CARO, 2020 – CA Final Audit Question Bank

CARO, 2020 – CA Final Audit Question Bank is designed strictly as per the latest syllabus and exam pattern.

CARO, 2020 – CA Final Audit Question Bank

Applicability of CARO, 2020

Question 1.
ABC Pvt. Ltd. is a holding company of XYZ Ltd. Whether CARO is applicable to ABC Pvt. Ltd.?
Answer:
Applicability of CARO over a Private company (holding of public company):
The Companies (Auditor’s Report] Order, 2020, exempts private limited companies, not being a subsidiary or holding of a public company, from its application which fulfils all the following conditions:

its paid-up capital and reserves are not more than ₹ 1 Cr. as on Balance Sheet date, and
its total borrowings any bank or financial institution are not more than ₹ 1 cr. at any point of time during the financial year; and
its total revenue as disclosed in ScheduleIII (including revenue from discontinuing operations] does not exceed ₹ 10 Cr. during the financial year as per the financial statements.

In the present case, ABC Pvt. Ltd. is a holding company of XYZ Ltd., hence reporting under CARO is required.

Conclusion: CARO is applicable.

Question 2.
Astha Pvt. Ltd. has fully paid capital of ₹ 140 lakhs. During the year, the company had borrowed ₹ 15 lakhs each from a bank and a financial institution independently. It has the turnover (Net of excise ₹ 50 lakhs which is credited to a separate account) of ₹ 475 lakhs. Will Companies (Auditor’s Report) Order, 2020 be applicable to Astha Pvt. Ltd.?
Answer:
Applicability of CARO over a Private Company:
The Companies (Auditor’s Report) Order, 2020, exempts private limited companies, not being a subsidiary or holding of a public company, from its application which fulfils all the following conditions:

its paid-up capital and reserves are not more than ₹ 1 Cr. as on Balance Sheet date, and
its total borrowings any bank or financial institution are not more than ₹ 1 cr, at any point of time during the financial year; and
its total revenue as disclosed in Schedule III (including revenue from discontinuing operations) does not exceed₹ 10 Cr. during the financial year as per the financial statements,

In the present case, paid up capital of the company exceeds ₹ 1 Cr., hence reporting under CARO is required.

Conclusion: CARO is applicable over the company.

Question 3.
E-Tech Pvt. Ltd., which has an aggregate outstanding loan of ₹ 20 lakhs from Banks and ₹ 30 lakhs from Financial Institutions, defaulted in repayment thereof to the extent of 50%. The company holds that it being a private limited company, the Companies (Auditor’s Report) Order, 2020 is not applicable.

You are required to state the list of companies to which CARO is not applicable and state how would you deal with the given situation as an auditor of the company.
Answer:
Applicability of CARO, 2020:

The Companies (Auditor’s Report) Order (CARO), 2020, exempts private limited companies, not being a subsidiary or holding of a public company, from its application which fulfils all the following conditions:
1. its paid-up capital and reserves are not more than ₹ 1 Cr, as on Balance Sheet date, and
2. its total borrowings any bank or financial institution are not more than ₹ 1 cr, at any point of time during the financial year; and
3. its total revenue as disclosed in Schedule III (including revenue from discontinuing operations) does not exceed ₹ 10 Cr. during the financial year as per the financial statements.
In the instant case the total borrowings do not exceed ₹ 100 lakhs during the year, reporting under CARO is not required.

Conclusion: Contention of the E Tech Pvt. Ltd., is correct that CARO, 2020 will not be applicable on it as outstanding loan from banks and financial institution in aggregate does not exceeds ₹ 1 Cr.

Question 4.
A Pvt. Ltd. is incorporated on 1st july, 2020. During the year ended 31st March, 2021, it had issued shares (fully paid up) of ₹ 80 lakhs, had borrowed ₹ 60 lakhs each from 2 financial institutions and its turnover (Net of excise ₹ 100 lakhs which is credited to a separate account) is ₹ 950 lakhs. Will Companies Auditors Report Order, 2020 (CARO) be applicable to A Pvt. Ltd.?
Answer:
Applicability of CARO, 2020:

The Companies (Auditor’s Report) Order (CARO), 2020, exempts private limited companies, not being a subsidiary or holding of a public company, from its application which fulfils all the following conditions:
1. its paid-up capital and reserves are not more than ₹ 1 Cr. as on Balance Sheet date, and
2. its total borrowings any bank or financial institution are not more than ₹ 1 cr. at any point of time during the financial year; and
3. its total revenue as disclosed in Schedule III (including revenue from discontinuing operations) does not exceed ₹ 10 Cr. during the financial year as per the financial statements.
In the present case paid-up capital is ₹ 80 lakhs, turnover is less than ₹ 10 Crores but its borrowings from banks and financial institution is ₹ 120 Lakhs.
While computing revenue, excise duty will not be considered as per the requirements of Schedule III.
While computing borrowings from banks and financial statements, loans are to be taken cumulatively not individually.

Conclusion: Contention of the A Pvt. Ltd. is not correct as total borrowings exceeds ₹ 1 Cr,, hence reporting under CARO, 2020 will be required.

Question 5.
As an auditor, how would you deal with the following: L Private Ltd., which has outstanding loan of more than ₹ 100 lakhs from Financial Institution defaulted in repayment thereof to the extent of 50%. The company holds that it being a private limited company, the Companies Auditors Report Order (CARO) is not applicable.
Answer:
Applicability of CARO, 2020:

The Companies (Auditor’s Report) Order (CARO), 2020, exempts private limited companies, not being a subsidiary or holding of a public company, from its application which fulfils all the following conditions:
1. its paid-up capital and reserves are not more than ₹ 1 Cr. as on Balance Sheet date, and
2. its total borrowings any bank or financial institution are not more than ₹ 1 cr. at any point of time during the financial year; and
3. its total revenue as disclosed in Schedule III (including revenue from discontinuing operations) does not exceed ₹ 10 Cr. during the financial year as per the financial statements.
In the instant case the total borrowings exceed ₹ 100 Lakhs out of which company defaults in repayment to the extent of 50%. As borrowings exceeds ₹ 1 Cr. during the year, reporting under CARO is required.
Para 3 (ix) of CARO, 2020 requires the auditor to comment 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.

