‘Telegram: t.me/cahemantsomani _—_—_ Learn with Rankers!: CA Hemant Somani (AIR-46) Youtube: CA Hemant Somani (AIR-46) CHAPTER 5.2: CARO, 2020 Powers conferred by seetion 143(11) of the Companies Act, 2013, CG issued Companies (Auditor's Report) Order, 2020 > Applicability: ‘Applicable to: + Every company including a foreign company (as defined in Sec. 2(42) of the Co.Act, 2013) + Applicable in case of branches also Tnelusions & Exclusions 2 i t t L Insurance | | Banking ‘Company OPC & Small company | | company U/s8of Company Co.Act2013 | | under Co.Act Private Company (Not being a subsidiary or holding company of a public company) Below all condition need to be fulfil: 1 Paid-up capital & Reserves & Surplus ‘As on balance sheet [ = €i crore date Total borrowings from any bank or financial atany point oftime | =®1crore institution during the Fy revenue from discontinuing operations) Total revenue as disclosed in Schedule III Gneluding | as perthe financial | <¥10 crore tatements, Para aGxxi + Inclusions: ‘+ CARO shall not apply to the auditor's report on consolidated financial statements except i.c., For CARO applicability, following items are included to calculate limit: «Credit card O/s Paid Up Capital & Reserve Borrowing T Revenue Equity share capital Loan from Bank, FI, NBFC Disclosed in Schedule IIL Preference share capital Loans may be in any form: | comprises of: ‘Amount originally paid upon | «’Term loan, Demand ‘Revenue from operations & loans, Other Income. Calls in arrear (Deduet) ‘Cash credit overdraft, | Other than finanee company: - Capital reserves + Export eredit, Bill Sale of products Revenue reserves purchased discounted | -Sale of services Security premium «Short term, ong term | -Other operating revenues Revaluation Reserves, « Secured, Unsecured Other income shall consist of P&L Credit Balance (tobe add) | Non-fund-based eredit P&L Debit Balance (Reduce) | facilities converted into fund Interest Income - Dividend Income = Net gain/loss on sale of based credit facilities investments/Fixed Asset ESOP Reserves Interest accrued as well as ~ Other non-operating income due {net of expenses directly attributable to such income) . ons: i., For CARO applicability, following items are excluded to ealeulate limit: Paid Up Capital & Reserve | Borrowing [Revenue Share application Loan from individual ‘Advance received Call in advance Interest accrued but not due Excise Duty/GST 1[Page‘Telegram: t.me/cahemantsomani —_—_ Learn with Ranker CA Hemant Somani (AIR-46) Youtube: CA Hemant Somani (AIR-46) Q. What are the various types of companies covered under Companies (Auditor's Report) Order, 2020 [CARO, 2020]? Or Examine the applicability of CARO, 2020 in the below mentioned cases: (a) Edneating child is a limited company registered under section 8 of the companies Act, 2013 (b) ASHU PVT. LTD. having paid up capital and reserves of € 50 lakhs. During the year, the company had borrowed 870Lakhs each from a bank and financial institution independently. Turnover for the year was Rs, goo lakhs. Hint: ‘+ Explain CARO “Applicable to” & “Not-Applicable to” as explained in above notes ‘+ Conclusion: Not applicable in case of Educating Child as itis registered under section 8 ‘+ _ Incase of Ashu Pvt. Ltd. CARO 2020 is applicable as borrowing in aggregate exceeds €1 crore Q.Astha Pvt. Ltd, has fully paid capital of € 140 lakh. During the year, the company had borrowed & 15 lakh each from a bank and a financial institution independently. It has the turnover (Net of excise € 50 lakh which is eredited toa separate account) of ¥ 475 lakh, Will Companies (Auditor's Report) Order, 2020 be applicable to Astha Pvt. Ltd.? Answer Applicability of CARO, 2020; The CARO, 2020 specifically exempts a private limited company, not being a subsidiary or holding company of a public company, having a paid up capital and reserves and surplus not more than ¥ one crore as on the balance sheet date and which does not have total borrowings exceeding ¥ one erore from any bank or financial institution at any point of time during the finaneial year and which does not have a total revenue as disclosed in Scheduled III to the Companies Act, 2013 (including revenue from discontinuing operations) exceeding € ten crore during the financial year as per the financial statements, In the case of Astha Pvt. Ltd., it has outstanding loan of 30 lakh (£15 lakh + €15 lakh) collectively from bank and financial institution which is less than %1 crore & and turnover is £4.75 crore ie. also less than ¥ 10 crore and not exceeding the limit. However, it has paid capital of 2140 lakh i.e. more than % 1 crore. ‘Thus, in view of € 140 lakh paid up capital which is exceeding the preseribed limit for exemption, CARO, 2020 will be applicable to Astha Pvt. Ltd. Q.T Pvt. Lid’s paid up Capital & Reserves are less than Rupees 50 lakhs and it has no outstanding loan exceeding Rupees 25 lakhs from any bank or financial institution. Its sales are ¥ 6 crores before deducting Trade discount Rupees 10 lakhs and Sales returns Rupees 95 lakhs. The services rendered by the company amounted to Rupees 10 lakhs. The company contends that reporting under Companies Auditor's Reports Order (CARO) is not licable, Discuss Hint + Explain theory same as explained in above question * turnover of the company including value of service rendered after deducting trade discount and sales returns amounts to £5.05 crores (i.e. 6 - 0.10 ~ 0.95 + 0.10 crore), + CARO 2020 will not be applicable to T Pvt. Ltd. Q. E-Tech Pvt. Ltd. which has an aggregate outstanding loan of €20 lakhs from Banks and &3o lakhs from Financial Institutions, defaulted in repayment thereof to the extent of 50%. The company holds that it being a private limited company, the Companies (Auditor's Report) Order, 2020 is not applicable. You are required to state the list of companies to which CARO is not applicable and state how would you deal with the given situation as an auditor of the