the auditor is required to disclose total amount overdue for
more than ninety days in respect of loans/advances in nature of loans granted to
all parties.
He is also required to verify whether the company has taken reasonable steps for
recovery of principal and interest if it is overdue for more than 90 days. A loan is
considered to be overdue when the payment has not been made or received on the due
date as per the agreement.
The term ―reasonable steps‖ has not been defined. Taking its natural meaning,
reasonable steps not only mean issuing a legal notice. Even a reminder notice sent
can be treated as a reasonable step.
No. of Principal Interest Total Remarks (if

cases Amount Overdue Overdue any)
Overdue
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];
This clause requires reporting in respect of loan or advance in the nature of loan granted
which has fallen due during the year and has been renewed or extended or fresh loans
granted to settle the overdues of existing loans given to the same parties.
This clause is inserted to identify instances of ‗evergreening‘ of loans/advances in nature of

loans. [Note: The term „evergreening‟ is not defined in the Act. However, in general
3.11
parlance it implies an attempt to mask loan default by giving new loans to help
delinquent borrowers to repay/adjust principal or pay interest on old loans.]
Audit Procedures and Reporting
1. Obtain a list of loans falling due during the year as well as list of loans renewed or
extended including fresh loans granted to settle the overdues of existing loans.
2. Examine the loan agreements to ascertain the terms of renewal/extension of loan or
advance in nature of loan.
3. In respect of loans falling due as on the balance sheet date and which were
renewed/extended/settled post balance sheet date and before the date of
audit report, the same should also be considered for reporting under this
clause. Further, same matter would also get reported next year.
Name of Aggregate amount of Percentage* of the

the overdues of existing aggregate to the total
parties loans renewed or loans or advances in the
extended or settled by nature of loans granted
fresh loans during the year
* Example – Company A has an opening loan of Rs. 100 and granted 3 more loans of Rs. 200,
300 and 400 during the year. Company extended tenure in respect of two loans (Rs. 100 and
Rs. 200) when fell due for payment. Percentage of the aggregate to the total loans or
advances in the nature of loans granted during the year in the instant case would be 33%
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 clause (76) of section 2 of the
Companies Act, 2013;
This clause requires the auditor to report the gross amount of loans or advances in the
nature of loans either repayable on demand or without specifying any terms or period
of repayment. If response is ‗yes‘, the auditor is required to report the aggregate
amount of loans granted to promoters as defined in clause (69) of section 2 of the Act,
related parties as defined in clause (76) of section 2 of the Act.
1. Obtain the list of promoters and related parties as per section 2(69) and section
2(76) respectively of the Act. Such relationship may exist at any point during the year.
2. Consider the requirements of SA 550 - Related Parties.
3. The auditor has to examine from the loan agreements to ascertain whether:
a. The agreement contains the schedule of repayment and
b. Whether loans are repayable on demand.
3.12
4. In case the auditor identifies that loans/advances in nature of loans are granted to
promoters or related parties which are repayable on demand or without specifying any
terms or period of repayment, the auditor should state the fact and report the gross
amount of such loans/advances in nature of loan granted during the year.
All Promoters Related

Parties Parties
Aggregate amount of
loans/ advances in
nature of loans
Repayable on demand
(A)
Agreement does not
specify any terms or
period of repayment
(B)
Total (A+B)
Percentage of loans/
advances in nature of
loans to the total
Loans
Paragraph 3(iv) – SEC. 185 & 186

In respect of loans, investments, guarantees, and security whether provisions of
section 185 and 186 of the Companies Act, 2013 have been complied with. If not,
provide the details thereof.
According to Section 185 of the Companies Act, 2013, no company shall, directly or indirectly
advance any loan to any of its directors or to any other persons with whom directors
are interested or give any guarantee or provide any security in connection with any loan
taken by the director or such other person.
In other words, according to Section 185(1) of the Companies Act, a company cannot give
any loan or give any guarantee or provide any security in connection with any loan taken by:
(PROHIBITORY)
 Any Director of the Company
 Any Relative of such Director
 Any partner of such Director
 Any director of its holding company
 Any relative of director of its holding company
 Any partner of director of its holding company
 Any firm in which any of the above mentioned director is a partner (Director of
Lending/its holding company)
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 Any firm in which relative of the above mentioned director is a partner (Director of
Lending/its holding company)
SECTION 185(2) - RESTRICTIVE
This section states that a Company can advance any loan (including book debt) or give any
guarantee or provide any security in connection with any loan taken by any person in whom
any of Director of the Company is interested subject to the conditions:
“Any person in whom any of Director of the Company is interested” means the
following:
 Any PRIVATE Limited company in which such director (Director of Lending/its
holding company) is a Director or member. or
 Body corporate in which such Director or Directors (Director of Lending/its holding
company) hold not less than 25% of the total voting power. or
 Body Corporate, the BOD, MD or manager whereof is accustomed to act in accordance
with the directions or instructions of board or of any Director or directors of lending
company.
Such grant of loan or giving any guarantee or providing any security is subject to
the following conditions:
1. Prior approval of shareholders is required by way of passing a special resolution in
a general meeting and
2. That loan shall be utilized by the borrowing company for its principal business
activities.
SECTION 185 (3) – EXCEPTIONS
Grant of a loan or giving a guarantee or providing security is allowable to:
1) Managing or a whole time director
a) As a part of service extended to all employees OR
b) As per a scheme approved by members through a special resolution.
2) Given in ordinary Course of Business
If the company is engaged in lending activity regularly, i.e. if the company lends
not only to Directors and related parties but also to Arm Length Parties or unrelated
parties, then it can be said that the loan is given in the ordinary course of business. In
such a case, the interest charged on such loans shall not be less than the rate of
prevailing yield of 1 year, 3 years, 5 years or 10 years Government security closest to the
tenor of the loan.
3) Any loan made by a Holding company to its wholly-owned Subsidiary Company
or any guarantee given or security provided by a holding company in respect of any
loan made. Such loan must be utilized by the subsidiary company for its principal
business activities.
According to Section 186 of the Companies Act, 2013, no company shall directly or
indirectly —
(a) give any loan to any person or other body corporate;
(b) give any guarantee or provide security in connection with a loan to any other body
corporate or person; and
3.14
(c) acquire by way of subscription, purchase or otherwise, the securities of any other
body corporate
exceeding sixty per cent ( 60%) of its paid-up share capital, free reserves
and securities premium account or one hundred per cent (100%) of its
free reserves and securities premium account, whichever is more.
The Board of directors of the company can give loan, guarantee, or provide
security and make investment within the limits specified u/s 186(2), by passing
a board resolution.
If the limits mentioned above exceeds, then the company is required to take prior
approval by means of a special resolution passed at a general meeting. -
Section 186(3)
The particulars of such loans or guarantees shall be disclosed by the
company in its financial statements. – Section 186(4)
Exemptions to wholly owned subsidiary company:
(i) Where a loan or guarantee is given or security provided by a company to
its wholly owned subsidiary company or a joint venture company, or an
investment made by a holding company, in the securities of its wholly
owned subsidiary company, the requirement of sub- section (3) of
section 186 shall not apply.
(ii)In such case, the company is required to disclose the details of such loans
or guarantee or security or investment in the financial statement as provided
under sub- section (4) of section 186.
As per Section 186(1) of the Companies Act, 2013, the term ―investment‖ means:
1. Subscribing to or purchase of Shares
2. Subscribing to or purchase of Share Warrants
3. Subscribing to or purchase of debentures, bonds or similar debt securities.
According to the provisions of sec-186, Inter-corporate investments (i.e. investment by one
company in another company) shall not be made through more than two layers of
investment companies.
According to explanation to Section 2(87)(d) of the Companies Act, “Layer” in relation to a
holding Company means its subsidiary or subsidiaries.
For Example A LTD is the holding company and B Ltd is the subsidiary company of A LTD
and C LTD is the subsidiary company of B LTD, then the investments moves from A LTD to B
LTD is the one layer and investment moves from B LTD to C LTD is the second layer. Hence,
results an indirect investment by A LTD in C LTD.
„Investment Company‟ means a Company whose principal business is the acquisition of
shares, debentures or other securities‖
DUTIES OF THE AUDITOR UNDER SECITON 186
The only duty of the auditor is to check whether the company complies with the
requirements of Section 186 while granting loans or making investments.
Audit Procedures
3.15
1. Obtain list of loans/guarantee/security/investments made by the company