Conclusion: Contention of L Pvt. Ltd. is not correct as borrowings from financial institution exceeds ₹ 1 Cr., and auditor is required to report the period and amount of default in repayment of dues under Para 3(viii) of CARO, 2020.

Question 6.
T Pvt. Ltd.’s paid up Capital & Reserves are less than ₹ 1 cr. and it has no outstanding loan exceeding ₹ 1 Cr. from any bank or financial institution. Its sales are ₹ 12 crores before deducting Trade discount ₹ 20 lakhs and Sales returns ₹ 1.90 Cr. The services rendered by the company amounted to ₹ 20 lakhs. The company contends that reporting under Companies Auditor’s Reports Order (CARO) is not applicable. Discuss.
Answer:
Applicability of CARO, 2020:

The Companies (Auditor’s Report) Order (CARO), 2020, exempts private limited companies, not being a subsidiary or holding of a public company, from its application which fulfils all the following conditions:
1. its paid-up capital and reserves are not more than ₹ 1 Cr. as on Balance Sheet date, and
2. its total borrowings any bank or financial institution are not more than ₹ 1 cr. at any point of time during the financial year; and
3. its total revenue as disclosed in Schedule III (including revenue from discontinuing operations) does not exceed ₹ 10 Cr. during the financial year as per the financial statements.
As per Schedule III, revenue from operations shall consists of revenue from sale of products, sale of services, and other operating revenues.
While computing total revenue, trade discount as well as sales returns are required to be deducted.
In the present case the turnover of the company including value of service rendered after deducting trade discount and sales returns amounts to ₹ 10.10 crores (i.e. 12 – 0.20 – 1.90 + 0.20 crore).

Conclusion: Contention of the company that CARO is not applicable is not correct, as Total Revenue exceeds ₹ 10 Cr.

Question 7.
A Private limited company reports the following position as on 31^st March, 2021:
Paid up capital : 60 Lacs
Revaluation reserves : 20 Lacs
Capital reserves : 22 Lacs
P & L A/c (Dr. Balance) : 4 Lacs
The management of the company contends that CARO, 2020 is not applicable to it.
Answer:
Applicability of CARO, 2020:

The Companies (Auditor’s Report) Order (CARO), 2020, exempts private limited companies, not being a subsidiary or holding of a public company, from its application which fulfils all the following conditions:
1. its paid-up capital and reserves are not more than ₹ 1 Cr. as on Balance Sheet date, and
2. its total borrowings any bank or financial institution are not more than ₹ 1 cr. at any point of time during the financial year; and
3. its total revenue as disclosed in Schedule 111 (including revenue from discontinuing operations) does not exceed ₹ 10 Cr. during the financial year as per the financial statements.
As per Guidance Note on CARO, 2020 issued by ICAI, while computing paid up capital and reserves, capital reserves, revenue reserves, revaluation reserves and credit balance of Profit and loss account are to be considered in aggregate as reduced by debit balance in the profit and loss account, if any.
In the present case, paid-up capital and reserves after deducting debit balance of Profit & Loss Account amounts to ₹ 98 Lacs (60 + 20 + 22 – 4).

Conclusion: CARO is not applicable as paid-up capital and reserves does not exceed ₹ 1 Cr. (assuming that other conditions as to borrowings and revenue also satisfied).

Question 8.
Under CARO, 2020, how as a statutory auditor would you comment on the following: X Pvt. Ltd. is a subsidiary of a listed entity. The management of the company believes that since X Pvt. Ltd. is a private company and satisfies all conditions under CARO, 2020, reporting under CARO is not applicable.
Answer:
Applicability of CARO, 2020:

The Companies (Auditor’s Report) Order (CARO), 2020, applies to all companies including foreign companies except certain companies which are specifically exempted.
CARO, 2020 exempts private limited companies not being a subsidiary or holding of a public company, from its application which fulfils certain conditions.
In the present case M/s X Pvt. Ltd. is a subsidiary of a listed entity and its management believes that the company satisfies all conditions as required under CARO, 2020.

Conclusion: Exemption from CARO is not available to a private company which is a subsidiary of a public company. Hence contention of the management that company being a private limited company and satisfies all the conditions required for exemption, is not correct.

Question 9.
H Private Ltd. (not a small company) had taken overdrafts from two banks with a limit of ₹ 40 lacs each against the security of fixed deposit it had with those banks and an unsecured overdraft from a financial institution of ₹ 36 lacs. The said loans were outstanding as at 31^st March, 2021. The paid-up capital and reserves of the company as at that date was ₹ 80 lacs and its revenue during the financial year ended on 31st March, 2021 was ₹ 6 crores. The management of the company is of the opinion that CARO, 2020 is not applicable to it because turnover and paid-up capital were within the limits prescribed and loans taken against the fixed deposits cannot be considered. The company further contended that loan limit is to be reckoned per bank or financial institution and not cumulatively. Comment.
Answer:
Applicability of CARO, 2020:

The Companies (Auditor’s Report) Order (CARO), 2020, exempts private limited companies, not being a subsidiary or holding of a public company, from its application which fulfils all the following conditions:
1. its paid-up capital and reserves are not more than ₹ 1 Cr. as on Balance Sheet date, and
2. its total borrowings any bank or financial institution are not more than ₹ 1 cr. at any point of time during the financial year; and
3. its total revenue as disclosed in Schedule III (including revenue from discontinuing operations) does not exceed ₹ 10 Cr. during the financial year as per the financial statements.
In the present case paid-up capital is less than ₹1 Cr., Revenue is less than ₹ 10 Crores but its total borrowings from banks and financial institution is ₹ 1.16 Cr.
As per Guidance Note of CARO, 2020 issued by ICAI, while computing total borrowings from banks and financial statements, loans against Fixed deposits are to be taken into consideration. Further loans from banks and financial institutions are to be taken cumulatively not individually.

