PAGE Contents I-9 CARO, 2020 in nutshell I-51 CARO, 2020 clause-wise Ready Reckoner I-53 DIVISION ONE APPLICABILITY OF REQUIREMENTS OF CARO, 2020 CHAPTER 0 Introduction 3 CHAPTER 1 Applicability of CARO, 2020 16 DIVISION TWO REPORTING UNDER CARO, 2020 (AS APPLICABLE TO AUDIT OF STANDALONE FINANCIAL STATEMENT) [CLAUSES 3(i) TO 3(xx) OF CARO, 2020] CHAPTER 2 Property, Plant and Equipment 49 CHAPTER 3 Intangible Assets 141 I-5
CHAPTER 4 Title Deeds of all Immovable Properties Disclosed in Accounts 163 CHAPTER 5 Proceedings Pending against the Company for Holding Benami Property 252 CHAPTER 6 Inventory 271 CHAPTER 7 Quarterly Statements Submitted to Banks/FIs by Companies Enjoying Sanctioned Working Capital Limits 312 CHAPTER 8 Loans or Advances in the Nature of Loans or Guarantees or Security Provided to, or Investments made in, Other Entities 351 CHAPTER 9 Reporting on Compliance with Sections 185 and 186 as Regards Loans, Investments, Guarantees and Securities 475 CHAPTER 10 Acceptance of Public Deposits and Deemed Deposits 512 CHAPTER 11 Maintenance of Cost Records 552 CHAPTER 12 Payment/Non-Payment of Statutory Dues 568 CHAPTER 13 Transactions not Recorded in the Books and Surrendered or Disclosed as Income in Tax Assessment 622 CHAPTER-HEADS I-6 PAGE
CHAPTER 14 Company Defaults in Repayment of Loans/Other Borrowings/in Payment of Interest to any Lender 634 CHAPTER 15 End use of Term Loans 684 CHAPTER 16 ‘Asset-Liability Maturity Mismatch’ - Use of Short-Term Funds for Long-Term Purposes 696 CHAPTER 17 Funds taken from other entities by Company to Meet Obligations of Subsidiaries, Associates or JVs 707 CHAPTER 18 Whether Company has Raised Loan on Pledge of Securities in Subsidiaries, Associates or JVs 726 CHAPTER 19 End Use of Moneys Raised by Way of IPO/FPO 736 CHAPTER 20 Private Placement/Preferential Allotment of Shares/FCDs/ PCDs/OCDs 748 CHAPTER 21 Frauds Noticed/Reported 770 CHAPTER 22 Reporting of Compliances by Nidhi Companies 803 CHAPTER 23 Related Party Transactions 826 CHAPTER 24 Internal Audit 866 I-7 CHAPTER-HEADS PAGE
PAGE CHAPTER 25 Non-Cash Transactions Involving Directors or Connected Persons 884 CHAPTER 26 Reporting in Respect of NBFCs, HFCs and CICs 897 CHAPTER 27 Whether Company has Incurred Cash Loss 924 CHAPTER 28 Resignation of Statutory Auditors 934 CHAPTER 29 Material Going Concern Uncertainty 945 CHAPTER 30 Transfer of Unspent CSR Funds 1017 CHAPTER 31 Reasons to be Stated by Auditor for Qualified or Adverse Remarks in CARO Report 1043 DIVISION THREE CARO REPORT ON CONSOLIDATED FINANCIAL STATEMENTS UNDER CARO, 2020 CHAPTER 32 Qualified/Adverse Remarks in CARO Reports of Companies Included in Consolidated Financial Statements 1047 APPENDICES SCHEDULE III OF COMPANIES ACT, 2013 1057 COMPANIES (AUDITOR'S REPORT) ORDER, 2020 1162 RELEVANT PROVISION OF COMPANIES ACT, 2013 1170 CHAPTER-HEADS I-8
PAGE Chapter-heads I-5 CARO, 2020 in nutshell I-51 CARO, 2020 Clause-wise Ready Reckoner I-53 DIVISION ONE APPLICABILITY OF REQUIREMENTS OF CARO, 2020 INTRODUCTION 0.1 Backdrop 3 0.2 ICAI’s Guidance note on reporting requirements of CARO 3 0.3 CARO Report 3 0.4 CARO, 2020 applies to audit reports of Companies (except those specifically exempted) for F.Y. 2021-22 & subsequent FYs 4 0.5 Features of CARO, 2020 4 0.6 CARO, 2020 applicable to all companies unless specifically exempted 5 0.7 Single clause CARO report applicable to consolidated Financial Statements 5 0.8 Auditor required to report only on matters specified in Paras 3 and 4 of the Order as applicable to the company 6 0.9 Requirements of CARO, 2020 are supplemental to the existing provisions of section 143 of the Act 7 0.10 Distinction between CARO, 2020 and section 143(1) 7 0.11 Supplemental to Comptroller and Auditor General Directions 7 I-9
PAGE 0.12 General Audit Approach to CARO, 2020 8 0.12-1 Period of compliance 8 0.12-1A Whether reporting under CARO, 2020 should be with reference to the balance sheet date position or w.r.t. position during the FY under audit? 8 0.12-2 Investigation is not required 8 0.12-3 Working Papers 9 0.12-4 Observe CARO, 2020 in letter and spirit 9 0.12-5 CARO, 2020 is not restrictive of auditor’s duties 9 0.12-6 Exercise of judgment 9 0.12-7 Avoid criticising management’s actions based on “hindsight” 10 0.13 Management’s responsibility to prepare the data required to be reported in various clauses of CARO, 2020 10 0.14 CARO, 2020 and ARI Disclosures required by amended Schedule III 11 0.15 Frequently Asked Questions 14 1 APPLICABILITY OF CARO, 2020 1.1 Effective date of CARO, 2020 17 1.2 Companies to which CARO, 2020 applies 17 1.2-1 Applies to foreign company 18 1.2-2 Applicability of CARO, 2020 to audit of branches of a company 19 1.3 Exemption of companies from CARO, 2020 20 1.3-1 Applicability of CARO, 2020 would depend on the status of the company as at the balance sheet date 21 1.3-2 Insurance companies, banking companies, section 8 companies, OPCs and small companies are unconditionally exempt from CARO, 2020 21 1.3-3 Company licensed to operate under section 8 of the Act 22 1.3-4 Definition of ‘One Person Company’ (OPC) 23 1.3-5 Small Company 29 CONTENTS I-10
PAGE 1.3-6 Exemption to private limited companies from CARO, 2020 31 1.3-7 Not a holding Co. or a subsidiary of a public company 32 1.3-8 Paid up capital plus reserves and surplus should not exceed ` 1 crore 33 1.3-9 Total borrowings not exceeding ` 1 crore from any bank or Financial Institution [clause 1(2)(v)] 36 1.3-10 Total revenue not exceeding ` 10 crore 39 1.4 Applicability of CARO, 2020 to REITs and INVITs 41 1.5 Frequently Asked Questions 41 1.6 Case Studies 44 DIVISION
AUDIT