2. Check whether the company exceeded the limit of 60% or 100% specified in the
section.
3. If the limits exceed, check whether a special resolution is passed at a general
meeting.
4. Check and ensure that the company has not made investments through more
than 2 layers.
5. Check whether the company has disclosed all the details in the financial statements.
6. It may be noted that the aforesaid section is not applicable in respect of any loan
made, any guarantee given or any security provided or any investment made by
banking company or an insurance company or a housing finance company in
the ordinary course of its business, or a company established with the object of and
engaged in the business of financing industrial enterprises, or of providing
infrastructural facilities. However the restriction with regard to the
investment through more than two layers of investment companies would be
applicable for such companies also. The auditor may ensure compliance
accordingly.
Non-compliance may be reported incorporating the following details:
Non-compliance of Section 186 Remarks,

if any
of
at balance sheet
Company/ Party
Balance as
Involved
Amount
S. No.
Name
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
3.16
Paragraph 3(v) - DEPOSITS:

In case the company has accepted deposits, whether the directives issued by the Reserve
Bank of India 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 should be stated; 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?
Explanation
Where the company accepts deposits, the auditor has to verify whether it has complied with
the directives given by Reserve Bank of India as well as the provisions of Section 73 to 76, and
other relevant provisions of the Companies Act, 2013. The company should also comply with
any orders passed by the National Company Law Tribunal/any court or any other tribunal.
Where the company contravenes any of the above provisions, the nature of such
contravention should be mentioned by the auditor in his report.
Paragraph 3(vi) - MAINTENANCE OF COST RECORDS:
Where maintenance of cost records has been specified by the Central
Government under sub-section (1) of section 148 of the Companies Act, whether
such accounts and records have been so made and maintained;
According to section 148(1) of the Companies Act, 2013, the Central Government may
direct a company or companies operating under a specific industry to make and
maintain cost accounting records apart from maintaining financial records. In such a
case, it is an obligation on the part of the company to make and maintain cost accounting
records. – Companies (Cost records and Audit) Rules, 2014.
The Order does not require a detailed examination of the cost records. The auditor
should, therefore, conduct a general review of the cost records to ensure that the
records as prescribed are made and maintained.
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 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.‖
Where maintenance of cost records has not been specified for the company, this clause
will not be applicable and the auditor may report accordingly.
Paragraph 3(vii)(a) - STATUTORY DUES:

UNDISPUTED STATUTORY DUES
Whether the company regular in depositing undisputed statutory dues
including 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
3.17
financial year concerned for a period of more than six months from the date
they became payable, shall be indicated.
Explanation
1. For reporting under this clause, the auditor has to concentrate on the regularity
of deposit of undisputed statutory dues by the company. Every statutory due is not
required to be paid regularly. The dues like GST, PF, ESI etc. are the best examples of
Statutory Dues that are required to be deposited regularly. Similarly, non-payment of
advance income tax/non-deduction of TDS would constitute default in payment of
statutory dues.
2. 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 in his audit report.
3. While the auditor has to report upon the regularity of the deposit, he is not required to
specify in detail each instance where there has been a delay or the extent of the delay.
It should be sufficient if he indicates whether generally the deposits have been regular
or otherwise.
4. The term “any other statutory dues” indicates that this clause covers all types
of dues under various statues which may be applicable to a company having
regard to its nature of business.
5. If the company is not regular, the auditor is required to state the extent of
arrears outstanding as at the last day of the financial year concerned which
remains outstanding for a period of more than six months from the date
they became payable.
Other Points
An obligation to pay a statutory due arises out of the requirements of a statute,
rather than being based on an independent contractual or legal relationship.
Examples of ―statutory dues‖ would include municipal taxes, taxes deducted at source,
land revenue etc.
The following cannot be considered as statutory dues:
1. Electricity Bill – Arises on account of a contract
2. Bonus
3. Dividend Payment. However, dividend declared and not paid to the shareholders
within specified time limit and which is required to be transferred to specified fund
will be considered as a statutory due.
There may be situations in case of Goods and Services tax, where the vendor has not shown
the amount of Goods and services tax paid to him in his statement/return but the company
has appropriate justifications for considering those payments made as input tax credit in the
books of account and consequently adjusted the same in the books of account against its
Goods and services tax liability, same shall be considered as statutory dues paid on due date.
It may be noted that penalty and/or interest levied under the respective laws would be
covered within the term ―amounts payable‖.
Paragraph 3(vii)(b) – DISPUTED STATUTORY DUES
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Where statutory dues referred to in sub-clause (a) 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);
Explanation
1. The auditor should obtain sufficient and appropriate audit evidence to determine
whether the statutory due is question is a disputed amount. Statutory dues are treated
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 example, where the company had not
accepted the demand raised by the Assessing Officer in respect of Income Tax, and
where an application is made to the Commissioner Appeals for rectification of mistake
u/s.154, it can be deemed that the income tax is disputed.
2. Where the dispute relates only to a part and not the whole of amounts, only such
amount should be treated as disputed and the balance amount should be regarded as
undisputed.
3. In case of disputed statutory dues, the clause requires the auditor to report the amount
involved along with the forum before which the disputed is pending.
The information required by this clause may be reported in the following format:
Statement of Disputed Dues
Name Nature of Amount Period to Forum Remarks,
of the the Dues (Rs.) which where if any
Statute The dispute
amount is
relates pending
Paragraph 3(viii) – TRANSACTIONS NOT RECORDED DISCLOSED AS INCOME

Whether any transactions not recorded in the books of account have been
surrendered or disclosed as income during the year in the tax assessments
under the Income Tax Act, 1961 (43 of 1961), if so, whether the previously
unrecorded income has been properly recorded in the books of account during
the year;
Audit Procedures
1. Review all the tax assessments completed during the year under audit.
2. Also review the tax assessments completed subsequent to the balance sheet date
but prior to signing of the auditor‘s report if the surrendered or disclosed income
relates to the year under audit or prior years.
3. Obtain a representation letter from the management that all the assessments
completed during the year have been duly informed to the auditor.
4. Obtain a copy of statement made in the course of search and survey to verify
whether any income which was previously unrecorded is surrendered or disclosed.
Proper recording includes proper disclosure thereof in the financial statements of the
company. The disclosure in the financial statements should be sufficient to enable the
users understand the impact of such transactions.
3.19
5. Where the addition is made by the income tax authorities and the company has
disputed such additions, reporting under this clause is not applicable.
6. Also verify whether the surrendered or disclosed income is required to be classified as
extraordinary items as per the requirements of AS 5.
Paragraph 3(ix)(a) - REPAYMENT OF LOANS:
Whether the company has defaulted in repayment of loans or other borrowings
or in the payment of interest thereon to any lender, if yes, the period and
amount of default to be reported as per the format given below;
Nature of name of Amount whether no. of Remarks,