company. Hint: + Explain CARO “Applicable to” & “Not-Applicable to” as explained in above notes + Inthe instant case the total borrowings do not exceed €100 lakhs during the year, reporting under CARO is not required QA Private limited company reports the following position as on 31% March, 2021: Paid up capital 60 Lacs Revaluation reserves 20 Lacs Capital reserves 22 Lacs. P&L A/e (Dr. Balance) ‘4 Lacs ‘The management of the company contends that CARO, 2020 is not applicable to it Hint: + Explain CARO “Applicable to” & “Not-Applicable to” as explained in above notes # Inthe present case, paid-up capital and reservest98 Laes (60 + 20 + 22 ~ 4), So CARO is not applicable 2IPageYoutube: CA Hemant Somani (AIR-46) ‘Telegram: t.me/cahemantsomani CA Hemant Somani (AIR-46) HH Private Ltd. (not a small company) had taken overdrafts from 2 banks with a limit of €40 lacs each against the security of fixed deposit it had with those banks and an unsecured overdraft from a financial institution of 236 laes. The said loans were outstanding as at 31* March, CARO is Applicable, as Total borrowing amounts to Rs. (40*2 + 36 = 116 lacs) > Matters to be included in Auditor’s Report '* Whether the company is maintaining proper records showing full particulars, including ‘of Records | quantitative details and situation of Property, Plant and Equipment ‘+ Whether the company is maintaining proper records showing full particulars of intangible assets; Physical |+ Whether these Property, Plant and Equipment have been physically verified by the verification | management at reasonable intervals; ‘+ whether any material diserepancies were noticed on such verification and if'so, whether the same have been properly dealt in the books of account; (Note: Reasonable interval depends upon the circumstances of each case ie. Value of asset, Geographical location ete., While an annual verification may’be reasonable, it may be impracticable to carry out the same in some cases. Even in such cases, the verification programme should be such that all assets are verified at least once in every 3 years.] Title Deed | Whether the title deeds of all the immovable properties (other than properties where the company is the lessee and the lease agreements are duly executed in favour of the lessee) disclosed in the financial statements are held in the name of the company, if not, provide the details thereof in the format below: Description | Gross | Held | Whether | Period held_] “Reason for ofproperty | carrying | in | promoter, | ~indicate | not being. value | name | director or | range, held in name of | theirrelative | where of company oremployee | appropriate © Also indicate if in dispute Revaluation |+ whether the company has revalued its Property, Plant and Equipment (including Right of Use 10% assets) or intangible assets or both during the year and, + ifso, 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; Benami | 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 thereunder, + ifso, whether the company has appropriately disclosed the details in its financial statements; ‘+ Explain Para 3(j) of CARO 2020, ic. Whether management verify PPE at reasonable interval, any material discrepancies properly dealt with in the books ‘+ SA570 “Going Concern’ requires the auditor to perform appropriate procedures so as to ensure appropriateness of going concern assumption, as company sold all its manufacturing fixed assets .uditor should incorporate the below mentioned para in his report "As per AS-1, “Disclosure of Accounting Policies”, “the enterprise is normally viewed as a going concern, that as continuing its operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the seale of its operations.” Although the company has disposed off its manufacturing fixed assets during the financial year ending on 31-3-2021, itis still a going concern in the form of a trading company. 3] Pace‘Telegram: t.me/cahemantsomani Youtube: CA Hemant Somani (AIR-46) CA Hemant Somani (AIR-46) “The property, plant and equipment have been physically verified by the management at reasonable itervals; material discrepancies were noticed on such verification and the same have been properly dealt with in the books of aecount;” Q. Under CARO, 2020, asa statutory auditor, how would you report: NSP Limited has its factory building, appearing as fixed assets in its financial statements in the name of one of its director who was overlooking the manufacturing activities. Or, ABC Ltd. owns a piece of Land and Building situated at IP road, Mumbai which was purchased before 30 years. The title deeds for the same are deposited with State Bank of India for obtaining credit facilities by the ‘company. As the statutory auditor of the company for the year ended 31** March, 2021, what are the audit procedures to be followed and what is the reporting under CARO, 2020? Or, ‘The Company is in the process of selling its office along with the freehold land available at Chandigarh and is actively ‘on the lookout for potential buyers. Whilst the same was purchased at £25 Lakhs in 2008, the current market value is, 2250 Lakhs, This property is pending to be registered in the name of the Company, due to certain procedural issues associated with the Registration though the Company is having a valid possession and has paid its purchase cost in full. The Company has disclosed this amount under Fixed Assets though no disclosure of non- registration is made in the notes forming part of the accounts Hint: ‘+ Para 3(i)(€) of CARO, 2020, whether the title deeds is in name of company ‘+ Whatis Title deeds: (O_ Registered sale deed / transfer deed / conveyance deed, etc. of land, land & building together, ete. purchased, allotted, transferred by any person including any government, government authority / body / agency/ corporation, etc. to the company. In case of leaschold land and land & buildings together, covered under the head property, plant and equipment (fixed