2 PROPERTY, PLANT AND EQUIPMENT 2.0 Map of Clause 3(i)(a)(A), clause 3(i)(b) and clause 3(i)(d) of CARO 50 2.1 Matters required to be verified and reported as per Clause 3(i)(a)(A) 52 2.2 Matters required to be verified and reported as per Clause 3(i)(b) 52 2.3 Matters required to be verified and reported as per Clause 3(i)(d) 53 2.4 Applicability/non-applicability of requirements of Clause 3(i)(a)(A) and Clause 3(i)(b) 53 2.5 Applicability/non-applicability of requirements of Clause 3(i)(d) 53 2.6 Comparison of reporting requirements under Clause 3(i) (a)/(b) PPE Assets and Clause 3(ii) Inventories 53 2.7 Property, plant and equipment 54 2.8 Whether ‘PPE’ covers ROU assets, investment properties and held for sale assets 54 I-11 CONTENTS
TWO REPORTING UNDER
CARO, 2020 (AS APPLICABLE TO
OF
STANDALONE
FINANCIAL STATEMENT)
[CLAUSES
3(i) TO 3(xx) OF CARO, 2020]
PAGE 2.9 Distinction between PPE and Fixed Assets 55 2.10 PPE covers ‘bearer plants’ also 55 2.11 PPE acquired under finance/operating lease 56 2.12 Is project under sale PPE or current asset? 56 2.13 Whether ‘PPE’ includes CWIP 56 2.14 If any PPE item has been obtained free of cost as a Government grant, are Clauses 3(i)(a)(A), 3(i)(b) and 3(i) (d) applicable to it? 57 2.15/16 Clause 3(i)(a)(A) of the Order does not require the auditor to comment on records maintained for intangible assets 57 2.17 What is meant by ‘proper records’? 57 2.18 Electronic PPE register - Whether proper records for the purposes of Clause 3(i)(a)(A) of the Order 62 2.19 How to enter quantitative details in PPE records 64 2.20 How to enter location/situation of PPE items in PPE records 64 2.21 Is it necessary to enter the relevant particulars as per Income-tax Act, 1961 in the PPE register? 64 2.22 Physical verification of PPE items is management’s responsibility, not auditor’s responsibility 65 2.22-1 The company is engaged in the business of letting-out its assets on operating lease to different parties. Is it necessary to physically verify these assets given on operating lease? If the management is not doing so, is any comment required in auditor’s report? 65 2.22-2 Is Clause 3(i)(b) regarding physical verification applicable to intangible assets? 65 2.23 Auditor’s duties as regards physical verification of PPE conducted by the management - Whether he should attend the physical verification? 65 2.24 What is meant by ‘reasonable intervals’? 68 2.25 Material discrepancies 68 2.26 When can discrepancy be regarded as ‘material’? 69 2.27 Auditor’s comment required only if company has revalued its PPE or intangible assets or both during the year 70 2.28 If no revaluation during the year, no need to state that there has been no revaluation of PPE or intangible assets or both 70 CONTENTS I-12
PAGE 2.29 What is meant by revaluation? 70 2.30 Registered Valuer 71 2.31 Net carrying value 74 2.32 Revaluation is optional but if done it must comply with accounting standards 74 2.33 Clause 3(i)(d) is neither exhaustive of auditor’s duties nor exhaustive of management’s duties as regards revaluation 74 2.33-1 Revaluation Model to be followed for revaluation of PPEs where AS (10) is the applicable accounting standard 75 2.33-2 Revaluation Model to be followed for revaluation of PPEs where Ind AS (16) is the applicable accounting standard 77 2.34 Disclosure of change due to revaluation in reconciliation of gross and net carrying amounts in notes to accounts [amended Schedule III] 80 2.35 Schedule III disclosure requirements corresponding to Clause 3(i)(d) of CARO, 2020 80 2.36 Comparison between clause 3(i)(d) of CARO, 2020 and corresponding ARI disclosure requirements of Schedule III 83 2.37 Checklist for Clause 3(i)(a)(A): Proper records of PPE 83 2.38 Checklist for Clause 3(i)(b): Physical verification of PPE by Management 85 2.39 Checklist for Clause 3(i)(d): Revaluation of PPE and/or intangible assets during the year 87 2.40 Documentation in audit file required 91 2.41 Suggested format for reporting details under Clause 3(i)(d) regarding revaluation of PPE assets/Intangible assets 91 2.42 Auditor’s duty under section 143(3)(i) - Existence, adequacy and operating effectiveness of internal financial controls 92 2.43 Auditor’s duty under section 143(3)(e) 93 2.44 Forward Linkages to Tax Audit report in Form No. 3CD 93 2.45 Sample drafts of comments under Clauses 3(i)(a)(A) and 3(i)(b) 93 2.46 Corporate Practices (Extracts from the Annual Reports of Companies) 95 2.46-1 Where auditor has adverse comments/qualifications/disclaimers to make 95 I-13 CONTENTS
PAGE 2.46-2 Where auditor has no adverse comments/ qualifications/disclaimers to make 101 2.46-3 Clause 3(i)(d) : Revaluation of PPE (including ROU assets) and/or Intangible assets 130 2.47 Clauses 3(i)(a)(A), 3(i)(b) and 3(i)(d) are not applicable to audit report on consolidated financial statements 131 2.48 Case Studies 132 2.49 Frequently Asked Questions 135 2.50 Multiple Choice Questions 139 3 INTANGIBLE ASSETS 3.0 Map of clauses 3(i)(a)(B) and 3(i)(d) 141 3.1 Matters required to be verified and reported as per Clause 3(i)(a)(B) 143 3.2 Matters required to be verified and reported as per Clause 3(i)(d) 143 3.3 Intangible assets 144 3.3-1 Asset 145 3.3-2 Monetary Assets 146 3.3-3 Non-monetary assets 146 3.4 Proper records of intangible assets 146 3.4-1 Full particulars of intangible assets 146 3.4-2 Electronic intangible assets register - Whether proper records for the purposes of clause 3(i)(a) (B) of the Order 148 3.4-3 Is it necessary to enter the relevant particulars as per Income-tax Act, 1961 in the intangible assets register? 150 3.5 Auditor’s comment required only if company has revalued its PPE or intangible assets or both during the year 150 3.6 If no revaluation during the year, no need to state that there has been no revaluation of PPE or intangible assets or both 151 3.7 What is meant by revaluation? 151 3.8 Registered Valuer 152 CONTENTS I-14
