MEPL CLASSES

CA – CMA INTER
AUDIT AND ASSURANCE
CARO 2020
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Main Centre- 59 Jatindra Mohan Avenue Shobhabazar Kolkata-700005
(TIME – 90 MINUTES) (MARKS – 40 MARKS)

1. Discuss which class of companies are specifically exempt from the applicability of CARO
(5 MARKS)

Answer to Question 1
CARO, 2020 shall apply to every company including a foreign company as defined in Sec.
2(42) of
the Companies Act, 2013, except:
(i) a banking company;

(ii) an insurance company;

(iii) a company licensed to operate u/s 8 of the Companies Act;

(iv) a One-Person Company as defined in Sec. 2(62) of the Companies Act and a Small
Company as defined in Sec. 2(85) of the Companies Act; and

(v) a private limited company, not being a subsidiary or holding of a public company,

• having a Paid-up capital & Reserves & Surplus not more than ₹ 1 Cr. as on the balance
sheet date, and

• which does not have total borrowings exceeding ₹ 1 Cr. from any bank or financial
institution at any point of time during the financial year, and

• which does not have a total revenue as disclosed in Schedule III to the Companies Act,
2013 (including revenue from discontinuing operations) exceeding ₹ 10 Cr. during the
financial year as per the financial statements.

Provisions of CARO are equally applicable in case of branches also, because under sec.
143(8), a branch auditor has same duties as of company auditor.
A company if covered under the definition of small company, it will remain exempted from
the applicability of the Order even if it falls under any of the criteria specified for private
company.

Note: As per Sec. 2(85) of Companies Act, 2013 read with Rule 2(1)(t) of the Companies
(Specification of Definitions Details) Rules, 2014 as amended by Companies
(Specification of definition details) Amendment Rules, 2022 w.e.f. 15.09.2022, small
company means a company, other than a public company:
(i) paid-up share capital of which does not exceed ₹ 4 crore; and
(ii) turnover of which as per its last profit and loss account for the immediately
preceding financial year does not exceed ₹ 40 crore.

Question 2
Examine the applicability of CARO, 2020 in the below mentioned cases:
(a) ‘Educating Child’ is a limited company registered under section 8 of the Companies Act,
2013. (5 MARKS)

Answer to Question 2 (a)

CARO, 2020 shall apply to every company including a foreign company as defined in Sec.
2(42) of
the Companies Act, 2013, except:
(i) a banking company;

(ii) an insurance company;

(iii) a company licensed to operate u/s 8 of the Companies Act;

(iv) a One-Person Company as defined in Sec. 2(62) of the Companies Act and a Small
Company as defined in Sec. 2(85) of the Companies Act; and

(v) a private limited company, not being a subsidiary or holding of a public company,

• having a Paid-up capital & Reserves & Surplus not more than ₹ 1 Cr. as on the balance
sheet date, and

• which does not have total borrowings exceeding ₹ 1 Cr. from any bank or financial
institution at any point of time during the financial year, and
• which does not have a total revenue as disclosed in Schedule III to the Companies Act,
2013 (including revenue from discontinuing operations) exceeding ₹ 10 Cr. during the
financial year as per the financial statements.

In the given case , ‘ Educating Child ‘ is licensed to operate under section 8 of the
Companies Act , 2013. Therefore, CARO 2020 shall not be applicable to ‘Educating Child’
accordingly

(b) Irah Pvt. Ltd. having paid capital and reserves of ₹ 50 lakh. During the year, the
company had borrowed ₹ 70 lakh each from a bank and a financial institution
independently. Turnover for the year was ₹ 900 lakh.

Answer to Question 2(b)

CARO, 2020 shall apply to every company including a foreign company as defined in Sec.
2(42) of
the Companies Act, 2013, except:
(i) a banking company;

(ii) an insurance company;

(iii) a company licensed to operate u/s 8 of the Companies Act;

(iv) a One-Person Company as defined in Sec. 2(62) of the Companies Act and a Small
Company as defined in Sec. 2(85) of the Companies Act; and

(v) a private limited company, not being a subsidiary or holding of a public company,

• having a Paid-up capital & Reserves & Surplus not more than ₹ 1 Cr. as on the balance
sheet date, and

• which does not have total borrowings exceeding ₹ 1 Cr. from any bank or financial
institution at any point of time during the financial year, and

• which does not have a total revenue as disclosed in Schedule III to the Companies Act,
2013 (including revenue from discontinuing operations) exceeding ₹ 10 Cr. during the
financial year as per the financial statements.
In the given case of Irah Pvt. Ltd., it has paid capital and reserves of ₹ 50 lakh i.e. less than
1 crore, turnover of ₹ 9 crore i.e. less than ₹ 10 crore. However, it has maximum
outstanding borrowings of ₹ 1.40 crore (₹ 70 lakh + ₹ 70 lakh) collectively from bank and
financial institution. Therefore, it fails to fulfill the condition relating to borrowings. Thus,
CARO, 2020 shall be applicable to Irah Pvt. Ltd. accordingly.