Borrowing Lender not paid principal days if any
Including on due or delay or
Debt date interest unpaid
securities
Explanation
1. Under this clause, the auditor is required to report whether the company has defaulted
in repayment of loans or other borrowings to any lender. When the company
defaulted in repayment, the auditor is required to mention the period of default as well
as the amount of default. In case of defaults to banks, financial institutions and
Government, the auditor should also provide lender wise details.
2. The term ―dues‖ include principal as well as interest.
3. The word ―default‖ has not been defined. Taking its natural meaning, when the
repayment is not made on the due date (i.e. on the last date specified in loan
documents etc) , it is treated as default.
Paragraph 3(ix)(b) – WILFUL DEFAULTER
Whether the company is a declared wilful defaulter by any bank or financial
institution or other lender;
Under this clause, the auditor is required to report whether the company has been declared
as a wilful defaulter by any bank or financial institution or any other lender.
AUDIT PROCEDURES
1. Enquire the management whether the company has been declared a wilful
defaulter or has been issued a show-cause notice by any bank, financial
institution or government/government authority.
If the company has not been declared a wilful defaulter but has received a
show-cause notice, the auditor may consider disclosing this fact in his
report.
2. When obtaining confirmations of outstanding loans and interest from banks/
financial institutions, include a question whether the company has been
declared a wilful defaulter.
3. Obtain latest CIBIL report of the company and verify whether the company has
been categorised as wilful defaulter.
Paragraph 3(ix)(c) END USE OF TERM LOANS:
3.20
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;
Under this clause the auditor is required to inquire about whether the term loans were
applied for the purposes for which they were obtained.
If not, the auditor is required state in his report the following:
a. Amount of loan so diverted
b. Purpose for which it is used
Paragraph 3(ix)(d) – USE OF SHORT TERM SOURCES FOR MEETING LONG
TERM REQUIREMENTS/APPLICATION OF FUNDS
Whether funds raised on short term basis have been utilised for long term
purposes, if yes, the nature and amount to be indicated;
If funds raised from short term sources are used for long-term purposes, the entity may face
liquidity problems as soon as the short-term sources fall due for payment. Therefore, the
auditor is required to go through the Funds Flow Statement of the company and if the
auditor finds that the quantum of long- term funds of a company is not significantly
different from the long-term application of funds, it is an indication that the long-
term assets of the company are financed from the long- term sources. However, if the
quantum of long-term funds is significantly less than the long-term application
of funds, it is an indication that short-term funds have been used to finance the long-term
assets of the company.
Paragraph 3(ix)(e) – FUNDS TAKEN TO MEET OBLIGATIONS OF
SUB/ASSO./JV
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;
Though the word entity has not been defined, in this regard, the entity will include banks,
financial institutions, company, limited liability partnership, trust, government, or others
irrespective of the legal form.
Funds will include both long term and short-term funds.
Reporting under this clause would normally be required when the company has taken
any funds from any entity or any person during the year and has also granted
loans or advances in the nature of loans to its subsidiaries, associate companies or joint
ventures or has made further investments in such subsidiaries, joint ventures, or
associate companies.
Reporting under this clause will be required for all funds taken during the year even if
these have been repaid before the year end. Further, reporting will be required where
funds were taken in earlier years and were repaid during the year or are outstanding as at the
year end.
The Act or the Order does not define the word ―obligation‖. Therefore, obligation of
subsidiary, joint venture or associate would mean the amounts that such subsidiaries, joint
venture or associate companies are required to pay themselves either to their vendors,
3.21
lenders, employees, or statutory authorities. When a company pays these amounts on
behalf of its subsidiaries, joint ventures or associate companies, the amount so paid is
generally treated as an asset either as loan, advance, or other current/ non-current assets in
the financial statements of the company.
Paragraph 3(ix)(f) – LOAN ON PLEDGE OF SECURITIES IN SUBSIDIARIES
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;
Where the company has raised loans during the year (from any lender) on the pledge of
securities (not restricted to equity shares and cover all types of securities) held in
its subsidiaries, joint ventures or associate companies, the auditor needs to provide the
details of such loans and shall also report whether the company has defaulted in
repayment of such loans raised. The term ―Default‖ will include both repayment of
principal and payment of interest.
Reporting cover all loans taken during the year even if these have been repaid during the
year.
1. Obtain schedule of all loans raised during the year
2. Verify the loan agreements to check the nature of security offered against such
loans.
3. The auditor should obtain and verify the documents related to charges created
including any modification thereof.
Paragraph 3(x)(a) – END USE OF ISSUE PROCEEDS
Whether moneys raised by way of initial public offer or further public offer
(including debt instruments) during the year were applied for the purposes for
which those are raised, if not, the details together with delays or default and
subsequent rectification, if any, as may be applicable, be reported;
Initial public offer or further public offer shall cover:
 Issue of equity shares
 Convertible securities
 Non-convertible debt securities
 Non- convertible redeemable preference shares
 Perpetual debt instruments
 Perpetual non-cumulative preference shares
 Indian depository receipts and
 Securitized debt instruments.
Under this clause the auditor is required to report whether money raised by the company
through Initial Public Offer or Further Public Offer have been utilised for the purposes
for which those were raised.
3.22
Normally, the companies do mention the end-use of the money proposed to be raised
through the Initial Public Offer or Further Public Offer in the offer document. The auditor
should examine such offer document to understand the proposed end use of money
raised from public.
The auditor should verify that the amount of end-use of money disclosed in the financial
statements by the management is not materially different from the proposed and
actual end use.
It may so happen that the moneys raised during the year might not have been applied for the
stated purpose during the year, for example, the moneys were raised at the fag- end of
the year. In such a case, the auditor should mention in his audit report that the moneys
raised during the year have not been utilised because moneys were raised at the fag-end of
the year.
If the company under audit has made temporary investment of the surplus funds pending
utilization of the same for the stated objectives, and have been used subsequently for the
stated objectives, the auditor should mention this fact in his report.
If, for any reason, the auditor is not able to verify the end-use of money raised from Initial
Public Offer or Further Public Offer (including debt instruments), he should state that he is
not able to comment upon the disclosure of end-use of money by the company
since he could not verify the same. He should also mention the reasons which
resulted in the auditor‘s inability to verify the disclosure.
Paragraph 3(x)(b) PREFERENTIAL ALLOTTMENT OR PRIVATE PLACEMENT