PAGE 3.9 Net carrying value 152 3.10 Revaluation is optional but if done it must comply with accounting standards 152 3.11 Clause 3(i)(d) is neither exhaustive of auditor’s duties nor exhaustive of management’s duties as regards revaluation 152 3.11-1 No revaluation of intangible assets permitted if company is governed by (AS) 26 153 3.11-2 Revaluation of intangible assets when company is governed by Ind AS 153 3.12 Disclosure of change due to revaluation in reconciliation of gross and net carrying amounts in notes to accounts [amended Schedule III] 155 3.13 Schedule III disclosure requirements corresponding to Clause 3(i)(d) of CARO, 2020 155 3.14 Checklist for Clause 3(i)(a)(B): Whether the company is maintaining proper records showing full particulars of intangible assets 156 3.15 Checklist for Clause 3(i)(d): Revaluation of PPE and/or intangible assets during the year 158 3.16 Audit Documentation to be maintained: Clause 3(i)(a)(B) 158 3.17 Audit Documentation to be maintained: Clause 3(i)(d) 158 3.18 Auditor’s duty under section 143(3)(i) - Existence, adequacy and operating effectiveness of internal financial controls 158 3.19 Auditor’s duty to report under section 143(3)(e) 159 3.20 Corporate Practices (Extracts from Annual Reports): Clause 3(i)(a)(B) 160 3.21 Clauses 3(i)(a)(B) and 3(i)(d) are not applicable to audit report on consolidated financial statements 160 3.22 Frequently Asked Questions 161 3.23 Case Studies 161 4 TITLE DEEDS OF ALL IMMOVABLE PROPERTIES DISCLOSED IN ACCOUNTS 4.0 Map of Clause 3(i)(c) 163 4.1 Matters required to be verified and reported as per Clause 3(i)(c) 164 I-15 CONTENTS
PAGE 4.2 Whether Reporting Requirement Applies only to Immovable Properties Included in Accounts as PPE 165 4.3 Immovable property 165 4.4 Title Deeds 166 4.5 Company required to disclose title deeds not held in company’s name, as part of “Additional Regulatory Information”, in notes to accounts 166 4.5-1 Comparison between clause 3(i)(c) of CARO, 2020 and corresponding ARI disclosure requirements of Schedule III 168 4.6 Checklist for Clause 3(i)(c): Title deeds of all immovable properties disclosed in FS whether held in Company’s name 169 4.7 Audit Documentation required: Clause 3(i)(c) 172 4.8 Auditor’s duty under section 143(3)(i) of the Act - Existence, adequacy and operating effectiveness of internal financial controls 173 4.9 Linkages to tax audit report in Form No. 3CD 174 4.10 Sample drafts of comments under clause 3(i)(c) 174 4.11 Corporate Practices: Extracts from annual reports 175 4.11-1 Where Clause 3(i)(c) is not applicable 175 4.11-2 Where original title deeds are in possession of bankers mortgagees from whom credit facilities have been availed 176 4.11-3 Unqualified remarks/remarks without any reservations/qualifications-title deeds of all immovable properties disclosed in FS are held in Company’s name 176 4.11-4 Qualified remarks of auditors i.e. title deeds of immovable properties disclosed in FS except some are held in the name of the company 182 4.12 Clause 3( i )( c ) is not applicable to audit report on consolidated financial statements 248 4.13 Frequently Asked Questions 248 4.14 Case Studies 249 4.15 Multiple Choice Questions 250 CONTENTS I-16
PAGE 5 PROCEEDINGS PENDING AGAINST THE COMPANY FOR HOLDING BENAMI PROPERTY 5.0 Map of Clause 3(i)(e) 252 5.1 Matters required to be verified and reported as per Clause 3(i)(e) 253 5.1-1 Comparison between clause 3(i)(e) of CARO, 2020 and corresponding ARI disclosure requirements of Schedule III 255 5.2 What auditor is not required or expected to do under clause 3(i)(e) 256 5.3 What is the scope of duties of auditor under clause 3(i)(e)? 256 5.4 Auditor to report under Clause 3(i)(e) even if any proceeding under PBPT Act initiated during the year is dropped as of date of audit report 257 5.5 Any proceeding initiated/pending against the Co. for holding benami property 257 5.6 Disclosures to be made by company in financial statements regarding proceedings initiated/pending under the PBPT Act 259 5.7 Audit Procedures and Reporting 261 5.8 Checklist for Clause 3(i)(e): Proceedings initiated or are pending against the company under the Benami Transactions (Prohibition) Act, 1988 whether disclosed in FS 262 5.9 What are the matters to be covered by auditor’s remarks under Clause 3(i)(e) 264 5.10 Suggested format for reporting details under Clause 3(i)(e) 265 5.11 Auditor’s duty under section 143(3)(j) read with Rule 11(a) 265 5.12 Corporate Practices (Extracts from annual reports of companies) 265 5.13 Clause 3(i)(e) is not applicable to audit report on consolidated financial statements 266 5.14 Case Studies 267 5.15 Frequently Asked Questions 268 5.16 Multiple Choice Questions 269 I-17 CONTENTS