Conclusion: Contention of H Ltd. is not correct as total borrowings exceeds ₹ 1 Cr., hence reporting under CARO, 2020 will be required.

Question 10.
A Private Limited Company reports the following position as on 31^st March, 2021:
Paid up Capital : ₹ 70 Lacs
Revaluation Reserve : ₹ 24 Lacs
Capital Reserve : ₹ 20 Lacs
Profit & Loss (Dr.) Balance : ₹ 24 Lacs
The Management of the Company contends that CARO, 2020 is not applicable to it. Comment.
Answer:
Applicability of CARO, 2020:

The Companies (Auditor’s Report) Order (CARO), 2020, exempts private limited companies, not being a subsidiary or holding of a public company, from its application which fulfils all the following conditions:
1. its paid-up capital and reserves are not more than ₹ 1 Cr. as on Balance Sheet date, and
2. its total borrowings any bank or financial institution are not more than ₹ 1 cr. at any point of time during the financial year; and
3. its total revenue as disclosed in Schedule III (including revenue from discontinuing operations) does not exceed ₹ 10 Cr. during the financial year as per the financial statements.
As per Guidance Note on CARO, 2020 issued by ICAI, while computing paid up capital and reserves, capital reserves, revenue reserves, revaluation reserves and credit balance of Profit and loss account are to be considered in aggregate as reduced by debit balance in the profit and loss account, if any.
In the present case, paid up-capital and reserves after deducting debit balance of Profit & Loss Account amounts to ₹ 90 Lacs (70 + 24 + 20 – 24).

Conclusion: CARO is not applicable as paid-up capital and reserves does not exceed ₹ 1 Cr. (assuming that other conditions as to borrowings and revenue also satisfied).

Matters to be Reported under CARO, 2020

Question 11.
X Ltd. closed its manufacturing operations and sold all its manufacturing fixed assets during the financial year ended 31^st March, 2021. However, it intends continue its operations as a trading : company. In respect of other fixed assets, the company carried out a physical verification as at i the end of 31^st March, 2021 and found a material discrepancy to the tune of ₹ 1 lac, which was written off and is disclosed separately in the profit and loss account. Kindly incorporate the above in your audit report.
Answer:
Reporting w.r.t. Fixed Assets:
Para 3(i) of CARO, 2020 requires the auditor to comment whether the 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.

SA 5 70 “Going Concern” requires the auditor to perform appropriate procedures so as to ensure appropriateness of going concern assumption.

In the present case, X Ltd. had closed its manufacturing operations and sold all its manufacturing fixed assets, but it intends continue its operations as a trading company. Hence auditor is required to examine management plans for continuation of the company and appropriateness of going concern assumption by performing appropriate procedures.

Further, in respect of other fixed assets, company has carried out physical verification and found a material discrepancy of ₹ 1 Lacs which was written off and disclosed separately in the profit and loss account. In respect of this, auditor 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 is as continuing its operation for the foreseeable future. It is assumed thatthe enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations.” Although the company has disposed off its manufacturing fixed assets during the financial year ending on 31-3-2021, it is still a going concern in the form of a trading company.

We also report that on physical verification of other fixed assets, a material discrepancy to the tune of ₹ 1 Lac was noticed and that the same has been properly dealt with in the books of account”.

Question 12.
Under CARO, 2020, as a statutory auditor, how would you report: NSP Limited has its factory building, appearing as fixed assets in its financial statements in the name of one of its director who was overlooking the manufacturing activities.
Answer:
Audit procedures w.r.t. reporting over title deeds of immovable properties under CARO:
Para 3 (i) (c) of CARO, 2020 requires the auditor to comment 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.

The Order is silent as to what constitutes ‘title deeds’. In general, title deeds mean a legal deed or document constituting evidence of a right, especially to the legal ownership of the immovable property.

Title deeds of the immovable property maybe Registered sale deed/transfer deed/conveyance deed, etc. of land, land & building together, etc. purchased, allotted, transferred by any person including any government, government authority/body/agency/corporation, etc. to the company.

If title deeds are not held in name of the company, details thereof to be provided in the below mentioned format:

Description of Property

Gross

carrying

value

Held in njme of

Whether promoter, director or their relative or employee

Period held – indicate range, where appropriate

Reason for not being held in name of company*

*Also indicate if in dispute.

Question 13.
ABC Ltd. owns a piece of Land and Building situated at IP road, Mumbai which was purchased before 30 years. The title deeds for the same arc 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^st March, 2021, what are the audit procedures to be followed and what is the reporting under CARO, 2020?
Answer:
Audit procedures w.r.t. reporting over title deeds of immovable properties under CARO:
Para 3(i) (c) of CARO, 2020 requires the auditor to comment 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.

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.

If title deeds are not held in name of the company, details thereof to be provided in the below mentioned format:

Description of Property	Gross carrying value	Held in name of	Whether promoter, director or their relative or employee	Period held – indicate range, where appropriate	Reason for not being held in name of company*

*Also indicate if in dispute.

Question 14.
The Property, Plant and Equipment of Amir Ltd. included ₹ 25.75 crores of earth removing machines of outdated technology which had been retired from active use and had been kept for disposal after knock down. These assets appeared at residual value and had been last inspected ten years back. As an Auditor, what may be your reporting concern in view of CARO, 2020 on matters specified above?
Answer:
Reporting w.r.t. Fixed Assets:
Para 3(i) of CARO, 2020 requires the auditor to comment

whether the property, plant and equipment assets 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.