OF SHARES:
Whether the company has made any preferential allotment or private
placement of shares or convertible debentures (fully, partially or optionally
convertible) during the year, and if so, whether the requirement of section
42 and 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 the details in respect of the amount involved and
nature of non-compliance;
The term ―private placement" means any offer of securities or invitation to subscribe
securities to a select group of persons who have been identified by the Board by
way of issue of a private placement offer letter.
Provisions of Section 42 in brief
i. A company whether private or public can issue shares on private placement
basis [Section 42(1)].
ii. The offer of securities or invitation to subscribe securities shall be made to such
number of persons not exceeding 50 (or to such number of persons
specified) in a financial year excluding securities issued to Qualified
Institutional Buyer (QIB) and employees under stock option scheme. .
[Section 42(2)]
iii. If a company makes an offer to more than the prescribed number of persons, the
same shall be deemed to be an offer to the public. [Section 42(3)]
3.23
iv. All monies payable towards subscription of securities under this section shall be
paid through cheque or demand draft or other banking channels but not by
cash. [Section 42(4)]
v. If a company makes an offer to more than the prescribed number of persons, the
same shall be deemed to be an offer to the public.
vi. A company making an offer or invitation under this section shall allot its
securities within sixty days from the date of receipt of the application
money for such securities and if the company is not able to allot the securities
within that period, it shall repay the application money to the subscribers
within fifteen days from the date of completion of sixty days and if the
company fails to repay the application money within the aforesaid period, it shall
be liable to repay that money with interest at the rate of twelve per cent per
annum from the expiry of the sixtieth day:
vii. Provided that monies received on application under this section shall be kept in
a separate bank account in a scheduled bank and shall not be utilised for any
purpose other than--
(a) for adjustment against allotment of securities; or
(b) for the repayment of monies where the company is unable to allot securities
Paragraph 3(xi) FRAUD:
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.
This clause requires the auditor to report whether any fraud has been noticed or reported
either on the company or by the company during the year. The auditor‟s responsibility
in this clause is not limited to frauds by the officers or employees of the
company.
If yes, the auditor is required to state the amount involved and the nature of the
fraud. The clause does not require the auditor to discover such frauds. The scope
of auditor‘s inquiry under this clause is restricted to frauds ―noticed or reported‖. This
indicates that management of the company should have knowledge about the frauds.
However, the auditor is not relived of his responsibility to follow SA 240. The
following are the audit procedures that can be followed by the auditor in this regard.
a. Examine Internal Auditor‟s Report, if any.
b. Examine the minutes of the audit committee to ascertain the instances of fraud
and the action taken.
c. Enquire the management about frauds that it has noticed or that have been
reported to it.
d. Obtain written representations from management.
Where the auditor identified any fraud and reported upon by him under Section
143(12) of the Companies Act, 2013, the same shall also be reported by the auditor
under this clause. However, it should be noted that the frauds suspected by the
auditor need not be reported under this clause.
3.24
The following is an example of reporting under this clause:
―We have been informed that the accountant of the company had misappropriated funds
amounting to rupees ten lakhs during the preceding year and the year under audit.
Investigations are in progress and the accountant has been dismissed and arrested. The
company has withheld his terminal benefits and it is estimated that the amount
misappropriated may not exceed the terminal benefits due to the accountant. The company is
also adequately covered by fidelity insurance cover.‖
Paragraph 3(xi)(b) – ADT - 4
Whether any report under sub-section (12) of section 143 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;
The auditor should consider whether any fraud has been reported by him during the year
and up to the date of issuance of auditor‘s report under section 143(12) of the Act and if so,
the same needs to be reported under this clause.
The reporting requirement under this clause would also apply to situations where during
the year the predecessor auditor of the company has reported under section 143(12)
before the appointment of the successor auditor.
The auditor should also consider whether cost auditor or secretarial auditor has filed
any report under section 143(12) of the Act in Form ADT-4 and accordingly the fact shall be
reported.
Paragraph 3(xi)(c) – WHISTLE BLOWER COMPLAINTS
Whether the auditor has considered whistle-blower complaints, if any, received
during the year by the company;
When the LODR Regulations were made applicable to the company under audit, it is
an obligation on the part of the company to establish a mechanism called as
vigil/whistle blower mechanism. This enables directors, employees or any other
person, to freely communicate their concerns about illegal or unethical practices.
Section 177(9) of the Companies Act requires the following classes of companies to
establish a vigil mechanism for their directors and employees to report their genuine
concerns or grievances.
1. Every Listed Company
2. Companies which accepts deposits from public
3. Companies which have borrowed money from Banks and FI in excess of Rs.50 crores.
Apart from the above requirements, some companies may establish the said mechanism
voluntarily.
The auditor shall review the minutes of audit committee and board meetings to
identify whistle blower complaints, if any.
NIDHI COMPANY:
a. Whether the Nidhi Company has complied with the Net Owned Funds to Deposits
in the ratio of 1:20 to meet out the liability;
3.25
b. Whether the Nidhi Company is maintaining ten per cent unencumbered term
deposits as specified in the Nidhi Rules, 2014 to meet out the liability;
c. Whether there has been any default in payment of interest on deposits or repayment
thereof for any period and if so, the details thereof;
Section 406(1) of the Companies Act, 2013, ―Nidhi‖ means a company which has been
incorporated as a Nidhi with the objective of cultivating the habit of thrift and savings
amongst its members, receiving deposits from, or 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.
A Nidhi company can accept deposits not exceeding 20 times of its net owned funds as per
last audited balance sheet.
The unencumbered term deposits are required to be made in a scheduled commercial bank
(other than a co-operative bank or a regional rural bank) or post office deposits in
its own name.
―Net Owned Funds‖ means aggregate of paid up equity share capital and free
reserves as reduced by accumulated losses and intangible assets appearing in the last audited
balance sheet.
Paragraph 3(xiii) RELATED PARTIES AND RELATED PARTY TRANSACTIONS:
Whether all transactions with the related parties are in compliance with
sections 177 and 188 of Companies Act, 2013 where applicable and the details
have been disclosed in the Financial Statements etc., as required by the
applicable accounting standards;
Provisions of Section 188 in brief
Section 188 is applicable to all classes of companies. This section envisages the approval of
BOD and/or the approval of the shareholders as the case may be, when the company
wants to enter into any contract or arrangement with related parties.
Related Party Limits of Transactions exceeding which