assets), the lease agreement duly registered with the appropriate authority + Iftitle deeds are not held in name of the company, details thereof to be provided in the below mentioned format: Deseription | Gross | Held in| Whether Period held ~ indicate | *Reason for not being of property | carrying | name of | promoter, director or _| range, where held in name of value | their relative or employee _| appropriate company Para 3(i)] Inventories (Link AS 2/Ind As 2) Physical |» whether physical verification of inventory has been conducted at reasonable intervals by the verification | 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; Working | Whether during any point of time of the year, the company has been sanetioned working capital limit | capital limits in excess of 5 crore rupees, in aggregate, from banks or financial institutions (Excess of Bs. | on the basis of security of current assets; whether the quarterly returns or statements filed by the 5crore) company with such banks or financial institutions are in agreement with the books of account of the Company, ifnot, give details; (Q.Mr. Arjun was appointed as the engagement partner on behalf of Bhism & Co., a Chartered Accountant Firm, for conducting statutory audit assignment of Sinwar Ltd., unlisted public company. Mr. Brijesh, one of the senior engagement team members, was given the responsibility to audit the matters as per the requirements of CARO, 2020 and in that connection, he made the following observations, that may be relevant for reporting as per the said Order: ‘Sr.No | Observations One of the Plant and Equipment taken on a lease Cright of use” asset) by Sinwar Ltd. was revalued based on the valuation by a registered valuer and the net carrying value of Plant and Equipment in a aggregate was changed from &4 crore to €4.45 crore. ‘During the year under consideration, cash credit limit of €5.5 crore was sanctioned to Sinwar Ltd. by DMC Bank based on the security of current assets which was reduced to €4.5 crore after 6 months. In this connection, quarterly returns have been filed by the eompany with the DMC bank which b are in agreement with Books of Accounts. 41Pac‘Telegram: t.me/cahemantsomani Youtube: CA Hemant Somani (AIR-46) CA Hemant Somani (AIR-46) “Answer: (a) According to Clanse (i) (d) of Para 3 of CARO 2020, the auditor is required to report 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 the change is 10% or more in the aggregate of the net carrying value of each class of Property, Plant and Equipment or intangible assets; In the given situation, Sinwar Ltd, has revalued one of the Plant and Equipment taken on a lease (‘right of use’ asset) based on the valuation by a registered valuer, The amount of change in the value of such Plant and Equipment is €45 lakh. As the net carrying value of Plant and Equipment in aggregate was changed from 4 crore to €4.45 crore i.e. change was 10% or more. Thus, the auditor is required to report the amount of change of %45 lakh in accordance with Clause (i) (4) of Para 3 of CARO 2020. (b) As per Clause (ii) (b) of Para 3 of CARO 2020, the auditor is required to report whether during any point of time of the vear, 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 eompany with such banks or financial institutions are in agreement with the books of account of the Company, if not, give details; In the instant case, Sinwar Ltd. has been sanetioned a cash credit limit of %5.5 crore by DMC Bank during the year under consideration, which is exceeding the prescribed limit of 85 crore based on the security of current assets. Further, quarterly returns have also been filed by the company with the DMC bank in this eonneetion, ‘which is in agreement with Books of Accounts. In view of the above, the auditor is required to report the same in accordance with Clause (ii) (b) of Para 3 of CARO 2020 Q. Physical verification of only 40% of items of inventory has been conducted by the company. The balance 60% will be conducted in next year due to lack of time and resources. As a statutory auditor, how would you report under CARO 2020 Answer: Physical Verification of Inventory: Clause (ii) of Para 3 of CARO, 2020 requires the auditor to report on 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. Physical verification of inventory is the responsibility of the management which should normally verify all material items at least once in a year and more often in appropriate cases. The auditor in order to satisfy himself about verification at reasonable intervals and on coverage and procedures applied should examine the adequacy of evidence and record of verification. In the given case, the above requirement of CARO, 2020 has not been fulfilled as such and the auditor should point out the specific areas where he believes the procedure of inventory verification is not reasonable. He may consider the impact thereof on financial statements and his report accordingly. [Note: What constitutes “reasonable intervals” depends on circumstances of each case. The periodicity of the physical verification of inventories depends upon the nature of inventories, their location and the feasibility of conducting a physical verification, Normally, wherever practicable, all the items of inventories should be verified by the ‘management of the company at least once in.a year’) 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 ‘Loan, ‘Whether during the vear the company has provided loans or provided advances in the nature of Advance, | loans, or stood guarantee, or provided security to any other entity [not applicable to Guarantee & | companies whose principal business is to give loans], if so, indicate- Security |(A)_‘Theaggregate amount during the year, and balance outstanding at the balance sheet * ToGroup date with respect to such loans or advances and guarantees or security to subsidiaries, © Non- Joint ventures and associates; Group _|(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; Terms ‘whether the investments made, guarantees provided, security given and the terms and prejudicial | conditions of the grant ofall loans and advances in the nature of loans and guarantees provided are not prejudicial to the company’s interest‘Telegram: t.me/cahemantsomani Youtube: CA Hemant Somani (AIR-46) CA Hemant Somani (AIR-46) ‘Loan given | in respect of loans and advances in the nature of loans, whether the schedule of repayment of Schedule _| principal and payment of interest has been stipulated and whether the repayments or receipts are regular ‘Overdue | ifthe amount is overdue, state the total amount overdue for more than 90 days, and whether >90 days __| reasonable steps have been taken by the company for reeovery of the principal and interest ‘New Loan to | « Whether any loan or advance in the nature of loan granted which has fallen due during the repay old year, has been renewed or extended or fresh loans granted to settle the overdues of Joan existing loans given to the same parties, 1fSo, Specify Aggregate amount of such dues renewed || Percentage of the aggregate to the total or extended or settled by fresh loans loans or advances in the nature of loans granted during the year [Not applicable to companies whose principal business isto give loans) Toan '* Whether the company has granted any loans or advances in the nature of loans either repayable repayable on demand or without specifying any terms or period of repayment, on demand i IfS0, Specify ‘Aggregate amount Percentage thereof to the total loans granted, aggregate amount of loans granted to Promoters, related parties int Explain Above Para 3 clause (iii) & Para 3 clause (v) ‘+ Parag (iii)(a) of CARO, 2020 : whether during the year the company has provided loans or advances in the nature of loans, Para 3(4ii)(b) of CARO, 2020, requires the auditor to report whether the terms and conditions. Present case, company has granted a loan to firm in which a director is interested, the terms and. conditions of which are prejudicial to the company interest, hence auditor may report as under: “According to the information and explanations given to us and based on the audit procedures conducted by us, we are of the opinion that the terms and conditions of loans granted by the company to a firm in which a director of the company is interested, (total loan amount granted % -- and balance outstanding as at balance sheet date €———--) are prejudicial to the company’s interest on account of the fact that the loans have been granted at an interest rate of ___% per annum which is significantly lower than the cost of funds to the company and also lower than the prevailing yield of government security close to the tenor of the loan” ‘+ Para 3(iii)(P) of CARO, 2020 whether the company has granted any Joans or advances in the nature of loans, either repayable on demand or without specifying any terms or period of repayment, -Q. Loan Has given to subsidiary, but squared up during the year, How do you frame CARO 2020 report. Hint: Explain Para 3(ii)(a) & 3Gii)(b), Guidance Note on CARO, 2020 as issued by ICAI states, party might have taken a loan/advance in nature of loan from a company and repaid it during the same financial year. Therefore, while examining the loans, the auditor should also take into consideration the loans/advances in nature of loan transactions that have been squared-up during the year and report such transactions under this clause Report will be as follows: “The Company has granted loan of 2 Crore @ 15% p.a. to2 ofits subsidiaries during the Financial Year 2020-21. The ‘maximum amount involved during the year was $2.00 crore and the year-end balance of such loans was Nil”. 6 [Pace‘Telegram: t.me/cahemantsomani Youtube: CA Hemant Somani (AIR-46) CA Hemant Somani (AIR-46) Para 3(iv) ‘Compliance of provisions of Secs. 185 & 186 (Link S-ITI, SA 550) In respect of loans given, investments made, guarantees, and security whether provisions of Sections 185 and 186 of the Companies Act, 2013 have been complied with. If not, provide details thereof Para 3(v) Public Deposits Accepted Comply | i..0. deposits accepted by the company or amounts which are deemed to be deposits, whether the RBI, See 73 | directives issued by the RBI and the provisions of sections 73 to.76 or any other relevant provisions of &ra the Companies Act and the rules framed thereunder, where applicable, have been complied with. If not, the nature of such contraventions be stated: Order by | Ifan order has been passed by Company Law Board or NCLT or RBI or any Court or any other Court Tribunal, whether the same has been complied with or not? Para 3(vi)_| Cost Records ‘Whether maintenance of cost records has been speeified by the CG u/s 148(1) of the Companies Act, 2013 and whether such accounts and records have been so made and maintained. Q. CARO, 2020 requires the auditor of the company to report whether maintenance of cost records has been specified by the Central Government under section 148 of the Companies Act, 2013 and whether such accounts and records have been so made and maintained. ‘You are required to briefly explain the andit procedure to be followed by the auditor and suggest the reporting pattern, ‘Answer clause (vi) Where maintenance of cost records has been prescribed by the central Government under section 148(1) of the Act, whether such accounts and records have been made and maintained, 1. The order requires the auditor to report whether cost accounts and records have been made & maintained when required under 148(1) 2. The auditor should obtain a written representation from the management. 