Question 3
The company has dispensed with the practice of taking inventory of their inventories at
the year-end as in their opinion the exercise is redundant, time consuming and intrusion
to normal functioning of the operations. Explain reporting requirement under CARO, 2020.
(5 MARKS)

Answer to Question 3

Clause (ii) of Para 3 of CARO, 2020, requires the auditor to report

(a) 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;

(b) 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;

In the given case, the above requirement of physical verification of inventory by the
management has not been taken place and therefore the auditor should point out the
same under CARO, 2020. He may consider the impact on financial statement and report
accordingly.

Question 4
M Ltd. has given certain loans to related parties and also has accepted certain deposits. As an
auditor, how you include the above items in paragraph 3 of CARO? (5 MARKS)
 Answer to Question 4

Clause (iv) of Para 3 of CARO, 2020, requires the auditor to report

In respect of loans, investments, guarantees, and security, whether provisions of sections
185 and 186 of the Companies Act have been complied with, if not, provide the details
thereof;
For this purpose of ensuring compliance of Sec. 185, the auditor should carry out the
following procedures:

(i) Obtain from the management the details of the directors or any other person in whom
the director is interested. He may also check the details of the persons covered under this
clause from Form MBP-1 and from the Register maintained u/s 189 of the Act.

(ii) Obtain and check the details of the transactions carried out with such persons,
including of any guarantee given and security provided.

(iii) Further examine the details to find out whether any of the transaction is attracting the
provisions of section 185 of the Act.

iv) In case of transactions that are covered under the exceptions as provided under section
185, the auditor should obtain the necessary evidence in support of such exception

The auditor should report the nature of non-compliance of Sec. 185, the maximum
amount outstanding during the year and the amount outstanding as at the balance sheet
date in respect of—
(i) the Directors; and

(ii) persons in whom directors are interested (specify the relationship with the Director
concerned).

For this purpose of ensuring compliance of Sec. 186, the auditor should:
(1) Obtain the details of, loans given to any person or other body corporate, guarantee
given or security provided in connection with a loan to any other body corporate or
person and securities acquired of any other body corporate by way of subscription,
purchase or otherwise, made during the year as well as the outstanding balances as at
the beginning of the year.

(2) Check whether, at any point of time during the year in case of aforesaid transactions,
the company has exceeded the limit of 60% of its paid-up share capital, free reserves and
 securities premium account or 100% of its free reserves and securities premium account,
whichever is more. If it exceeds the limits specified above, whether prior approval by
means of a special resolution passed at a general meeting has been obtained.

(3) Check whether the company has made investments through more than two layers of
investment companies

(4) Check whether the company has disclosed the full particulars of the loan given,
investment made or guarantee given or security provided in the financial statement
including the purpose for which the same is proposed to be utilized by the recipient.

(5) Check whether the company has passed the board resolution as prescribed and
obtained the prior approval, wherever required, from the public financial institution
concerned where any term loan is subsisting.

(6) Check whether rate of interest is not lower than the prevailing yield of one year,
three-year, five years or ten-year government security closest to the tenor of the loan
granted

(7) Check if the company is in default in the repayment of any deposits accepted or in
payment of interest thereon, then the company is not allowed to give any loan or
guarantee or any security or an acquisition till such default is subsisting

(8) Check whether the company has maintained a register (as per Form MBP-2) in the
manner as prescribed and also check the compliances of other provisions and relevant
rules.

Question 5
State the matters to be included in the auditor’s report as per CARO regarding:
(i) Private placement of preferential issues.
(ii) Utilization of IPO and further public offer. (5 MARKS)

Answer to Question 5
(i) Private placement of preferential issues.