In the present case, the Property, Plant and Equipment of Amir Ltd. included ₹ 25.75 crores of earth removing machines of outdated technology which had been retired from active use and had been kept for disposal after knock down. These assets appeared at residual value and had been last inspected ten years back.

Inspection of above mentioned machine was done 10 years back. Though it is a retired machine, however value is ₹ 25.75 crores which is a significant amount, requires physical verification at regular intervals.

Conclusion: Auditor is required to state the fact about discrepancies in system of physical verification of machineries held for disposal.

Question 15.
What are the reporting requirements for closing stock in the CARO, 2020.
Answer:
Reporting Requirement for Closing Stock under CARO: ,
Para 3(ii) of CARO, 2020 requires the auditor to comment on the following:
(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 ₹ 5 crore, 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.

Question 16.
As the statutory auditor of B Ltd. to whom CARO, 2020 is applicable, how would you report in the following situations: Physical verification of only 50% (in value) of items of inventory has been conducted by the company. The balance 50% will be conducted in next year due to lack of time and resources.
Answer:
Physical verification of Inventory:
Para 3 (ii) of CARO, 2020 requires the auditor to state in his report whether physical verification of inventory has been conducted at reasonable interval 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 verify all material items at least once in a year and more often in appropriate cases.

What constitutes “reasonable intervals” depends on circumstances of each case. The periodicity of the physical verification of inventories depends upon the nature of inventories, their location and the feasibility of conducting a physical verification. The management of a company normally determines the periodicity of the physical verification of inventories considering these factors.

Normally, wherever practicable, all the items of inventories should be verified by the management of the company at least once in a year.

The auditor in order to satisfy himself about verification at reasonable intervals should examine the adequacy of evidence and record of verification.

In the given case, physical verification of 50% of the items has not been conducted by the management during the year.

Conclusion: Auditor should point out the fact regarding inadequacies in the physical verification procedures of inventory in his report.

Question 17.
In the course of audit of Y Ltd., as the auditor of the company you observe the following: The company has advanced a loan to a firm in which a director was interested at a rate lower than the prevailing market rate as well as there was no agreement on terms of repayment.
How auditor will report in CARO, 2020?
Answer:
Reporting requirement under CARO, 2020:
Para 3 (ii)(a) of CARO, 2020 requires the auditor to report whether during the year the company has provided loans or advances in the nature of loans, or stood guarantee, or provided security to any other entity, if so, indicate the aggregate amount during the year, and balance outstanding at the balance sheet date with respect to such loans or advances.

Para 3(iii)(b) of CARO, 2020, requires the auditor to report whether 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.

In the present case, company has granted a loan to a 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”.

Pare 3(iii)(f) of CARO, 2020 requires the auditor to report whether the company has granted any loans or advances in the nature of loans either repayable on demand or without specifying any terms or period of repayment, if so, specify the aggregate amount, percentage thereof to the total loans granted, aggregate amount of loans granted to Promoters, related parties as defined in Sec. 2(76) of the Companies Act, 2013.

Question 18.
H Ltd. granted unsecured loan of ₹ 1 crore @ 15% p.a. to two of its subsidiaries during the Financial Year 2020-21. Before the year end both the companies repaid the loan. The management of H Ltd. is of the opinion that since no balance is outstanding as on 31st March 2021, these loans are not required to be reported in CARO, 2020. Comment and draft a suitable report.
Answer:
Reporting requirement under CARO, 2020:
Para 3 (iiii) (a) of CARO, 2020 requires the auditor to report whether during the year the company has provided loans or advances in the nature of loans, or stood guarantee, or provided security to any other entity, if so, indicate the aggregate amount during the year, and balance outstanding at the balance sheet date with respect to such loans or advances.

Guidance Note on CARO, 2020 as issued by ICAI states that it may so happen that a 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.

In the given case, H Ltd. has granted unsecured loan of ₹ 1 crore @15% p.a. to two of its subsidiaries during the Financial Year 2020-21. During the year, both the companies have repaid its loan. Therefore, the auditor need to consider the transaction and comment as follows:

“The Company has granted loan of ₹ 1 Crore @ 15% p.a. to 2 of its subsidiaries during the Financial Year 2020-21. The maximum amount involved during the year was ₹ 1.00 crore and the year-end balance of such loans was Nil”.

Question 19.
ABC Ltd. has granted a loan of ₹ 20 crores to its associate XYZ (R) Ltd. at the beginning of the financial year and it remain outstanding at the year end. How the auditor should report the fact?
Answer:
Reporting requirement under CARO, 2020:
As per Para 3 (iii) of CARO, 2020 auditor is required to report the following in respect of loans and advances granted during the year by the company to another company, firms, LLPs or any other entities:

aggregate amount during the year, and balance outstanding at the balance sheet date with respect to such loans or advances.

whether 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.

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;

if the amount is overdue, state the total amount overdue for more than 90 days, and whether reasonable steps have been taken by the company for recovery of the principal and interest;

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;

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

In the given case, ABC Ltd. has granted a loan of ₹ 20 crores to its associates at the beginning the Financial Year and it remain outstanding at year end.

Conclusion: Auditor is required to report the matters as required under Para 3 (iii) of CARO, 2020.

Question 20.
As a Company auditor you noticed that there is an inter corporate loan granted by the company. What are the reporting requirements as regard the matters concerning terms of interest on the inter-corporate loan?
Answer:
Reporting requirements as to inter corporate loan granted by the company:
As per Para 3 (iv) of CARO, 2 0 2 0, the auditor is required to report, in respect of loans, investments, guarantees, and security whether provisions of Sections 185 and 186 of the Companies Act, 2013 have been complied with. If not, provide details thereof. For this purpose of ensuring compliance of Sec. 186, the auditor should:

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.