3. ‘The auditor should, conduct a general review of the cost records to ensure that the records as prescribed are made and maintained 4. Auditor should report on this clause in such cases also, where maintenance of cost records is required although cost audit is not mandatory ICAI Mlustration: Should the auditor examine the cost record in detail while reporting under CARO? CARO does NOT require a detailed examination of Cost Records. The Auditor should, therefore, conduct a general review of Cost Records to ensure that the records as prescribed are made and maintained. The word "made" applies in respect of Cost Accounts, and the word “maintained” applies in respect of Cost Records relating to Materials, Labour, Overheads, etc. Para gtvii) Statutory Dues (Link SA-250, Ind As 37, AS 20) Undisputed | Whether the company is regular in depositing undisputed statutory dues including GST, PE, statutory | ESI. income-tax, sales-tax, service tax, duty of customs, duty of excise, VAT, cess and any other dues 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 FY concerned for a period of more than 6 months from the date they became payable, shall be indicated Disputed | 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). ‘Note: + Non-payment of advance income tax would constitute default in payment of statutory dues * “Disputed”: where there is a positive evidence or action on the part of the company to show that it has not accepted the demand for payment of tax or duty, eg. where it has gone into appeal. Q. Asa statutory auditor: During the course of audit of ABC Ltd. it is noticed that out of %12 Laes of provident fund contribution accounted in the books, only €2 Lacs has been remitted to the authorities during the year. On enquiry the Chief Accountant informed that due to financial problems they have not remitted but will remit the same as and when the position improves. Hint: 71Pas‘Telegram: t.me/cahemantsomani Youtube: CA Hemant Somani (AIR-46) CA Hemant Somani (AIR-46) + Explain Para 3(vii)(a) of CARO, 2020 + SA- 250 “Consideration of Laws and Regulations in an audit of financial statements, also requires the auditor to obtain sufficient appropriate audit evidence regarding compliance with the provisions of those laws and. regulations generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial statements” + company is not regular in depositing the provident Fund needs to be disclosed by the auditor in his audit report as per requirement of Para 3(vii)(a) of CARO, 2020 Q. Big and Small Ltd. received a show cause notice from GST department intending to levy a demand of 25 Takhs in December 2020. The company replied to the above notice in January 2021 contending that itis not liable for the levy. No further aetion was initiated by the GST department upto the finalization of the audit for the year ended on 31 March, 2021. As the auditor of the company, what is your role in this? Hint: + Explain Para 3(v + Explain $4-250 requirement as explained in above question + A mere representation to the Department shall not constitute the dispute, So no reporting is required. ‘+ But if auditor is of opinion that exist a dispute, then as per AS 29/Ind As 37, Then provision required to be made & should also report amount of dues not deposited & forum where dispute is pending, Q.XYZ Pvt. Ltd. has submitted the finaneial statements for the year ended 31-3-2021 for audit. The audit assistant observes and brings to your notice that the company’s records show following dues: = Income Tax relating to Assessment Year 2017-18 125 lacs ~ Appeal is pending before Hon'ble TAT. since 30-09-2016. ~ Customs duty 85 lakhs ~ Demand notice received on 15-9-2020 but no action has been taken to pay or appeal. |AS an auditor, how would you bring this fact to the members? Hint: + For Income tax, (Its Disputed) Reporting required in Para 3(vii)(b) of CARO 2020 as follows: S.No | Name of Statue Nature of Dues | Amount in aes | Period to which | Forum where dispute amount relates _ | is pending 1 | Tneome-tax Act, 1961_| Tneome Tax | 125,00 AY 2015-16 ITAT + For Custom Duty, Company has not taken any action and is outstanding for more than 6 months (Its, undisputed), reporting under Para 3(vii)(a) Para (viii) ‘Unrecorded Income: (Link SA 240) ‘+ 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, + If'so, whether the previously unrecorded income has been properly recorded in the books of account during the year; Para (ix) Repayment of Dues (Link SA 570) Defaulted | 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 the format below: Nature of borrowing, | Name | Amount not | Whether | No. of Remarks, including debt of paid ondue | principal or | days delay | ifany securities lender* | date interest or unpaid “Lender wise details NOTE: Submission of application for re-schedulement/restructuring does not mean that no default has occurred Wilful ’b) Whether the company is a declared wilful defaulter by any bank or financial institution or other defaulter__| lender Fund ‘©) Whether term loans were applied for the purpose for which the loans were obtained; if not, the Diverted __| amount of loan so diverted and the purpose for which it is used may be reported Shortto | d)whether funds raised on short term basis have been utilised for long term purposes, ifyes, Jong term _| the nature and amount to be indicated; Fundfor _ | e) Whether the company has taken any funds from any entity or person on account of or to meet Sub/JV _| the obligations of its subsidiaries, associates or joint ventures, if so, details thereof with nature of such transactions and the amount in each cases‘Telegram: t.me/cahemantsomani Youtube: CA Hemant Somani (AIR-46) CA Hemant Somani (AIR-46) Pledge 1) Whether the company has raised loans during the year on the pledge of securities held in its Securities | subsidiaries, joint ventures or associate companies, ifso, give details thereof and also report if of Sub/JV_| the company has defaulted in repayment of such loans raised. Q. Aterm Ioan was obtained from a bank for €80 lakhs for acquiring R&D equipment, out of which & 15 lakh was used to buy a car for use of the concerned director who was looking at the R&D activities. As a statutory auditor, how would you report under CARO 2020. Answer: Utilisation