Transactions u/s 188 approval from the shareholders is
which requires prior required
approval of the Board
of Directors
Sale, purchase, or supply 10% or more of the turnover of the Company
of any goods or material,
directly or through the
appointment of any
agent*
Selling or otherwise 10% or more of the Net Worth of the
disposing of or buying Company
property of any kind,
directly or through the
appointment of agent*
Leasing of property of any 10% or more of the turnover of the Company
3.26
kind*
Availing or rendering of 10% or more of the turnover of the Company
any services, directly or
through the appointment
of agent*
Such related party‘s at a monthly remuneration exceeding Rs.
appointment to any office 2,50,000/-
or place of profit in the
Company, its subsidiary
or associate Company
Underwriting the 1% of the net worth
subscription of any of the Company
securities or derivatives
thereof, of the company
All the above limits are to be taken on all transactions are done on a financial year basis.
However:
 Approval of shareholders by way of resolution is not required for transactions
entered into between a holding company and its wholly owned subsidiary whose
accounts are consolidated with such holding company and placed before the
shareholders at the general meeting for approval.
 Approval of the Board of Directors and shareholders is not required in
respect of related party transactions entered into by the company in its ordinary
course of business and on an arm‟s length basis. Explanation (b) to section 188(1)
of the Act defines ‗arm‘s length transaction‘ to mean a transaction between two related
parties that is conducted as if they were unrelated, so that there is no conflict of
interest.
Suppose company A Ltd. sells a product in the market for Rs. 400 per unit and it also
sells the same to its associate company B Ltd. for Rs. 400 per unit and on the same
terms of contract as with other parties. Here, the price charged from the associate
company and others is the same and the transaction between A Ltd. and B Ltd. is
governed by market forces and, therefore, is on arm‘s length basis.
―Related party‖, with reference to a company, means—
(i) a director or his relative;
(ii) a key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager is a member or director;
(v) a public company in which a director or manager is a director or holds along with his
relatives, more than two per cent. of its paid-up share capital;
(vi) any body corporate whose Board of Directors, managing director or manager is
accustomed to act in accordance with the advice, directions or instructions of a director or
manager;
(vii) any person on whose advice, directions or instructions a director or manager is
accustomed to act:
3.27
(viii) any body corporate which is –
 a holding, subsidiary or an associate company of such company;
 a subsidiary of a holding company to which it is also a subsidiary; or
 an investing company or the venturer of a company.
The transactions which are covered by section 188 of the Act are:
 Sale, purchase or supply of any goods or materials;
 Selling or otherwise disposing of, or buying, property of any kind;
 Leasing of property of any kind;
 Availing or rendering of any services;
 Appointment of any agent for purchase or sale of goods, materials, services or
property;
 Such related party's appointment to any office or place of profit in the company, its
subsidiary company or associate company; and
 Underwriting the subscription of any securities or derivatives thereof, of the company.
 A body corporate (foreign company) which is a holding /subsidiary/associate/fellow
subsidiary of an Indian company will be treated as a related party.
According to Section 177 of the Companies Act, the audit committee is responsible to
approve any transaction proposed to be entered by the company with related parties.
However, Companies Amendment Act, 2017 clarifies that Related Party
Transactions between a holding company and its subsidiaries will not require
the approval of the audit committee.
00
Paragraph 3(xiv)(a) – INTERNAL AUDIT SYSTEM
Whether the company has an internal audit system commensurate with the size
and nature of its business;
Section 138 of the Companies Act, 2013 made it mandatory on the part of certain types of
companies to have an internal audit system.
This clause requires the auditor to comment whether the company has an internal audit
system commensurate with the size and nature of its business. In this regard, the
auditor should evaluate the following:
The size of the internal audit department
The adequacy or other wise of the size of internal audit department depends on factors like:
 Nature of business of the company
 Number of operating locations
 Extent to which internal controls are decentralized
 Qualification of the person who undertake internal audit work
 To whom the internal auditor reports. In general, the higher the level to
which the internal auditor reports, the greater would be the independence of the
internal auditor.
In respect of companies which are excluded from the ambit of internal audit under
section 138 of the Act, the auditor would still be well-advised to make inquiries
3.28
0regarding the existence of internal audit system and to report the fact under this
clause.
A company may either have its own internal audit department or entrust the work of
internal audit to an external agency.
If the auditor determines that the internal audit system is not commensurate with the size
and nature of business of a company that is required to have internal audit, then the auditor
should communicate with the Audit Committee/Board and seek their inputs as part of
―Communication to Those Charged with Governance‖ as required under Standards on
Auditing and shall accordingly report the fact under this clause.
Paragraph 3(xiv)(b) – CONSIDERATION OF INTERNAL AUDIT REPORTS
Whether the reports of the Internal Auditors for the period under audit were
considered by the statutory auditor;
For reporting under this clause, normally, the statutory auditor shall review the internal
audit reports to evaluate the system of internal controls operated in the company.
Where the auditor considers the work done by the internal auditor for his audit purposes,
compliance with SA 610(Revised), ―Using the Work of Internal Auditors‖, is mandatory for
the statutory auditor.
The statutory auditor as a part of his audit procedures should ensure that all internal audit
observations having a financial impact are considered by the management and also
control deficiencies pointed out by the internal auditors are rectified.
The statutory auditor should also assess the impact of the control deficiencies, if any
pointed by the internal auditors, while framing his report on the internal financial
controls over financial reporting (IFCoFR) under clause (i) of sub- section 3 of section
143 of the Companies Act, 2013.
Paragraph 3(xv) - NON-CASH TRANSACTIONS:
Whether the company has entered into any non-cash transactions with
directors or persons connected with him and if so, whether the provisions of
section 192 of Companies Act, 2013 have been complied with;
According to Section 192 of the Companies Act, a company shall not enter into an
arrangement with—
 its director or its holding, subsidiary or associate company or a person
connected with him for acquisition of assets for consideration other than
cash, from the company; or
 the company acquires or is to acquire assets for consideration other than cash, from
such director or person so connected.
The section prohibits the company from entering into the above said types of arrangements
unless prior approval of the members for such arrangement is accorded by passing a
resolution in a general meeting.
In case the concerned director or the person connected therewith, is also a director of its
holding company, a similar approval should have been obtained by the holding company
through a resolution at its general meeting.
3.29
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 this clause requires the auditor to report whether the provisions of
section 192 of the Act have been complied with.
In other words, such transactions involving change in the assets or liabilities of a
company but not involving “cash” or cash equivalents” as defined under AS 3, ―Cash
Flow Statement‖ or as defined under Ind AS 7, ―Cash Flow Statement (as may be applicable),
may be construed as non-cash transactions.
There may be a situation where the acquisition of the asset takes place in one year and
the corresponding liability is created in the financial statements, however, the
corresponding settlement is made in the following year. The said transaction will not
be considered as non-cash transaction. Further, mergers under Court schemes
would be entered into subject to requisite approvals of Court etc. and would not be
considered non-cash transactions.
AUDIT PROCEDURES
1. Obtain written representations from management as to whether the company has
entered into any non-cash transactions. The auditor should corroborate the
representations with requisite books and other related records.
2. If the company enters into any such arrangement, check whether the requirements of
section 192 have been complied with by it.
Paragraph 3(xvi)(a) - REGISTRATION BY NBFC:
Whether the company is required to be registered under section 45-IA of the
Reserve Bank of India Act, 1934 and if so, whether the registration has been
obtained.
According to Section 45-IA of RBI Act, a non-banking financial company shall carry its
business only after obtaining a Certificate of Registration (COR) from RBI. Hence, if the
company under audit is a NBFC, it is the duty of the auditor to verify and ensure that it has
obtained a certificate of registration from RBI.
Paragraph 3(xvi)(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;
This clause is an extension of the above clause and requires reporting on whether the
company is carrying on Non-Banking Financial or Housing Finance activities without a valid
Certificate of Registration from the Reserve Bank of India.
The registering authority for Housing Finance companies has been National Housing Bank.
However, based on the amendments made to the Housing Finance Bank Act, 1987
through the Finance (No.2) Act, 2019 such registration in future is to be done by RBI.
In the event the company has conducted such activities without holding a valid
certificate of registration, the auditor shall report the same under this clause along
with reasons, if any, for not obtaining registration.
3.30
Paragraph 3(xvi)(c) - CIC
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
fulfill the criteria of a CIC, and in case the company is an exempted or
unregistered CIC, whether it continues to fulfill such criteria;
A non-banking financial company carrying on the business of acquisition of shares and
securities and which satisfies the following conditions as on the date of the last audited
balance sheet shall be called as a Core Investment Company (CIC):-
 It holds not less than 90% of its net assets in the form of investment in equity
shares, preference shares, bonds, debentures, debt or loans in group companies;
 Its investments in the equity shares (including instruments compulsorily
convertible into equity shares within a period not exceeding 10 years from the date of
issue) in group companies constitute not less than 60% of its net assets.
 It does not trade in its investments in shares, bonds, debentures, debt or loans in
group companies except through block sale for the purpose of dilution or
disinvestment;
 It does not carry on any other financial activity referred to in Section 45I(c) and 45I(f)
of the Reserve Bank of India Act, 1934 except investment in:
o bank deposits,
o money market instruments, including money market mutual funds and liquid
mutual funds
o government securities, and
o bonds or debentures issued by group companies,
o granting of loans to group companies and
o issuing guarantees on behalf of group companies.
Core Investment companies having total assets of not less than Rs.100 Crores either