PAGE 6 INVENTORY 6.0 Map of clause 3(ii)(a) 271 6.1 Reporting requirements of CARO, 2020 as regards inventory 272 6.2 Meaning of inventory 272 6.3 Whether assets given under finance lease by lessor-company will be covered under clause 3(i) (PPE) or under clause 3(ii)(a) (inventory)? 273 6.4 Whether assets given under operating lease and assets taken under finance lease will be covered under clause 3(i) (PPE) or under clause 3(ii)(a) (inventory)? 273 6.5 Can it be said that clause 3(ii)(a) will not apply to inventories of construction companies since these are immovable (e.g., flats) and hence do not require physical verification? 273 6.6 Physical verification by Management 274 6.6-1 What about inventories held with third parties (e.g., consignees, customers on sale or return basis, bounded warehouses)? Is auditor to insist that management physically verify these also? 274 6.6-2 Where due to the nature of the production process/industry, physical verification of WIP is impracticable 275 6.6-3 Auditor’s responsibilities with reference to physical stock-taking conducted by management 275 6.7 Reasonable Intervals [Clause 3(ii)(a)] 277 6.8 Auditor’s opinion on the appropriateness of the coverage & procedure of verification 277 6.9 Any discrepancies of 10% or more in the aggregate for each class of inventory noticed on physical verification 278 6.9-1 Discrepancy 278 6.9-2 Each class of inventory 278 6.9-3 Determination of discrepancies in the aggregate for each class of inventory and reporting thereon if it is 10% or more in the aggregate for that class 279 CONTENTS I-18
PAGE 6.10 Checklist for Clause 3(ii)(a) dealing with inventory 281 6.11 Audit Documentation: Stock statement not sufficient to evidence auditors compliance with Clause 3(ii)(a) 284 6.12 What are the matters to be covered by auditor’s remarks under Clause 3(ii)(a) 293 6.13 Auditor’s duty under section 143(3)(i) - Existence, adequacy and operating effectiveness of internal financial controls 294 6.14 Auditor’s duty under section 143(3)(h) - Any qualification, reservation or adverse remark relating to accounts 294 6.15 Linkages with tax audit report in Form No. 3CD 295 6.16 Sample drafts of comments under clause 3(ii)(a) 295 6.17 Corporate Practices (Extracts from annual reports) 296 6.17-1 Where auditor has adverse comments/qualifications to make 296 6.17-2 Where clause is not applicable 299 6.17-3 Inventory comprising of Treasury Bills and Dated Government Securities are held in the form of Subsidiary General Ledger (SGL) account maintained with the Reserve Bank of India 299 6.17-4 Securities held as stock-in-trade 300 6.17-5 Where inventory includes land, buildings, construction, work-in-progress, construction and development material, development rights, spares 300 6.17-6 Stock of Gas at the end of the year taken with reference to reading of Turbine flow meter/ Gas Chromatograph/Gas measurement system installed at Terminals 300 6.17-7 Where auditor has no adverse comments/ qualifications to make 300 6.18 Clause not applicable to audit report on CFS 305 6.19 Frequently Asked Questions 305 6.20 Case Studies 308 6.21 Multiple Choice Questions 309 I-19 CONTENTS
PAGE 7 QUARTERLY STATEMENTS SUBMITTED TO BANKS/FIs BY COMPANIES ENJOYING SANCTIONED WORKING CAPITAL LIMITS 7.0 Map of Clause 3(ii)(b) 312 7.1 Reporting requirements of CARO, 2020 as regards quarterly statements submitted to banks/FIs by companies enjoying working capital limits 313 7.2 Reporting not required if sanctioned working capital limits are unsecured or are sanctioned on basis of non-current assets 314 7.3 Reporting not required if working capital limits do not exceed the limit of five crore rupees 314 7.4 Sanctioned limit exceeding ` 5 crores on any day during the year triggers reporting under this clause 314 7.5 Definition of “working capital” 314 7.6 The term “Sanctioned working capital limits” would cover both fund based and non-fund based limits 315 7.7 Current assets 315 7.8 “Sanctioned” 315 7.9 How to reckon the limit of ` 5 crores 315 7.10 “During any point of time of the year” 316 7.11 Auditor’s duties under this clause reporting requirement is triggered 316 7.12 Corresponding requirement of amended Schedule III regarding “Additional Regulatory Information” disclosures in notes to accounts 318 7.12-1 Comparison between clause 3(ii)(b) of CARO, 2020 and corresponding ARI disclosure requirements of Schedule III 319 7.13 Checklist for Clause 3(ii)(b): Whether quarterly statements submitted by Company to banks/FIs in respect of working capital limits against current assets & whether such statements agree with books of account 320 7.14 Audit Documentation required: Clause 3(ii)(b) 321 CONTENTS I-20
PAGE 7.15 What are the matters to be covered by auditor’s remarks under Clause 3(ii)(b) 321 7.15-1 Auditor may limit his liability by clearly stating that he is not required to audit/certify the quarterly statements and has not done so 322 7.16 Suggested format for reporting details under Clause 3(ii)(b) 322 7.17 Linkages to tax audit report in Form No. 3CD 323 7.18 Corporate Practices (Extracts from annual reports) 323 7.18-1 Where there are no disagreements between the quarterly statements and the books of account of the Company 323 7.18-2 Clause 3(ii)(b) not applicable as WC limits are secured by negative lien on assets of the Company 328 7.18-3 Submission of quarterly stock statement/DP calculation not stipulated by the Bank 328 7.18-4 Clause not applicable as Company’s account is NPA and no WC limit sanctioned/renewed during the year 328 7.18-5 Company not required to file quarterly statements with Bank as it had closed the working capital limits with the bank 329 7.18-6 Company not required to file statements since limits undrawn/unutilized 329 7.18-7 Company settled all dues of working capital under OTS 329 7.18-8 Company’s quarterly statements submitted for 3 quarters agree with books; Company has not submitted statement for Q4 329 7.18-9 Revised quarterly statements filed which are in agreement with books of account 330 7.18-10 Where quarterly statements submitted are not in agreement with books of account 331 7.19 Clause 3( ii )( b ) is not applicable to audit report on consolidated financial statements 347 7.20 Frequently Asked Questions 347 7.21 Case Studies 349 7.22 Multiple Choice Questions 349 I-21 CONTENTS