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.

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.

Non-compliance of Sec. 186 with respect to interest on the intercorporate loan may be reported incorporating following details:

S. No.	Non-compliance of Section 186				Remarks, if any
S. No.		Name of Company/Party	Amount Involved	Balance as at Balance Sheet Date	Remarks, if any
1	Loan given at rate of interest lower than prescribed
2	Any other default

Question 21.
CARO, 2020 requires the auditor of the company to report whether maintenance of cost records has been specified by the Central Government under section 148 of the Companies Act, 2013 and whether such accounts and records have been so made and maintained.

You are required to briefly explain the audit procedure to be followed by the auditor and suggest the reporting pattern.
Answer:
Reporting requirement under CARO, 2020:
Para 3(vi) of CARO, 2020 requires the auditor to comment “whether maintenance of cost records has been specified by the CG u/s 148(1) of the Companies Act, 2013 and whether such accounts and records have been so made and maintained”

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

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.

The Order does not require a detailed examination of such records. The auditor should, therefore, conduct a general review of the cost records to ensure that the records as prescribed are made and maintained. He should, of course, make such reference to the records as is necessary for the purposes of his audit.

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.”

Question 22.
As a statutory auditor, how would you deal with the following case: During the course of audit of ABC Ltd. it is noticed that out of ₹ 12 Lacs of provident fund contribution accounted in the books, only ₹ 2 Lacs has been remitted to the authorities during the year. On enquiry the Chief Accountant informed that due to financial problems they have not remitted but will remit the same as and when the position improves.
Or
During the course of Audit of M/s CT Ltd. for the financial year 2020-21, it has noticed that ₹ 2.00 lakhs of employee contribution and ₹ 9.50 lakhs of employer contribution towards employee state insurance contribution have been accounted in the books of account in respective heads. Whereas, it was found that ₹ 4.00 lakhs only have been deposited with ESIC department during the year ended 31^stst March, 2021. The Finance Manager informed that auditor that due to financial crunch they have not deposited the amount due, but will deposit the amount overdue along with interest as and when financial position improves. Comment as a statutory auditor.
Answer:
Reporting Requirement under CARO w.r.t. payment of statutory dues:
Para 3(vii)(a) of CARO, 2020 requires the auditor to comment whether the company is regular in depositing undisputed statutory dues including GST, Provident Fund, Employees State Insurance (ESI), Income-tax, Sales-tax, Wealth tax, Service tax, Duties ofCustoms, Duty of Excise, Value Added Tax, cess and any other statutory dues with the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they became payable shall be indicated.

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”.

A company is required to deposit provident fund and Employees State Insurance dues to appropriate authorities with in the period prescribed under the EPF Act and the Rules governing it.

In the present case company is not regular in depositing the provident Fund/ESI Contributions. The reason put forward by the Chief Accountant that the amount has not been deposited due to financial problems faced by the Company is no excuse for not remitting the PF/ESI Contributions.

Conclusion: Non-payment of PF/ESI contribution needs to be disclosed by the auditor in his audit report as per requirement of Para 3(vii)(a) of CARO, 2020.

Question 23.
As a Statutory Auditor, how would you deal with the following: PQR Ltd. has not deposited Provident Fund contribution of ₹ 10 lakhs with the authorities till the year-end.
Answer:
Reporting Requirement under CARO w.r.t. payment of statutory dues:
Para 3(vii)(a) of CARO, 2020 requires the auditor to comment whether the company is regular in depositing undisputed statutory dues including GST, Provident Fund, Employees State Insurance (ESI), Income-tax, Sales-tax, Wealth tax, Service tax, Duties of Customs, Duty of Excise, Value Added Tax, cess and any other statutory dues with the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they became payable shall be indicated.

A company is required to deposit provident fund and Employees State Insurance dues to appropriate authorities with in the period prescribed under the EPF Act and the Rules governing it.

In the present case company is not regular in depositing the provident Fund.

Conclusion: Non-payment of PF needs to be disclosed by the auditor in his audit report as per requirement of Para 3(vii)(a) of CARO, 2020.

Question 24.
Comment on the following: Is the company regular in depositing undisputed statutory dues including GST, Provident Fund, Employees State Insurance, Income Tax, Sales Tax, Wealth Tax, Customs duty, Excise duty, Value added Tax, Cess and any other statutory dues with the appropriate authorities and if not, the extent of arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they became payable shall be indicated by the auditor.
Answer:
Reporting on Regularity of payment of statutory dues:
Para 3(vii)(a) of CARO, 2020 requires the auditor to comment:
(i) whether the company is regular in depositing undisputed statutory dues including GST, Provident Fund, Employees State Insurance, Income Tax, Sales Tax, Service Tax, Duties of Customs, duty of Excise, Value added Tax, Cess and any other statutory dues with the appropriate authorities; and

(ii) if not, the extent of arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they became payable shall be indicated by the auditor.

Implication of Para 3(vii)(a) are as follows:

Auditor is required to comment upon regularity in depositing undisputed statutory dues.
Payment includes all statutory dues payable by the company. The amount payable will include the interest/penalty payable under the respective laws.
If the company is not regular in depositing the undisputed statutory dues the auditor is required to state the extent of outstanding statutory dues as at the last day of the financial year from a period of more than six months from the date they became payable.
The auditor has to get a written representation from the management indicating the details of disputed claims, undisputed but have remained outstanding for more than six months and a statement as to the completeness of the information provided by the management.