individually or in aggregate along with other CICs in the Group and which raises or holds
public funds are categorized as Systematically Important Core Investment
Company (CIC-ND-SI).
All CIC-ND-SI are required to apply to RBI for grant of certificate of registration within a
period of three months from the date of becoming a CIC-ND-SI.
Companies which fall under the definition of Core Investment Company but do not have
asset size of more than Rs.100 Crores and Core Investment Companies that do not have
access to public funds are exempted from registration requirement with RBI. However, these
CICs exempted from registration with the RBI shall pass a Board Resolution that it will not,
in the future, access public funds.
The auditor should report under this clause incorporating the following details:
Whether the company is a Core Investment Company as defined in the regulations made by
Reserve Bank of India.
If the answer is affirmative, report the following:
 If the company is exempted from registration whether the company continues to
meet the criteria for non- registration; if not reasons thereof.
3.31
 If the company is required to be registered and it is not registered or has not
applied for registration the fact shall be reported along with the reasons for non-
registration.
Paragraph 3(xvi)(d) – NUMBER OF CORE INVESTRMENT COMPANYS IN
GROUP
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;
―Companies in the Group‖ is defined in the Core Investment Companies (Reserve Bank)
Directions as follows:
―Companies in the Group‖ means an arrangement involving two or more entities related to
each other through any of the following relationships, viz.
1. Subsidiary – parent (defined in terms of AS 21),
2. Joint venture (defined in terms of AS 27)
3. Associate (defined in terms of AS 23)
4. Promoter-promotee for listed companies,
5. a related party (defined in terms of AS 18) etc.
 The auditor should obtain the list of Companies in the group as defined in Core
Investment Companies (Reserve Bank) Directions 2016.
 The auditor shall obtain a written representation from management about the CICs in
the group (including CICs exempt from registration and CICs not registered) and
completeness thereof. To the extent possible, the auditor shall corroborate this with
the list of registered CICs in the RBI Website.
 If the group has no CIC or not more than one CIC, the auditor shall report this fact.
 If the group has more than one CIC (including CICs exempt from registration and
CICs not registered), the auditor shall report the number of CICs in the Group.
Paragraph 3(xvii) – CASH LOSS
Whether the Company has incurred cash losses in the financial year and in the
immediately preceding financial year, if so, state the amount of cash losses;
This clause is applicable to all companies.
This clause requires the auditor to report:
 Whether the company has incurred cash losses during the period covered by the
audit report and in the immediately preceding financial year.
 If so, the auditor is required to report amount of cash losses for the period
covered under audit and immediately preceding financial year.
The term “cash losses” is not defined in the Act and the accounting standards/Indian
accounting standards.
3.32
The figure of cash losses is not readily available from the financial statements of the
company. Accordingly, for the purpose of reporting under this clause, the auditor would
need to determine the figure of cash losses for the period covered by the audit report and
for the financial year immediately preceding the period covered by the audit report.
To ascertain the cash losses, the figure of net profit/loss after taxes (PLAT) is adjusted
for the effects of transactions of non-cash nature such as depreciation, amortization and
impairment loss etc.
Further, a situation may be there where the company has suffered cash losses in only
one of the years referred to in this clause. In such a situation, the auditor is well advised
to comment on the two years se
parately.
Paragraph 3(xviii) – RESIGNATION BY STATUTORY AUDITORS
Whether there has been any resignation of the statutory auditors during the
year, if so, whether the auditor has taken into consideration the issues,
objections or concerns raised by the outgoing auditors;
Under this clause the auditor is required to report whether he has considered the issues,
objections or concerns raised by the outgoing auditors who had resigned from the
office of the auditor during the year under audit.
In other words, this clause is applicable when the existing auditor has been
appointed to fill the casual vacancy arising out of the resignation of the previous
auditor [Sec. 140(2)]
As per Section 140(2) of the Companies Act, 2013, where an auditor of a company resigns
from his office, he is required to file a statement in Form ADT -3 (called as Notice of
Resignation) with concerned ROC with in a period of 30 days from the date of his
resignation. In such a form, the auditor shall state the reasons and other facts with regard to
his resignation. While mentioning the reasons for his resignation, the auditor shall not
provide general reasons such as pre- occupation or personal reasons or administrative
reasons or health reasons or mutual consent or unavoidable reasons.
The “Implementation Guide on Resignation/ Withdrawal from an Engagement to
Perform Audit of Financial Statements‖ issued by ICAI specifies that the letter of
resignation shall include:
(a) If the withdrawal or resignation results from an inability to obtain sufficient
appropriate audit evidence, the reasons for that inability;
(b) The possible effects on the financial statements of undetected misstatements, if
any, could be both material and pervasive;
(c) The fact that circumstances leading to withdrawal or resignation from the
engagement were communicated to an appropriate level of the management, and
where appropriate, to those charged with governance;
(d) The response from the management or those charged with governance on the
written communication made by the auditor. If response is not received, state the fact.
(e) Prior to resignation, the last audit/ limited review report issued by the auditor.
Clause 8 of Part I of First Schedule to the Chartered Accountants Act made it mandatory on
the part of the incoming auditor to communicate with the outgoing in writing
3.33
prior to acceptance of the audit. This communication with the previous auditor helps
the incoming auditor to ascertain about the existence of any professional reasons for
which he cannot accept the appointment. This communication helps the incoming
auditor to safeguard his own interest, the legitimate interest of the public and the
independence of the existing accountant.
The incoming auditor should comply with the provisions of ICAI Code of ethics,
abovementioned Implementation Guide and requirements of the Companies Act,
2013.
The Incoming auditor should:
1. Obtain a copy of letter of resignation and copy of Form ADT 3.
2. Consider the reasons for resignation
Paragraph 3(xix) – MATERIAL UNCERTAINTY
On the basis of the financial ratios, ageing and expected dates of realisation of
financial assets and payment of financial liabilities, other information
accompanying the financial statements, the auditor‟s knowledge of the Board of
Directors and management plans, whether the auditor is of the opinion that no
material uncertainty exists as on the date of the audit report that company is
capable of meeting its liabilities existing at the date of balance sheet as and
when they fall due within a period of one year from the balance sheet date;
Paragraph 3(xx)(a) - UNSPENT CSR FUNDS IN RESPECT OF OTHER THAN
ONGOING PROJECT
Whether, in respect of other than ongoing projects, the company has
transferred unspent amount to a Fund specified in Schedule VII to the
Companies Act within a period of six months of the expiry of the financial year
in compliance with second proviso to sub-section (5) of section 135 of the said
Act;
This clause requires the auditor to comment whether the company has transferred the
unspent amount, in respect of “other than ongoing projects”, to a fund specified
in Schedule VII to the Companies Act 2013 within a period of six months of the expiry
of the financial year in compliance with the second proviso to sub-section (5) of section
135 of the said Act.
The auditor shall check whether the company has recorded a provision as at the balance
sheet date, to the extent considered necessary in accordance with the provisions of AS 29/
Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, in respect of the
unspent amount.
Paragraph 3(xx)(b) – UNSPENT CSR FUNDS IN RESPECT OF ONGOING
PROJECT
Whether any amount remaining unspent under section (5) of section 135 of
Companies Act, pursuant to any ongoing project, has been transferred to special
account in compliance with provision of sub section (6) of section 135 of the said
Act;
This clause requires the auditor to comment whether the company has transferred the
unspent amount in respect of any “ongoing projects”, to a special account within a
3.34
period of thirty days from the end of the financial year in compliance with the
provision of sub-section (6) of section 135 of the Act.
The auditor shall check whether the company has recorded a provision as at the balance
sheet date, to the extent considered necessary in accordance with the provisions of AS 29/
Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, in respect of the
unspent amount on ongoing projects.
Paragraph 3(xxi) – QUALIFICATION/ADVERSE REMARKS RELATING TO
CARO IN AUDITOR‟S REPORT OF COMPONENTS
Whether there have been any qualifications or adverse remarks by the
respective auditors in the Companies (Auditor‟s Report) Order (CARO) reports
of the companies included in the consolidated financial statements, if yes,
indicate the details of the companies and the paragraph numbers of the CARO
report containing the qualifications or adverse remarks.
This clause requires the auditor to comment whether there have been any qualifications or
adverse remarks by the respective auditors (“component auditors”) in the Companies
(Auditor‘s Report) Order (CARO) reports of the companies included in the consolidated
financial statements. This clause further requires the auditor to provide the details of the
companies and the paragraph numbers of the respective CARO report containing the
qualifications or adverse remarks. Reporting under this clause is only required for those
entities included in the consolidated financial statements to whom CARO 2020 is applicable
The term qualification/adverse remark used in this clause does not mean a
qualification/adverse opinion as per principles enunciated in SA 705(Revised),
―Modifications to the Opinion in the Independent Auditor‘s Report‖.
There may be situations where the component auditor has reported on the financial
statements of the component to the principal auditor but has not issued his statutory
audit report by the date of the principal auditor‟s audit report. This may happen
because unlisted companies in the group may have time till six months from the year end to
conduct their annual general meeting and hence their statutory audit report/CARO report
may be finalised later than the principal auditor‘s report. In such situations, the principal
auditor should clearly mention while reporting on this clause, the name of the
component and the fact that CARO report of that component has not been issued
by its auditor till the date of principal auditor‟s report.
As mentioned earlier, the concept of materiality is relevant when reporting under CARO.
However, if a qualification/adverse remark is given by any individual component, there is a
presumption that the item is material to the component. Hence when reporting under clause
3(xxi), the auditor is not required to reevaluate the materiality from a consolidation
perspective. Hence every qualification/adverse remark made by every individual component
including the parent should be included while reporting under clause 3(xxi).
Reasons to be stated for unfavourable or qualified answers