PAGE 8 LOANS OR ADVANCES IN THE NATURE OF LOANS OR GUARANTEES OR SECURITY PROVIDED TO, OR INVESTMENTS MADE IN, OTHER ENTITIES 8.0 Map of Clause 3(iii) 352 8.1 Applicability of various sub-clauses to various transactions if auditee company’s principal business is to give loans 355 8.2 Applicability of various sub-clauses to various transactions if auditee company’s principal business is not giving loans 356 8.3 Company whose principal business is of making loans 356 8.4 Subsidiary 357 8.4-1 Control 358 8.4-2 One-half of total voting power 358 8.4-3 Total Voting Power 359 8.4-4 Control of composition of BOD of subsidiary by holding company 359 8.4-5 “Subsidiary” or “Subsidiary Company” must be a body corporate 360 8.4-6 Common directors not the test for holding cosubsidiary relationship 361 8.4-7 Layers of subsidiaries 361 8.5 “Associate Company” [Section 2(6)] 362 8.6 Joint Ventures 363 8.7 Loans 363 8.8 Advances in the nature of loans 363 8.9 Sale and Repurchase 364 8.10 Investments made 364 8.11 Guarantees 365 8.12 Reporting Requirements of CARO, 2020 as regards loans or advances in the nature of loans or guarantees or security provided or investments made 366 8.12A Inter-linkages between various sub-clauses of clause 3(iii) 366 8.13 Matters to be reported as per sub-clause (a) of clause 3(iii) - Aggregate amounts of loans, advances in the nature of loans, guarantees and security provided by the company during the year 369 CONTENTS I-22
PAGE 8.14 Suggested format for reporting under clause 3(iii)(a) 370 8.15 Matters to be reported as per Clause 3(iii)(b) - Whether terms & conditions of loans, advances in the nature of loans, guarantees and security provided and investment made, by the company are prejudicial to the company [clause 3(iii)(b)] 371 8.15-1 Whether it can be concluded that loans given are not prejudicial to company if provisions of section 186 are complied with? 374 8.15-2 0% interest Loan to JV at 0% despite JV’s increasing negative net worth & negative cash flows and EOM para on Going Concern by JV’s auditor - Whether prejudicial to interests of the company 375 8.15-3 Loan to subsidiary which is loss-making with negative cash flows from investing and financing activity - Whether prejudicial to company? 376 8.15-4 0% interest loans to loss-making and defaulting JVs and subsidiaries opined by auditor to be not prejudicial to company’s interests based on external expert’s report obtained a day before signing audit report 377 8.15-5 Draft of auditor’s remark under clause 3(iii)(b) where auditor reaches an unfavourable conclusion from his audit procedures 387 8.15-6 Auditor’s duty under new clause (e) of rule 11 of the Companies (Audit and Auditors) Rules, 2014 387 8.15-7 Disclosure requirements of amended Schedule III 388 8.16 Matters required to be reported as per clause 3(iii)(c) 388 8.16-1 Audit Procedures and Reporting [Clause 3(iii)(c)] 389 8.17 Suggested format for reporting under clause 3(iii)(c) 390 8.18 Matters to be reported under clause 3(iii)(d) - “Overdues” of loans/advances in the nature of loans given by the Co. & reasonable steps for recovery 390 8.18-1 Reasonable steps for recovery 390 8.18-2 Will taking post-dated cheques from the defaulting party amount to ‘reasonable steps for recovery’? 391 I-23 CONTENTS
If the post-dated cheques taken are honoured before the date of issue of audit report, can the auditor regard the taking of post-dated
PAGE 8.18-3
‘reasonable steps’ for recovery? 391 8.18-4 Audit Procedures and Reporting under clause 3(iii)(d) 391 8.19 Suggested format for reporting overdues under clause 3(iii)(d) 392 8.20 Matters to be reported under clause 3(iii)(e) - Evergreening of loans or advances in the nature of loans that have fallen due during the year 392 8.20-1 Audit procedures and reporting under clause 3(iii)(e) 393 8.21 Suggested format for reporting under clause 3(iii)(e) 393 8.22 Matters to be reported under clause 3(iii)(f): Whether Co. has granted loans/advances in nature of loans repayable on demand or without specifying terms of repayment 393 8.22-1 “Related Party” [Section 2(76)] 394 8.22-2 Promoter [Section 2(69)] 395 8.22-3 Audit procedures and reporting 397 8.23 Suggested format for reporting under clause 3(iii)(f) 398 8.24 Corresponding ARI disclosure requirements for clause 3(iii)(f) of CARO, 2020 398 8.25 Comparison between clause 3( iii )( f ) of CARO, 2020 and corresponding ARI disclosure requirements of Schedule III 399 8.26 Linkage with Clause 3(iv) of CARO 400 8.27 Linkage with Clause 3(ix)(d) of CARO 400 8.28 Linkage with Clause 3(ix)(e) of CARO 401 8.29 Linkage with Clause 3(xi)(a)/3(xi)(b) of CARO 402 8.30 Linkage with Clause 3(xiii) of CARO 402 8.31 Linkage with Clause 3(xvi) of CARO 402 8.32 Auditor’s duties under section 143(12) 403 8.33 Auditor’s duties under section 143(1)( a ) and ( d ) of Companies Act, 2013 403 8.34 Linkage with tax audit report in Form No. 3CD 403 8.35 Corporate Practices (Extracts from annual reports) 403 CONTENTS I-24
cheques as