of Term Loans: According to clause (ix) of Para 3 of CARO, 2020, the auditor is required to report “whether term loans were applied for the purposes for which those were obtained. If not, the amount of loan so diverted and the purpose for which it is used may be reported”. ‘The auditor should examine the terms and conditions of the term loan with the actual utilisation of the loans. If the auditor finds that the fund has not been utilized for the purpose for which they were obtained, the report should state the fact, In the instant case, term loan taken for the purpose of R&D equipment has been utilized for the purchase of ear which has no relation with R&D equipment. ‘Therefore, ear though used for R&D Director cannot be considered as R&D equipment. The auditor should state the fact in his report as per Paragraph 3 clause (ix) of the CARO 2020, that out of the term loan taken for R&D equipment, 15 lakhs was not utilised for the intended purpose of acquiring R&D equipment. Q. K Ld. took a term loan from a nationalized bank in 2015 for ¥200 lakhs repayable in 5 equal instalments of 40 lakhs from gist March, 2016 onwards, It repaid the loans due in 2016 & 2017, but defaulted in 2018, 2019 & 2020. As auditor of K Ltd, what's your responsibility assumting that company has sought reschedulement of loan? Hint: ‘+ Asper clause (ix) of Para 3 of CARO, 2020, the auditor of a company has to report whether the Company has defaulted in repayment of loans or other borrowings or in the payment of interest ther@0....0» ‘Nature ofborrowing, [Name | Amountnot | Whether ‘No. of days | Remarks, including debt of paidondue | principalor |delayor | ifany securities Iender* | date interest unpaid + Inthis case, K Ltd, has defaulted in repayment of dues for three years. Applie change the default position ‘© Hence, the auditor shall report in his CARO report that the Company has defaulted in its repayment of dues to the bank to the extent of £120 lakhs and evaluate its consequential impact on the audit report. tion for rescheduling will not Q.R Lid. as at gist March, 2021 defaulted in the repayment of interest and principal due to a financial institution, ‘The due date was 28" February, 2021. However, the defaulted amount was paid on sth April, 2021. The company’s management is of the opinion that since the default is set right before the audit completion these need not be reported in CARO, 2020. Comment and draft a suitable report Hint: © Same Answer as above question, Just add below Point ‘+ Asper the general instructions for preparation of Balance Sheet, provided under Schedule III to the Companies Act, 2013, terms of repayment of term loans and other loans is required to be disclosed in the notes to accounts. It also requires disclosure of period and amount of continuing default as on the balance sheet date in repayment of loans and interest, separately in each case. ‘+ Inthe given case, remain outstanding as at March 31, 2021, So reporting is req + Conclusion: The auditor is required to state in his report the default of the company in respect of repayment of its dues and report as under: “The company has defaulted in repayment of principal and interest to the financial institution amounted to that become due on 28" Feb, 2021, However, the outstanding sum was settled by the company on sth April. 2021. Q.LM Lid. had obtained a term loan of £300 lakhs from a bank for the construction of a factory. Since there was a delay in the construction activities, the said funds were temporarily invested in short term deposit Answer: + As per clause (ix) of Para 3 of CARO, 2020, an auditor needs to state in his report that whether the term loans were applied for the purpose for which the loans were obtained. a|Page‘Telegram: t.me/cahemantsomani Youtube: CA Hemant Somani (AIR-46) CA Hemant Somani (AIR-46) In the present case, the proceeds of the term loan obtained by LM Ltd. have not been put to use for construction activities and have been temporarily invested in short term deposi ‘+ Here, the auditor should report the fact in his report that pending utilization of the term loan for construction of a factory, the funds were temporarily used for the purpose other than the purpose for which the loan was sanctioned, as per clause (ix) of Para 3 of CARO, 2020 Q. 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 Hint: Refer Clause (vi) (a) for statutory dues & Clause (ix (a)) for default in repayment of loan, Para 300) Application of Money raised by public issue and preferential Allotment | ‘Application. a)Whether moneys raised by way of initial public offer or further public offer (including debt ofMoney | instruments) during the year were applied for the purposes for which those are raised, if not, the raised by | details together with delays or default and subsequent rectification, if any, as may be applicable, be publie issue | reported Preferential | b) Whether the company has made any preferential allotment or private placement of shares or allotment | 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 Para (xi) Fraud by or on Company: (Link SA240) J ‘a) Whether any fraud by the company or any fraud on the Company has been noticed or reported during the year; yes, the nature and the amount involved isto be indicated, b) whether any report u/s 143(12) of the Companies Act has been filed by the auditors in Form ADT-4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central Government; c)_whether the auditor has considered whistle-blower complaints, if any, received during the year by the company; - Inquiry under this clause is restricted to frauds ‘noticed or reported’ during the year. - auditor is also required to comply with the requirements of SA 240 also along with this clause - Only noticed frauds shall be included here and not the suspected frauds = While reporting, auditor may also consider the principles of materiality outlined in Standards on Auditing Q. What are the reporting