Clause (x) of Para 3 of CARO, 2020, requires the auditor to report

Application of Money raised by public issue and preferential allotment –
PREFERENTIAL ALLOTMENT
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 requirements of section 42 and section 62 of the Companies Act, 2013
have been complied with and the funds raised have been used for the purposes for which
the funds were raised, if not, provide details in respect of amount involved and nature of
non-compliance;

The auditor may report the non-compliances incorporating the following details:
(a) Nature of Securities viz. Equity shares/ Preference shares/ Convertible debentures
(b) Purpose for which funds raised
(c) Total Amount Raised/ opening unutilized balance
(d) Amount utilized for the other purpose
(e) Unutilized balance as at Balance sheet Date

(ii) Utilization of IPO and further public offer.

Clause (x) of Para 3 of CARO, 2020, requires the auditor to report

Application of Money raised by public issue

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.

Currently, there is no legal requirement under the Act to disclose the end use of money
raised by IPO or FPO in the financial statements. The companies, however, make such a
disclosure in the Board’s Report. Schedule III to the Act requires that only unutilized
amount of any IPO or FPO made by the company should be disclosed in the financial
statements of a company.

Question 6
Discuss the matters to be included in the auditor's report regarding statutory dues and
repayment of loans or borrowing to a financial institution, bank, Government or dues to
debenture holders as per CARO, 2020. (5 MARKS)

Answer to Question 6
Clause (vii) of Para 3 of CARO, 2020, requires the auditor to report
Statutory Dues

(a) Whether the company is 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 financial year concerned for a period of more than
6 months from the date they became payable, shall be indicated.

(b) Where statutory dues referred above have not been deposited on account of any
dispute, then the amounts involved and the forum where dispute is pending shall be
mentioned.

(A mere representation to the concerned Department shall not be treated as a dispute)

Repayment of dues
(a) 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 :
• Nature of borrowing, including debt securities
• Name of lender*
• Amount not paid on due date
• Whether principal or interest
• No. of days delay or unpaid
• Remarks, if any

*Lender wise details to be provided in case of defaults to banks, financial institutions

and Government.

(b) whether the company is a declared willful defaulter by any bank or financial
institution or other lender;

(c) whether term loans were applied for the purpose for which the loans were obtained;
if not, the amount of loan so diverted and the purpose for which it is used may be
reported;

(d) whether funds raised on short term basis have been utilized for long term purposes, if
yes, the nature and amount to be indicated;
 (e) whether the company has taken any funds from any entity or person on account of or
to meet the obligations of its subsidiaries, associates or joint ventures, if so, details
thereof with nature of such transactions and the amount in each case;

(f) whether the company has raised loans during the year on the pledge of securities held
in its subsidiaries, joint ventures or associate companies, if so, give details thereof and
also report if the company has defaulted in repayment of such loans raised.

Question 7
Comment: No cost accounting records are maintained though the company is required to
maintain the same. (5 MARKS)

Solution to Question 7
Non-maintenance of Cost Records:

• As per the CARO, 2020, where maintenance of cost records has been prescribed by the C.
G., auditor of the company is specifically required to state whether such accounts and
records as prescribed have been made and maintained.

• Though the auditor is not required to conduct detailed audit but the auditor is expected
to conduct a general review of the cost records to determine whether the prescribed
accounts and records are prima facie complete.

• Therefore, whether cost audit is ordered or not the auditor should report upon the non-
maintenance of the cost records.

The word “made” applies in respect of cost accounts (or cost statements) and the word
“maintained” applies in respect of cost records relating to materials, labor, overheads, etc.

The auditor has to report under the clause irrespective of whether a cost audit has been
ordered by the Central Government.

The auditor should obtain a written representation from the management stating:
(a) whether cost records are required to be maintained for any product(s) or services of
the company u/s 148 of the Act, and the Companies (Cost Records and Audit) Rules, 2014;
and
(b) whether cost accounts and records are being made and maintained regularly.
The auditor should also obtain a list of books/records made and maintained in this regard.

Question 8
Comment on the following: ABC Ltd. has not deposited provident fund contributions of ₹20
lakhs to the authorities but accounted in the books. (5 MARKS)

Answer to Question 8
Non-Deposit of Provident Fund Dues:
• The auditor’s report under CARO, 2020 has to specifically state whether the
company is regular in depositing undisputed statutory dues including PF with the
appropriate authority and, if not, the extent of the arrears of outstanding statutory
dues as at the last day of the FY year concerned for a period of more than six
months from the date, they became payable, shall be indicated by the auditor.
• In this case, the failure of ABC Ltd. to deposit provident fund of ₹ 20 lakhs will be
reported by the auditor as per CARO, 2020 issued u/s 143(11) of the Companies Act,
2013.
• In indicating the arrears, the period to which the arrears relate should preferably be
also given