(1) Where, in the auditor's report, the answer to any of the questions referred to in paragraph
3 is unfavourable or qualified, the auditor's report shall also state the reasons for such
unfavourable or qualified answer, as the case may be.
(2) Where the auditor is unable to express any opinion in answer to a particular question, his
report shall indicate such fact together with the reasons why it is not possible for him to give
an answer to such question.
3.35
PRACTICAL QUESTIONS ON CARO

1. BK Ltd, a Benefit Fund, registered under NBFC Regulations, is in existence
for the past two decades. On 31st December 2015, this Company is converted
into a Bank. You have been appointed as an Auditor for the Financial Year
2015–2016. Comment whether CARO is applicable for this Company.
Banking Companies are exempted from CARO Reporting Requirements. As on the date of
Balance Sheet, the Company is a Banking Company. Hence, CARO is not applicable,
irrespective of the fact that the Company was converted from NBFC during the year.
2. S Pvt Ltd is the Holding Company of P Ltd. The Paid Up Capital and Reserves
are Rs. 30 Lakhs. The Borrowings from SBI is Rs.60 Lakhs. Total Revenue
from Operations (including from Discontinuing Operations) are Rs. 8 Crores.
The Auditors of S Pvt Ltd is of the view that CARO is not applicable since it is
a Private Limited Company satisfying the condition relating to Paid up Capital,
Borrowings and Total Revenue. Is their contention valid?
Whether CARO reporting is applicable for reporting on Consolidated Financial
Statements?
In this case, S Pvt Ltd is the Holding Company of P Ltd, a Public Company. Hence, CARO is
applicable for S Pvt Ltd. This is because, to exempt a private company from the requirements
of CARO, such a company is required to comply with all the four conditions that were
specified in the Act, where as in this case the company violated condition no.1.
CARO 2016 Reporting shall not apply to the Auditor‘s Report on Consolidated Financial
Statements.
3. M Pvt. Ltd provides the following information for the Financial Year 2015–
2016. Comment whether CARO is applicable for this Company:
(a) Paid–up Share Capital and Reserves – Rs.100 Lakhs,
(b) Borrowings from Banks – Rs.98 Lakhs,
(c)Total Revenue – Rs.12 Crores
To exempt a private company from the requirements of CARO, such a company is required to
comply with all the four conditions that were specified in the Act, where as in this case the
company violated condition relating to total revenue and hence CARO is applicable in this
case.
Guru Pvt Ltd has 2 Branches – in Chennai and in Mumbai. Each Branch has a separate
Statutory Auditor and the Company, as a whole, has a Central Statutory Auditor. Comment
which
Detailsof these Auditors must comply with CARO.
Chennai Branch Mumbai Branch Total
Paid up Capital and Reserves (in Lakhs) 40 70 110
Borrowings from Banks (in Lakhs) 10 26 36
Total Revenue (in Crores) 3 6 9
The conditions to be satisfied from being exempt from CARO shall be considered for the
company as a whole. So, if CARO is applicable to the Company as a whole, then each and
every Branch of the Company will also be automatically covered under CARO (irrespective of
the fact that the Branch‘s transactions are within the limits).
3.36
The Branch Auditor has the same reporting responsibilities in respect of the
Branch, as those of the Company Auditor in respect of the Company. The
comments of the Branch Auditor in respect of the Branch are dealt with by the Central
Statutory Auditor of the Company while finalizing his report under CARO.
In instant case, the Company has a Paid up Capital and Reserves of Rs. 110 Lakhs, which
exceeds the exemption limit of Rs.100 Lakhs / 1 Crore. Therefore, CARO is applicable for the
Company.
So, in this case, all the 3 Auditors. (2 Branch Auditors + Central Statutory, Auditor) must
comply with CARO.
5. Vayu Pvt Ltd has a Turnover of 8 Crores for the Financial Year 2015–2016.
The Outstanding Balance of Loans from Banks and Financial Institutions is 24
Lakhs throughout the year. The Company had a Capital of 120 Lakhs at the
beginning of the year and on 15.09.2015 the Company made a Buy Back of
Shares worth 30 Lakhs resulting in a Share Capital of 90 Lakhs as on 31st
March 2016. Comment whether CARO is applicable for the Company
Condition Analysis
(a) Not a Holding or Subsidiary of a Public Company Assumed satisfied
(b) Paid up Capital and R&S on B/s date ≤ 1 Crore Satisfied, since the condition is with
respect to B/s date. Net Amount 90
Lakhs is ≤ 1 Crore.
(c) Bank /FI Borrowings at any time, ≤ 1 Crore Satisfied, since 24 Lakhs ≤ 1 Crore.
(d) Total Revenue ≤ 10 Crores Satisfied, since 8 Crores ≤ 10 Crores.
Since all 4 conditions are satisfied, CARO is not applicable in this case.
6. ABC Pvt. Ltd has a balance of 30 Lakhs as Capital Reserve, 30 Lakhs as
Revenue Reserves, 40 Lakhs as Revaluation Reserve and 20 Lakhs as Paid–
Up Share Capital as on 31st March. Comment on the applicability of CARO to
the Company.
The term “Reserves” includes all types of Reserves (Capital Reserves, Revenue Reserves,
Revaluation Reserve, etc)
Here, Paid–Up Capital + Reserves = 20 Lakhs (Paid–Up Capital) + 100 Lakhs (Capital
Reserve + Revenue Reserve + Revaluation Reserve) = 120 Lakhs. Hence, CARO is applicable
for this Company.
7. Mahath Pvt Ltd provides the following information for the financial year
ending 31st March. Comment whether CARO is applicable for this Company.
(amounts in Lakhs)
Paid Up Share Capital 70.00
Capital Reserve 14.00
Revaluation Reserve 20.00
General Reserve 20.00
Profit and Loss (Dr.) 24 .00
As per Schedule III Requirements, Debit balance of P&L A/c, should be reduced from the
figure of Reserves.
3.37
In the present case,
Paid–Up Capital = 70 Lakhs
Reserves = 14 + 20 + 20 = 54 Lakhs
Less: P&L (Dr) = 24 Lakhs = 30 Lakhs
Paid Up Capital + Reserves = 100 Lakhs
Since Aggregate of Paid Up Capital and Reserves does not exceed 1 Crore, CARO is not
applicable for this Company assuming that all other 3 conditions of exemption are satisified.)
8. H Private Ltd had taken Overdrafts from SBI & HSBC with a limit of 40 Lakhs
each against the security of Fixed Deposit it had with those Banks and an
Unsecured Overdraft from a Financial Institution of 29 Lakhs. The said
loans were outstanding as at 31st March. The Paid Up Capital and Reserves of
the Company as at that date was 80 Lakhs and its Total Revenue during the
financial year ended on 31st March was 6 Crores. The Management of the
Company is of the opinion that CARO is not applicable to it because Total
Revenue and Paid–Up Capital were within the limits prescribed and
Borrowings against the Fixed Deposit cannot be considered. The Company
further contended that Borrowings Limit is to be reckoned per Bank or
Financial Institution and not cumulatively. Comment.
The term ―Borrowings ‘‘ include Total Borrowings from all the banks and financial
institutions cumulatively and it should also include borrowings against the Fixed Deposit.
Moreover, the outstanding balance shall not be netted off against the amount of Fixed
Deposit.
Total Borrowings in this case = 40 + 40 + 29 = 109 Lakhs = 1.09 Crores.
Since Borrowings is equal to greater than 1 Crore, CARO Reporting is applicable to the
Company.
9. In the current financial year, AP Pvt. Ltd has borrowed 1.20 Crore on 15th
June and repaid the entire loan before 31st March. Comment on the
applicability of CARO to this Company.
For the purpose of applicability of CARO, Balance Outstanding from a Bank or Financial
Institution, shall be construed at any point of time, during the year and not as at the end of
the year (i.e. 31st of March).
Where the Company had Borrowings from a Bank in excess of ` 1 Crore during the year, but
the year–end balance of the same is NIL, the Company would be still covered by CARO,
notwithstanding that it fulfills all other conditions for exemption from the Order. In the
present case, AP Pvt Ltd will be covered under CARO.
10. Anand Pvt Ltd is incorporated on 1st July 2015. During the year ended 31st
March 2016, it had issued Shares (fully paid up) of ` 80 Lakhs, had borrowed `
25 Lakhs each from 2 Financial Institutions and its Total Revenue (Net of
Excise of ` 50 Lakhs which is credited to a separate account) is ` 975 Lakhs.
Will CARO be applicable to Anand Pvt Ltd?
Condition Analysis
(a) Not a Holding/Sub. Assumed satisfied.
(b) (b)
PUCofand
a Public Company
R&S on B/s date ≤ 1 Crore Satisfied, since 80 Lakhs ≤ 1 Crore.
3.38
(c) Bank / FI Borrowings at any time, ≤ 1 Satisfied, since 25×2= 50 Lakhs ≤ 1 Crore.
Crore
If Excise Duty is taken / credited to a
(d) Total Revenue ≤ 10 Crores separate account, it shall not form part of the
Total Revenue. So, Total Revenue for this Co.
= ` 9.75 Crores, i.e. ≤ ` 10 Crores.
CARO does not apply to Anand Pvt. Ltd, since all the conditions relating to exemption are
satisfied.
11. Tarun Pvt Ltd‟s Paid Up Capital and Reserves are less than 100 Lakhs
and it has no Borrowings from any Bank or Financial Institution. Its Sales
are 12 Crores before deducting Trade Discount 20 Lakhs and Sales Returns
190 Lakhs. The services rendered by the Company amounted to 20 Lakhs.
Comment on applicability of CARO to this Company
Principles: Total Revenue = [Sales 12 Crores (–) Trade Discount 20 Lakhs (–) Returns 190
Lakhs] + Services Income 20 Lakhs = Net 10.10 Crores
Analysis:
Condition Analysis
(a) Not a Holding or Subsidiary of a Public Co Assumed satisfied.
(b) Paid up Capital and R&S on B/s date ≤ 1 Cr Satisfied, since it is given as ≤ 1 Crore.
(c) Bank / FI Borrw. at any time, ≤ 1 Cr Satisfied, since there are no Borrowings.
(d) Total Revenue ≤ 10 Crores Not satisfied, Since Tot Revenue > 10 Cr.
CARO applies to Tarun Pvt Ltd, since the Total Revenue exceeds 10 Crores.
3.39