PAGE 8.35-1 As Company invested in debentures, clause 3(iii)(c) to (f) dealing with loans/advances in the nature of loans do not apply 403 8.35-2 As Company has not granted loans or advances in the nature of loans during the year, clause 3(iii)(c) to 3(iii)(f) are not applicable to the Company 404 8.35-3 Clause 3(iii) is not applicable to Company as it carried out none of the transactions specified therein during the year 407 8.35-4 None of the transactions specified in clause 3(iii) have been carried out by company except loans given to employees 408 8.35-5 Company does not have any subsidiaries/JVs/ associates and hence reporting under clause 3(iii)(a)(A) is not applicable 408 8.35-6 Where auditor found and reported irregularities in respect of transactions to be reported upon under this clause 410 8.35-7 Where auditor reported that transactions covered by clause 3(iii) were prejudicial to the Company’s interest 428 8.35-8 Where auditor reported upon the sub-clauses with exceptions/Disclaimers/reservations 431 8.35-9 Where auditor reported upon sub-clauses of clause (iii) without any exceptions/reservations/ qualifications 437 8.35-10 Where Company disinvested from its erstwhile WOS to which it had granted loans in earlier years which have become irrecoverable now & fully provided for 441 8.35-11 Reporting under clause 3(iii)(c) in case of an NBFC 441 8.35-12 Audit reporting under sub-clause (a) of Clause 3(iii) 446 8.35-13 Audit reporting under clause 3(iii)(c) : Regular receipt of repayments and interest in respect of loans and advances granted 446 8.35-14 Audit reporting under Clause 3(iii)(d) on overdues & whether reasonable steps taken for recovery in respect of overdues 453 I-25 CONTENTS
9
REPORTING ON COMPLIANCE WITH SECTIONS 185 AND 186 AS REGARDS LOANS, INVESTMENTS, GUARANTEES AND SECURITIES
PAGE 8.35-15 Audit reporting under Clause 3( iii )( e ): Evergreening of overdue loans/advances in the nature of loans 454 8.35-16 Clause 3(iii)(f): Loans granted/advances in the nature of loans granted by company repayable on demand or without stipulating repayment schedule 457 8.36 Checklist for Clause 3(iii)(a) : Loans/advances in the nature of loans/guarantees/security provided by the company during the year 459 8.37 Checklist for Clause 3(iii)(b) : Prejudicial to Company’s interests or not 461 8.38 Checklist for Clause 3(iii)(c): Stipulation of Schedule of repayment/Regularity of receipt of interest & principal 463 8.39 Checklist for Clause 3(iii)(d): Overdues of loans/advances in the nature of loans granted by Company 464 8.40 Checklist for Clause 3(iii)(e): Evergreening 465 8.41 Checklist for Clause 3(iii)(f): Whether the company has granted any loans or advances in the nature of loans either repayable on demand or without specifying any terms or period of repayment 466 8.42 Clause 3(iii) is not applicable to audit report on consolidated financial statements 467 8.43 Case Studies 467 8.44 Frequently Asked Questions 473 8.45 Multiple Choice Questions 473
9.1 Map of Clause 3(iv) 475 9.2 Matters required to be verified and reported under clause 3(iv) 476 9.3 Definition of ‘Loan’ 476 9.3-1 Distinction between ‘salary advance’ and ‘loan’ 476 9.3-2 Financial accommodation not amounting to loan 477 9.3-3 Indirect loan 478 CONTENTS I-26
PAGE 9.4 Investment made 478 9.5 Guarantee 479 9.6 Loan to directors, etc. 479 9.6-1 Exceptions to the provisions of sub-sections (1) and (2) of section 185 480 9.6-2 Wholly Owned Subsidiary 481 9.7 Loan and investment by company [Section 186] 481 9.8 Making inter-corporate investments through investment companies [Section 186(1)] 482 9.8-1 Investment company 482 9.9 Restrictions on loans/investments transactions [Section 186(2)/(3)/(5)] 482 9.9-1 Whether scope of section 186 not limited to inter-corporate transactions? 484 9.9-2 definition of ‘loan’ 485 9.9-3 Distinction between loans and deposits 485 9.9-4 “Directly or Indirectly” 486 9.9-5 Whether section 186 is applicable to a company which is a subscriber to memorandum of association 486 9.9-6 Whether provisions of section 186 applicable to investments in the shares of a new company 486 9.9-7 Whether partners’ capital contribution in LLP is hit by section 186 486 9.9-8 Whether loan to LLP hit by section 186? 487 9.10 Disclosure of loans in financial statements [Section 186(4)] 487 9.11 Benchmark lending rate for loans made by company [Section 186(7)] 487 9.12 Companies defaulting on repayment of deposits barred from making loans, investments or giving guarantee/ security [Section 186(8)] 487 9.13 Register of loans, investments etc. [Section 186(9)/(10)] 487 9.14 Restrictions on acceptance of inter-corporate deposits [Section 186(6)] 488 9.15 Exemption from section 186 [Section 186(11)] 489 9.15-1 Infrastructure facilities 489 I-27 CONTENTS
PAGE 9.16 Power of Central Government to make Rules [Section 186(12)] 491 9.17 Audit procedures 491 9.17-1 Audit procedures for verifying compliance with section 185 491 9.17-2 Audit procedures for verifying compliance with the provisions of section 186 492 9.18 What are the matters to be covered by auditor’s remarks under clause 3(iv) 494 9.19 Linkage with clause 3(iii) of CARO 495 9.20 Linkage with clause 3(v) of CARO 495 9.21 Linkage with Tax audit report in Form No. 3CD 495 9.22 Suggested format for reporting non-compliances under section 186 495 9.23 Suggested format for reporting non-compliances under section 185 496 9.24 Corporate Practices (Extracts from Annual Reports) 496 9.24-1 Non-applicability of clause (iv) 496 9.24-2 Reporting Non-compliance with the provisions of section 186 497 9.23-3 Reporting where company is exempt from provisions of sections 185 and/or 186 498 9.24-4 Reporting that Company has complied with the applicable provisions of section 185 and/or section 186 499 9.25 Checklist for clause 3(iv) : Compliance with sections 185 and 186 500 9.26 Clause 3(iv) is not applicable to audit report on consolidated financial statements 502 9.27 Case Studies 503 9.28 Frequently Asked Questions 507 9.29 Multiple Choice Questions 508 10 ACCEPTANCE OF PUBLIC DEPOSITS AND DEEMED DEPOSITS 10.0 Map of Clause 3(v) 512 10.1 Requirements of clause 3(v) 514 CONTENTS I-28