requirements in the audit report under the Companies Act, 2013 / CARO, 2020 for the following situations? i, A fraud has been committed against the company by a vendor of the company. ‘The eompany has committed a major fraud on its customer and the ease is pending in the court. iii, A fraud has been committed against the company by an officer of the company iv, A fraud has been reported in the cost audit report but not noticed by statutory auditors in his audit. Answer Reporting Requirements in the Audit Report under the Companies Act, 2013 / CARO 2020: According to Clause (xi) (@) of Para 3 of CARO 2020, the auditor is required to report 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; Further, as per Clause (xi) (b) of Para 3 of CARO 2020, 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 rule13 of Companies (Audit and Auditors) Rules, 2014 with the Central Government; As per section 143(12) of the Companies Aet, 2013, if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government (in ease amount of fraud is rupees 1 crore or above) or Audit Committee or Board in other cases (in case the amount of fraud involved is less than rupees 1 crore) within such time and in such manner as may be preseribed. (Fraud committed against the company by a vendor of the Company: ¥ Incase employees or management are involved in fraud committed by vendor, reporting has to be done in accordance with CARO 2020 and as per section 143 (12) of the Companies Act, 2013. ¥ Suspected fraud by vendors, customers and other third parties should be dealt with in accordance with SA 240. Therefore, reporting has to be done in accordance with SA 240, “The Auditor's Responsibilities relating to Fraud in an audit of Financial Statements”.‘Telegram: t.me/cahemantsomani Youtube: CA Hemant Somani (AIR-46) t Somani (AIR-46) (i) Company has committed major fraud on its customer of which case is pending in the court: Major fraud committed by the company on its customer has to be reported in accordance with Clause (xi) of Para 3 of, CARO 2020. ii) Reporting required to C.G. [u/s 143(12)] if amount of fraud exceeds %1 Cr & Also require to be report in Para 3(xi) of CARO 2020 (jx) Effect of such fraud on financial statements need to be reported & Para 3(si) requires reporting of fraud Q. Asa statutory auditor, how would you report on the following under CARO: ABC Pvt. Ltd. is a manufacturer of Jewellery. A senior employee of the Company informed you that the Company does not properly disclose the purity of gold used on the jewellery. Hint: + Explain Para 3 clause (xi) of CARO, 2020 (as explained in above notes) «Inthe present ease if purity of gold is not properly disclosed on the jewellery it amounts to defrauding the \stomer upees It implies that the management is deceiving customers to obtain an illegal advantage + Asper SA 240 "The Auditor's responsibilities in relation to an audit of Financial Statements" the auditor ‘concerned with fraudulent acts that eause a material misstatement in financial statements. Hence as long as books of account are not falsified arising out of difference in the purity of gold, ie, actual cost of the gold and the sale price of gold, it has no implication for the auditor. + Conclusion: From the view point of reporting on frauds under CARO, 2020, there is no implication for misstatement in the financial statements. Hence, no reporting is necessary for non-proper disclosure of purity of gold on the jewellery. Q. The scope of auditor's inquiry under clause (xi) of paragraph 3 of Companies (Auditor's Report) Order, 2020 is restricted to frauds ‘noticed or reported’ during the year. It does not require auditor to discover such frauds Explain Hint: explain Para 3 clause (xi) of CARO, 2020 (as explained in above notes) + The scope of auditor’s inquiry under clause (xi) of paragraph 3 of Companies (Auditor's Report) Order, 2020 is restricted to frauds “noticed or reported’ during the year. It may be noted that this clause of the Order, by requiring the auditor to report whether any fraud by the company or on the company by its Officer or employees has been noticed or reported, does not relieve the auditor from his responsibility to consider fraud and error in an audit of financial statements. + Inother words, irrespective of the auditor’s comments under this clause, the auditor is also required to comply with the requirements of SA 240, “The Auditor's Responsibility Relating to Fraud in an Audit of Financial Statements”. Q. The Internal Auditor of the Company has identified a fraud in the reeruitment of employees by the HR department wherein certain sums were alleged to have been taken as kick-back from the employees for taking them on board with the Company. After due investigation, the concerned HR Manager was sacked. The amount of such kickbacks is expected to be in the range of £12 Lakhs, Under CARO, 2020, as a statutory auditor, how would you report? Hint: Auditor is required to report the matter as per Para (xi) of CARO, 2020 Para 3(xii) Nidhi Companies: 1:20 Whether the Nidhi Company has complied with the Net Owned Fund to Deposits in the ratio of 1: 20 to meet out the liability; ‘Nidhi Rules, 2014 to meet out the liability ‘Any Default _| whether there has been any default in payment of interest on deposits or repayment thereof for any period and if so, the details thereof; ] 10% Whether the Nidhi Company is maintaining 10% unencumbered term deposits as specified in the | Q. Advise the auditor regarding reporting requirements under CARO, 202% complied provisions contained in the Nidhi Rules, 2014 What audit procedures are to be adopted for verification and reporting on the same? Hint + Explain Para 3(xii) of CARO 2020 as explained above + Asper Rule 3(4) Net Owned Funds are defined as the aggregate of paid-up equity share capital and free reserves as reduced by accumulated losses and intangible assets appearing in the last audited + Clause(xii) Nidhi Company has‘Telegram: t.me/cahemantsomani Youtube: CA Hemant Somani (AIR-46) CA Hemant Somani (AIR-46) lance sheet. Provided that, the amount representing the proceeds of issue of preference shares, shall not be ‘+ ANidhi company ean accept fixed deposits, recurring deposits and savings deposits from its ‘members in accordance with the directions notified by the Central Government. The aggregate of such deposits is referred to as “deposit liability”. ‘+ The anditor should ask the management to provide the computation of the deposit liability and net owned funds on the basis of the requirements mentioned above. This would enable him to verify that the ratio of deposit liability to net owned funds is in accordance with the requirements prescribed in this regard. ‘See 177 & | Whether all transactions with the related parties are in compliance with Secs. 177 and 188 of 188 Companies Act, 2013 where applicable Disclosure —_| the details have been disclosed in the F.S etc. as required by the applicable accounting standards, ‘Note: Auditor can refer SA 550, “Related Parties” which has prescribed auditor’s responsibilities regarding related party relationships and transactions when performing an audit of financial statements, including guidance on the procedures to be performed by auditors ‘Hint: Auditor is required to report the matter as per Para 3(xiii) of CARO, 2020 ‘+ Whether the company has an internal audit system commensurate with the size and nature of its business + Whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor. '* Whether the company has entered into any non-cash transactions with directors or persons connected with directors and ‘so, whether provisions of Section 192 of Companies Act, 2013 have been complied with Hint: = Explain para 3 (xv) ‘+ Section 192 of the Companies Act, 2013 of the Act deals with restriction on non-cash transactions involving directors or persons connected with them. The section prohibits the company from entering into following types of arrangements unless it meets the conditions laid out in the said section: ()Anarrangement by which a director of the company or its holding, subsidiary or associate company or a person connected with such director aequires or is to acquire assets for consideration other than cash, from the company. (ii)_An arrangement by which the company acquires or is to acquire assets for consideration other than cash, from such director or person so connected ‘+ “According to the information and explanations given to us, the Company has entered into non-cash transactions with one of the directors/person connected with the director during the year, by the acquisition of assets by assuming direetly related liabilities, which in our opinion is covered under the provisions of Section 192 of the Act, and for which approval has not yet been obtained in a general meeting of the Company”. (a) Whether the company is required to be registered u/s 45-IA of the Reserve Bank of India Act, 1934 and if so, whether the registration has been obtained. \(b) Whether the company has conducted any Non-Banking Financial or Housing Finance activities without a valid Certifieate of Registration (CoR) from the Reserve Bank of India as per the Reserve Bank of India Act, 19343 (©) Whether the company is a Core Investment Company (CIC) as defined in the regulations made by the Reserve Bank of India, if so, whether it continues to fulfil the criteria of a CIC, and in case the company is an 12[ PageTelegram: t.me/eahemantsomani —_ Learn with Rankers!! —_ Youtube: CA Hemant Somani (AIR-46) CA Hemant Somani (AIR-46) ‘exempted or unregistered CIC, whether it continues to fulfil such criteria; |(d) Whether the Group has more than one CIC as part of the Group, if yes, indicate the number of CICs which are part of the Group; ‘Whether the company has incurred cash losses in the financial year and in the immediately preceding financial year, + jifso, state the amount of cash losses: J+ Whether there has been any resignation of the statutory auditors during the year, |+ ifso, whether the auditor has taken into consideration the issues, objections or concerns raised by the ‘outgoing auditors 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. ‘a) Whether, in respect of other than ongoing projects, the company has transferred unspent amonnt to a Fund specified in Schedule VI to the Companies Act, within a period of 6 months of the expiry of the finaneia year in compliance with 2nd proviso to Sec. 135(6) of the said Act; 1b) Whether any amount remaining unspent u/s 135(5) of the Companies Act, pursuant to any ongoing project, has been transferred to special account in compliance with the provision of Sec. 135(6) of the said Act. Illustration for easy explanation of above clause: 2% of Avg profit comes out to €100 lacs, out of which amount already spent is Rs. 20 Taes, So out of remaining UnSpent amount of Rs.80 laes ¥ For Ongoing project (ie. Multi Year), Assume its Rs.60 lacs: + Transfer within 30 days from end of FY to special a/e “Unspent CSR A/c” + Tobespend within 3 years ‘+ _Ifnot transfer within 30 days from end of 3 yrs to Fund in S-VIL ¥ Other than Ongoing project Assume its Rs.20 lacs: ‘+ Transfer within 6 months from end of FY to fund in $-VIT a) Whether there have been any qualifications or adverse remarks by the respective auditors in the CARO reports of the companies included in the consolidated financial statements, b) Ifyes, indicate the details of the companies and the paragraph » Reasons to be stated for unfavourable or qualified answers: Where, in the auditors report, the answer to any of the questions referred to in paragraph 3 is: @) Unfavourable or ‘The auditor's report shall also state the basis for such unfavourable or qualified Qualified answer, as the case may be 'B) Unable to express any | His report shall indicate sueh fact together with the reasons as to why itis not opinion possible for him to give his opinion on the same. 13 [Page