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ADVANCED AUDITING & PROFESSIONAL ETHICS CA C.V.SARMA, M.Com.

NON-APPLICABILITY - COMPANIES NOT COVERED BY THE ORDER

Description Gross Carrying Held in Whether Period held Reason for

DUTIES OF THE AUDITOR

This clause is not applicable to those companies whose principal business is to

b) whether the investments made, guarantees provided, security given and

Terms and conditions would primarily include:

Name of Amount Due date Extent of Remarks, if

No. of Principal Interest Total Remarks (if

This clause is inserted to identify instances of ‗evergreening‘ of loans/advances in nature of

Name of Aggregate amount of Percentage* of the

All Promoters Related

Paragraph 3(iv) – SEC. 185 & 186

1. Obtain list of loans/guarantee/security/investments made by the company

Non-compliance of Section 186 Remarks,

Paragraph 3(v) - DEPOSITS:

Paragraph 3(vii)(a) - STATUTORY DUES:

Paragraph 3(viii) – TRANSACTIONS NOT RECORDED DISCLOSED AS INCOME

Nature of name of Amount whether no. of Remarks,

Related Party Limits of Transactions exceeding which

Reasons to be stated for unfavourable or qualified answers

PRACTICAL QUESTIONS ON CARO

(d) Total Revenue ≤ 10 Crores Satisfied, since 8 Crores ≤ 10 Crores.

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