PAGE 10.2 Certification of Form DPT-3 by the Statutory Auditor 515 10.3 Definition of ‘Deposits’ 518 10.4 Deemed deposits 524 10.5 Compliance with RBI Directives/section 73/section 76/ Rules 525 10.6 Compliance with Order of CLB/NCLT/any Court/other Tribunal 531 10.7 Audit Procedures and Reporting 531 10.8 What are the matters to be covered by auditor’s remarks under clause 3(v) 533 10.9 Non-applicability of clause (v) 533 10.9A Clause 3(v) is not limited to public deposits accepted by the company 534 10.10 Reporting in respect of NBFCs 534 10.11 Linkage with Clause 3(xix) 534 10.12 Linkage with Tax audit report 535 10.13 Sample Drafts of Comments under clause 3(v) 535 10.14 Corporate Practices (Extracts from annual reports) 535 10.14-1 Non-Compliance with sections 73 to 76 and Deposit Rules, 2014 reported by auditor 535 10.14-2 Clause 3(v) is not applicable to the Company 536 10.14-3 Company has overdue earnest money deposits and security deposits of suppliers/contractors appearing in the books are in the nature of retention money for performance of contracts for supply of goods and services 539 10.14-4 Where company has complied with applicable provisions & no order passed by NCLT/RBI/any Court/any other Tribunal with regard to deposits accepted by company 539 10.14-5 Where company has not accepted deposits during the year and has only unclaimed deposits 539 10.14-6 All deposits of company have matured and settled except for deposits unpaid due to litigation/legal issues 540 10.15 Checklist on DPT-3 Certification 540 10.16 Checklist on clause 3(v) regarding deposits/deemed deposits accepted by the company 543 I-29 CONTENTS
PAGE 10.17 Audit Documentation - Working papers to be retained 546 10.18 Clause 3(v) is not applicable to audit report on consolidated financial statements 546 10.19 Frequently Asked Questions 547 10.20 Case Studies 547 10.21 Multiple Choice Questions 550 11 MAINTENANCE OF COST RECORDS 11.0 Map of Clause 3(vi) 552 11.1 Requirements of clause 3(vi) 553 11.2 Companies which are obligated to maintain cost records 554 11.3 Companies or classes of Companies obligated to maintain cost records as per prescribed Rules (Rule 3) 554 11.3-1 Maintenance of records 560 11.4 Whether clause 3(vi) would apply to companies for which cost audit has been ordered under section 148? 561 11.5 Whether statutory auditor needs to conduct a detailed audit of cost records for the purposes of reporting under clause 3(vi) of CARO, 2020? 561 11.6 What are the matters to be covered by auditor’s remarks under clause 3(vi) 561 11.7 Linkage with section 143(3)(b) and section 143(3)(h) of the Act 561 11.8 Linkage with tax audit report in Form No. 3CD 563 11.9 Corporate practices (Extracts from the Annual Reports of Companies) 564 11.10 Checklist on Clause 3(vi) 565 11.11 Documentation Audit - Working Papers to be retained 566 11.12 Clause 3(vi) is not applicable to audit report on consolidated financial statements 566 11.13 Multiple Choice Questions 566 12 PAYMENT/NON-PAYMENT OF STATUTORY DUES 12.0 Map of Clause 3(vii) 568 CONTENTS I-30
PAGE 12.1 Requirements of clause 3(vii) 570 12.2 Undisputed Statutory dues 571 12.3 Regularity in deposit of undisputed statutory dues [clause 3(vii)(a)] 573 12.4 Reporting the extent of arrears [clause 3(vii)(a)] 574 12.5 “From the date they become payable” 574 12.6 Subsequent clearance 574 12.7 Reporting of amount of disputed dues not deposited [clause 3(vii)(b)] 574 12.8 What are the matters to be covered by auditor’s remarks under clause 3(vii)(a) 575 12.9 What are the matters to be covered by auditor’s remarks under clause 3(vii)(b) 575 12.10 Linkage of Clause 3(vii)(b) with section 143(3)(j) and Rule 11(a) 576 12.11 Tabular format for reporting statement of arrears of undisputed statutory dues outstanding for more than six months as at the balance sheet date 576 12.12 Tabular format for reporting disputed statutory dues 576 12.13 Linkage of clause 3(vii)(a)/clause 3(vii)(b) with tax audit report in Form No. 3CD 576 12.14 Audit procedures - Auditor’s checklist - Undisputed statutory dues [Clause 3(vii)(a)] 577 12.15 Audit Procedures and Reporting - Disputed statutory dues [Clause 3(vii)(b)] 578 12.16 Sample drafts of comments under clause 3(vii)(a)/(b) 580 12.17 Corporate Practices - Extracts from annual reports: Clause 3(vii)(a) 580 12.17-1 Reporting where Company is not regular in depositing undisputed statutory dues 580 12.17-2 Undisputed unascertained PF dues remain undeposited pending issuance of guidelines by the regulatory authorities on the application of SC ruling 586 12.17-3 Reporting where Company is not regular in depositing undisputed statutory dues 588 12.17-4 Company is generally regular in depositing undisputed statutory dues 590 I-31 CONTENTS
PAGE 12.17-5 Company is generally regular in depositing though there is slight delay in few cases 591 12.18 Corporate Practices - Extracts from annual reports: Clause 3(vii)(b) Disputed statutory dues not deposited and forum at which dispute is pending 592 12.19 Checklist on Clause 3( vii )( a ) regarding regularity in depositing undisputed statutory dues 599 12.20 Checklist on Clause 3(vii)(b) regarding non-deposit of statutory dues due to dispute 601 12.21 Documentation - Working papers to be retained 602 12.22 Clause 3(vii)(a) & 3(vii)(b) are not applicable to audit report on consolidated financial statements 602 12.23 Frequently Asked Questions on clause 3(vii)(a) 603 12.24 Frequently Asked Questions on clause 3(vii)(b) 608 12.25 Case Studies 611 12.26 Multiple Choice Questions 620 13 TRANSACTIONS NOT RECORDED IN THE BOOKS AND SURRENDERED OR DISCLOSED AS INCOME IN TAX ASSESSMENT 13.0 Map of clause 3(viii) 622 13.1 Reporting requirements of CARO, 2020 as regards transactions not recorded in books and surrendered or disclosed in income-tax assessment 623 13.2 Scope of the terms “undisclosed income” and “surrendered or disclosed as income” 624 13.2-1 Undisclosed income 624 13.2-2 Scope of the expression “surrendered or disclosed as income in the tax assessments” 624 13.3 Disclosure requirements of amended Schedule III to the Act 625 13.3-1 Comparison between clause 3(viii) of CARO, 2020 and corresponding Additional Information disclosure requirements of Schedule III 626 13.4 Audit procedures and reporting 626 13.5 What are the matters to be covered by auditor’s remarks under clause 3(viii) 628 CONTENTS I-32