Question 25.
Big and Small Ltd. received a show cause notice from GST department intending to levya demand of ₹ 25 lakhs in December 2020. The company replied to the above notice in January 2021 contending that it is not liable for the levy. No further action was initiated by the GST department upto the finalization of the audit for the year ended on 31st March, 2021. As the auditor of the company, what is your role in this?
Answer:
Reporting in case of Statutory dues:
Para 3(vii)(a) of CARO, 2020 requires the auditor to comment whether the company is regular in depositing undisputed statutory dues including GST, Provident Fund, Employees State Insurance [ESI], Income-tax, Sales-tax, Wealth tax, Service tax, Duties of Customs, Duty of Excise, Value Added Tax, cess and any other statutory dues with the appropriate authorities and if pot, the extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they became payable shall be indicated.

As per Para 3(vii)(b) of CARO, 2020, 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 Department shall not constitute the dispute.

In the present case issuance of show cause notice by GST department does not tantamount to demand payable by the Company. In as much as the Company has replied to the notice and no further correspondence was received from the department, it has to be construed that there is no demand.

Conclusion: The auditor needs not to report on this.

Question 26.
XYZ Pvt. Ltd. has submitted the financial statements for the year ended 31-3-2021 for audit. The audit assistant observes and brings to your notice that the company’s records show following

Income Tax relating to Assessment Year 2017-18 ₹ 125 lacs – Appeal is pending before Hon’ble ITAT 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?
Answer:
Reporting under CARO w.r.t. Statutory Dues:
Para 3(vii)(a) of CARO, 2020 requires the auditor to comment whether the company is regular in depositing undisputed statutory dues including GST, Provident Fund, Employees State Insurance (ESI), Income-tax, Sales-tax, Wealth tax, Service tax, Duties of Customs, Duty of Excise, Value Added Tax, cess and any other statutory dues with the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they became payable shall be indicated.

As per Para 3(vii)[b] of CARO, 2020, 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.

The auditor should also obtain a management representation about the disputed dues, the amounts involved and the forum where the dispute is pending. The auditor should carry out necessary audit procedures to verify the information provided by the management.

In the present case, there is Income Tax demand of ₹ 125 Lacs and the company has gone for an appeal, it should be brought to notice of members by reporting under Para 3(vii)(b) of CARO, 2020 as below:

S. No.	Name of the Statute	Nature of Dues	Amount (in Lacs)	Period to which amount relates	Forum where dispute is pending
1	Income-tax Act, 1961	Income Tax	125.00	AY 2015-16	ITAT

In reference to demand notice received for Custom Duty of ₹ 85 Lacs on 15-9-2020 for which company has not taken any action and is outstanding for more than 6 months, it leads to the irregularity which should be brought to notice of members by reporting under Para 3(vii)(a) of CARO, 2020.

Question 27.
OK Ltd. has taken a term loan from a nationalized bank in 2016 for ₹ 200 lakhs repayable in five equal instalments of ₹ 40 lakhs from 31st March, 2017 onwards. It had repaid the loans due in 2017 & 2018, but defaulted in 2019,2020 & 2021. As the auditor of OK Ltd. what is your responsibility assuming that company has sought re-schedulement of loan?
Answer:
Reporting w.r.t. repayment of dues:
As per Para 3(ix)(a) of CARO, 2020 auditors of a company are required to comment in his report 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, 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

*Lenderwise details to be provided in case of defaults to banks, financial institutions and Government

As per the general instructions for preparation of Balance Sheet, provided under Schedule III to the Companies Act, 2013, terms of repayment ofterm 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.

Submission of application for re-schedulement/restruduring does not mean that no default has occurred.

In this case OK Ltd. has defaulted in repayment of dues for three years. Application for rescheduling will not change the default position.

Conclusion: The auditor has to report in his audit report that the Company has defaulted in its repayment of dues to the bank to the extent of ₹ 120 lakhs.

Question 28.
R Ltd. as at 31^st March, 2021 defaulted in the repayment of interest and principal due to a financial institution. The due date was 28l” February, 2021. However, the defaulted amount was paid on 5^th 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. [May 13 (4 Marks)]
Or
C Limited has defaulted in repayments of dues to a financial institution during the financial year 2020-21 and the same remained outstanding as at March 31, 2021. However, the Company settled the total outstanding dues including interest in April, 2020 subsequent to the year end and before completion of the audit. Discuss how you would deal with this matter and draft a suitable Auditor’s Report. [Nov. 14 (4 Marks)]
Answer:
Reporting w.r.t. repayment of dues:
As per Para 3(ix)(a) of CARO, 2020 auditors of a company are required to comment in his report 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, 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.

As per 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.

In the given case, company has defaulted in repayments of dues to a financial institution during the financial year 2020-21 which remain outstanding as at March 31, 2021. However, the company has settled the total outstanding dues including interest in April, 2021 but, the dues were outstanding as at March 31, 2021.

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 2 8th Feb, 2021. However, the outstanding sum was settled by the company on 5th April, 2021.

Question 29.
Under CARO how, as a statutory auditor how would you comment on the following: A Term Loan was obtained from a bank for ₹ 75 lakhs for acquiring R&D equipment, out of which ₹ 12 lakhs were used to buy a car for use of the concerned director, who was overlooking the R&D activities. [Nov. 12 (4 Marks)]
Answer:
Utilisation of Term Loans:
Para 3(ix)(c) of CARO, 2020 requires the auditor to comment 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;

For this purpose, 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 was taken for the purpose of purchase of Research & Development equipment, but a part of it has been utilized for purchase of vehicle for the use of Director.

Purchase of vehicle for use by Director who was incharge of the R&D activities, cannot be considered as purchase of Research & Development equipment.

Conclusion: Auditor is required to report the fact in his audit report. Reporting may be as follows:

In our opinion and according to the information and explanations given to us, the Company has utilized the money raised by the term loans during the year for the purposes for which they were raised, except for:

Nature of the fund Raised	Name of the lender	Amount diverted	Purpose for which amount was sanctioned	Purpose for which amount was utilised	Remarks

Question 30.
As a Statutory Auditor, how would you deal with the following: LM Ltd. had obtained a Term Loan of ₹ 300 lakhs from a bank for the construction of a factory. Since there was a delay in the construction activities, the said funds were temporarily invested in short term deposits.
Answer:
Utilisation of Term Loans:
Para 3 (ix) (c) of CARO, 2020 requires theauditor to comment 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;

As per Guidance Note on CARO, 2020, during construction phase, companies, generally, temporarily invest the surplus funds to reduce the cost of capital or for other business reasons. However, subsequently the same are utilised for the stated objectives. In such cases, the auditor should mention the fact that pending utilisation of the term loan for the stated purpose, the funds were temporarily used for the purpose other than for which the loan was sanctioned but were ultimately utilised for the stated end-use.

In the instant case, term loan was taken for the purpose of construction of a factory, but said funds were invested in short term deposits due to delay in construction activities.

Conclusion: Auditor is required to report the fact that the pending utilisation of term loan, the funds are temporarily invested in short term deposits, in his audit report as per requirement of paragraph 3 (ix)(c) of CARO, 2020.

Question 31.
During the financial year ended on 31-3-2021, LM Private Limited had borrowed from a Nationalized Bank, a term loan of ₹ 120 lakhs consisting of ₹ 100 lakhs for purchase of a machinery for the new plant and ₹ 20 lakhs for erection expenses. As on the date of 31^st March, 2021, the total of capital and free reserves of the Company was ₹ 50 lakhs and turnover for the year 2020-21 was ₹ 750 lakhs.

The Bank paid ₹ 100 lakhs to the vendor of the Company for the supply of machinery on 31-12-2020. The machinery had reached the yard of the Company. On 28-2-2021, the Company had drawn the balance of loan viz. ₹ 20 lakhs to the credit of its current account maintained with the Bank and utilized the full amount for renovating its administrative office building. The machinery had been kept as capital stock under construction. Comment as to reporting issues, if any, that the Auditor should be concerned with for the financial year ended on 31-3-2021, in this respect.
Answer:
Reporting as to misutilisation of Term Loans:
Reporting under CARO, 2020 is applicable in case of a private limited company if the total borrowings exceed ₹ 1 Cr. from any bank or financial institution at any point of time during the financial year.

Para 3 (ix) (c) of CARO, 2020 requires the auditor to comment 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;

In the present case, LM Private limited had borrowed from a Nationalized Bank, a term loan of ₹ 120 lakhs consisting of ₹ 100 lakhs for purchase of a machinery for the new plant and ₹ 20 lakhs for erection expenses. The Bank paid ₹ 100 lakhs to the vendor of the Company for the supply of machinery on 31-12-2020. The machinery had reached the yard of the Company. On 28-2-2021, the Company had drawn the balance of loan viz. ₹ 20 lakhs to the credit of its current account maintained with the Bank and utilized the full amount for renovating its administrative office building.

Auditor of LM Private Limited is under obligation to report on matters covered under CARO, 2020 as total borrowings exceed ₹ 1 Cr. LM Private Limited had taken term loan for erection purposes, but utilized the funds for renovation of administrative office building.

Conclusion: As per requirement of Para 3(ix)(c) of CARO, 2020, auditor is required to report the fact that out of the term loan obtained for machinery purchase and erection, ₹ 20 Lacs was not utilized for the purpose of erection of machinery.

Question 32.
As a statutory auditor, how would you report on the following under CARO: ABC Pvt. Ltd. is a manufacturer of jewellery. A senior employee of the Company informed you that the Company does not properly disclose the purity of gold used on the jewellery.
Answer:
Reporting under CARO w.r.t. Fraud:
Para 3 (x/) of CARO, 2020 requires the auditor to comment 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.

In the present case if purity of gold is not properly disclosed on the jewellery it amounts to defrauding the customers. It implies that the management is deceiving customers to obtain an illegal advantage.

As per SA 240 “The Auditor’s responsibilities in relation to an audit of Financial Statements” the auditor is concerned with fraudulent acts that cause 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, i.e., 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.

Question 33.
What are the reporting requirements in the audit report under the Companies Act, 2013/CARO, 2020 for the following situations?
(a) A fraud has been committed against the company by an officer of the company.
(b) A fraud has been committed against the company by a vendor of the company.
(c) The company has committed a major fraud on its customer and the case is pending in the court.
(d) A fraud has been reported in the cost audit report but not noticed by statutory auditors in his audit.
Answer:
Reporting under Companies Act, 2013/CARO, 2020 w.r.t. Fraud:
Section 143(12) of Companies Act, 2013 requires that if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed. For this purpose, Rule 13 prescribes the amount of ₹ 1 Cr. or more.

However, in case of a fraud involving lesser than the specified amount, i.e. below ₹ 1 Cr., the auditor shall report the matter to the audit committee constituted u/s 177 or to the Board in other cases within such time and in such manner as may be prescribed:

Para 3(xi) of CARO, 2020 requires the auditor to comment 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.

Accordingly, reporting requirements will be:

S. No.	Situation	Reporting under Companies Act, 2013	Reporting under CARO, 2020
1	A fraud has been committed against the company by an officer of the company	Reporting required to C.G. if amount of fraud exceeds ₹ 1 Cr.	Nature of Fraud and amount involved need to be reported under Para 3(xi).
2	A fraud has been committed against the company by a vendor of the company.	No reporting required.	Nature of Fraud and amount involved need to be reported under Para 3 (xi).
3	The company has committed a major fraud on its customer and the case is pending in the court.	Effect of such fraud on financial statements need to be reported.	Nature of Fraud and amount involved need to be reported under Para 3(xi).
4	A fraud has been reported in the cost audit report but not noticed by statutory auditors in his audit.	Effect of such fraud on financial statements need to be reported.	Para 3 (xi) requires reporting of fraud that has been noticed or reported during the year.

Question 34.
CARO, 2020 has made several significant changes and has introduced many new reporting requirements vis-a-vis CARO, 2016.

In view of the above, describe the relevant clause relating to Nidhi Companies – compliance with I net owned funds to deposit requirements and the relevant provisions.
What audit procedures are to.be adopted for verification and reporting on the same? [Nov. 16 (4 Marks)]
Answer:
Clause relating to NIDHI Companies under CARO, 2020:
Clause (xii) of Para 3 of CARO, 2020 requires the auditor to report certain matters relating to Nidhi Companies. The matters on which auditor is required to report are:

Whether the Nidhi Company has complied with the Net Owned Fund to Deposits in the ratio of 1: 20 to meet out the liability and
Whether the Nidhi Company is maintaining 10% unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability.
Whether there has been any default in payment of interest on deposits or repayment thereof for any period and if so, the details thereof;

Audit Procedures for Verification and Reporting:
Ministry of Corporate Affairs on 31st March 2014, vide its Notification No. GSR 258(E] notified the ‘Nidhi Rules 2014’, which came into force on the first day of April 2014.

As per Rule 3(d) Net Owned Funds are defined as the aggregate of paid-up equity share capital and free reserves as reduced by accumulated losses and intangible assets appearing in the last audited balance sheet. Provided that, the amount representing the proceeds of issue of preference shares, shall not be included for calculating Net Owned Funds.

A Nidhi company can accept fixed deposits, recurring deposits and savings deposits from its members in accordance with the directions notified by the Central Government. The aggregate of such deposits is referred to as “deposit liability”.

The auditor should ask the management to provide the computation of the deposit liability and net owned funds on the basis of the requirements mentioned above. This would enable him to verify that the ratio of deposit liability to net owned funds is in accordance with the requirements prescribed in this regard.

Question 35.
RNT Ltd. has entered into non-cash transactions with Mr. Ram, son of one of the directors of the company, which is an arrangement by which the RNT Ltd. is in process to acquire assets for consideration other than cash. Under CARO, 2020, as a statutory auditor, how would you report? [RTP-Nov. 19]
Answer:
Reporting under CARO, 2020:
Para 3(xv) of CARO, 2020 requires the auditor to comment “whether the company has entered into any non-cash transactions with directors or persons connected with him and if so, whether provisions of Section 192 of Companies Act, 2013 have been complied with”.

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:

An arrangement by which a director of the company or its holding, subsidiary or associate company or a person connected with such director acquires or is to acquire assets for consideration other than cash, from the company.
An arrangement by which the company acquires or is to acquire assets for consideration other than cash, from such director or person so connected.

The reporting requirements under this clause are in two parts. The first part requires the auditor to report on whether the company has entered into any non-cash transactions with the directors or any persons connected with such director/s. The second part of the clause requires the auditor to report whether the provisions of section 192 of the Act have been complied with. Therefore, the second part of the clause becomes reportable only if the answer to the first part is in affirmative.

Suggested paragraph on reporting:
“According to the information and explanations given to us, the Company has entered into non-cash transactions with one of the directors/person connected with the director during the year, by the acquisition of assets by assuming directly related liabilities, which in our opinion is covered under the provisions of Section 192 of the Act, and for which approval has not yet been obtained in a general meeting of the Company”.

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

This property is pending to be registered in the name of the Company, due to certain procedural issues associated with the Registration though the Company is having a valid possession and has paid its purchase cost in full. The Company has disclosed this amount under Fixed Assets though no disclosure of non-registration is made in the notes forming part of the accounts.

(c) An amount of ₹ 3.25 Lakhs per month is paid to M/s. WE CARE Associates, a partnership firm, which is a ‘related party’ in accordance with the provisions of the Companies Act, 2013 for the marketing services rendered by them. Based on an independent assessment, the consideration paid is higher than the arm’s length pricing by ₹ 0.2 5 Lakhs per month. Whilst the transaction was accounted in the financial statements based on the amounts’ paid, no separate disclosure has been made in the notes forming part of the accounts highlighting the same as a ‘related party’ transaction. [MTP-Oct. 19]

(d) The Internal Auditor of the Company has identified a fraud in the recruitment of employees by the HR department wherein certain sums were alleged to have been taken as kick-back from the employees for taking them on board with the Company. After due investigation, the concerned HR Manager was sacked. The amount of such kick-backs is expected to be in the range of ₹ 12 Lakhs. [MTP-March 19, RTP-May 19]
Answer:
Reporting under CARO, 2020
(a) Auditor is required to report the matter as per Para 3(xii) of CARO, 2020 which requires him to report “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”.

(b) Auditor is required to report the matter as per Para 3(i)(c) of CARO, 2020 which requires him to report, “whether the title deeds of all the immovable properties disclosed in the financial statements are held in the name of the company”. If title deeds are not held in name of the company, details thereof to be provided in the below mentioned format:

Description of Property	Gross carrying value	Held in name of	Whether promoter, director or their relative or employee	Period held – indicate range, where appropriate	Reason for not being held in name of company*

*Also indicate if in dispute.

(c) Auditor is required to report the matter as per Para 3(xiii) of CARO, 2020 which requires him to report “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”.

Reporting is required, as one of related party transaction amounting ₹ 3.25 lakhs per month i.e. in lieu of marketing services has been noticed of which amount ₹ 0.25 lakh per month is exceeding the arm’s length price has not been disclosed highlighting the same as related party transactions as per AS 18.

(d) Auditor is required to report the matter as per Para 3(xi) of CARO, 2020 which requires him 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.”

Reporting is required, as a fraud has been identified in recruitment of employees by the HR Department wherein certain sums were alleged to have been taken as kick-back from the employees of company amounting to ₹ 12 Lakhs, approx.

CARO, 2020 – CA Final Audit Question Bank

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