PAGE 13.6 Auditor’s duty to report u/s 143(3)(b) and u/s 143(3)(h) 628 13.7 Auditor’s duty u/s 143(12) to report to Central Government in Form ADT-4 629 13.8 Linkage with Clause 3(xi)(a) of CARO 629 13.9 Linkages to tax audit report in Form No. 3CD 629 13.10 Corporate Practices (Extracts from annual report) 629 13.11 Checklist on Clause 3( viii ): Unrecorded transactions surrendered/disclosed during the year in Income tax assessments 630 13.12 Clauses 3( viii ) is not applicable to audit report on consolidated financial statements 631 13.13 Frequently Asked Questions 631 13.14 Multiple Choice Questions 632 14 COMPANY DEFAULTS IN REPAYMENT OF LOANS/OTHER BORROWINGS/IN PAYMENT OF INTEREST TO ANY LENDER 14.0 Map of clause 3(ix)(a)/clause 3(ix)(b) 635 14.1 Matters required to be verified and reported as per clause 3(ix)(a) 635 14.2 “Borrowings”, “loans”, “dues” 636 14.3 Banks 636 14.4 Financial Institution 636 14.5 Government 636 14.6 ‘Default’ 637 14.7 Whether company has been declared a wilful defaulter 638 14.8 Additional Regulatory Information Disclosures on wilful default required in notes to accounts by amended Schedule III to the Act 639 14.8-1 Comparison between clause 3(ix)(b) of CARO, 2020 and corresponding ARI disclosure requirements of Schedule III 641 14.9 What are the matters to be covered by auditor’s remarks under clause 3(ix)(a) 641 14.10 What are the matters to be covered by auditor’s remarks under clause 3(ix)(b) 642 I-33 CONTENTS
PAGE 14.11 Prescribed format for reporting details under clause 3(ix)(a) 642 14.12 Linkage of clause 3(ix)(a) to Clause 3(xix) of CARO 642 14.13 Linkages of clause 3(ix)(a) to tax audit report in Form No. 3CD 642 14.14 Auditor’s duties as regards reporting on status of declaration of company as a wilful defaulter [clause 3(ix)(b)] 643 14.15 Sample draft of remarks/comments under clause 3(ix)(b) 644 14.16 Defaults and declaration as wilful defaulter to be factored in while reporting on going concern status under clause 3(xix) of the order 644 14.17 Linkage of clause 3(ix)(b) to Clause 3(xi)(a) of CARO 645 14.18 Corporate Practices (Extracts from Annual Reports): Clause 3(ix)(a) 645 14.18-1 Reporting of defaults by the Company 645 14.18-2 Where loans are repayable on demand and terms and conditions for payment of interest thereon have not been stipulated 659 14.18-3 No default in payment of interest on OCDs for current year but delayed payment of OCD interest for preceding FY in current year 660 14.18-4 No default in repayment of loans or other borrowings or in the payment of interest to any lender during the year except in case of loans under litigation 661 14.18-5 No default in repayment of loans or other borrowings or in the payment of interest to any lender during the year 662 14.18-6 No default in repayment of restructured loan in accordance with restructured/revised terms and conditions 662 14.19 Corporate Practices (Extracts from Annual Reports): Clause 3(ix)(b): Wilful defaulter declaration by Bank/FI/any other lender 662 14.20 Checklist for Clause 3(ix)(a): Defaults by Company in repayment of loans or other borrowings or in the payment of interest thereon to any lender 663 14.21 Checklist for Clause 3(ix)(b): Declaration of Company as Wilful defaulter by Bank/FI/Other lender 664 CONTENTS I-34
PAGE 14.22 Clauses 3(ix)(a) and 3(ix)(b) are not applicable to audit report on consolidated financial statements 666 14.23 Frequently Asked Questions 666 14.24 Multiple Choice Questions 667 15 END USE OF TERM LOANS 15.0 Map of clause 3(ix)(c) 684 15.1 Matters required to be verified and reported as per Clause 3(ix)(c) 685 15.2 Term loans 685 15.3 Diversion of Funds 685 15.4 Temporary investment of term loan funds pending end-use 686 15.4-1 What if, at the balance sheet date, some part of the term loan funds are temporarily invested pending utilisation for sanctioned purpose? 686 15.5 Disclosure requirements of amended Schedule III as regards diversion of funds borrowed from banks and financial institutions 686 15.6 Corresponding disclosure requirements for Clause 3(ix)(c) of CARO, 2020 (end use of borrowings) 687 15.6-1 Comparison between clause 3(ix)(c)/(d) of CARO, 2020 and corresponding disclosure requirements of Schedule III 687 15.7 Audit procedures as regards utilization of term loans 688 15.8 What are the matters to be covered by auditor’s remarks under Clause 3(ix)(c) 689 15.9 Suggested format for reporting under this clause 690 15.10 Linkage with other clauses of CARO 690 15.11 Linkage with section 143(1)(e)/Form 3CD 691 15.12 Corporate Practices (Extracts from Annual Reports) 691 15.13 Checklist for clause 3(ix)(c): End use of term loans 692 15.14 Clause 3(ix)(c) is not applicable to audit report on consolidated financial statements 693 15.15 Case Studies 693 15.16 Multiple Choice Questions 694 I-35 CONTENTS
- USE OF SHORT-TERM FUNDS FOR LONG-TERM PURPOSES
MATURITY
FUNDS TAKEN FROM OTHER ENTITIES BY COMPANY TO MEET OBLIGATIONS OF SUBSIDIARIES, ASSOCIATES OR JVs
PAGE 16
MISMATCH’
16.0 Map of Clause 3(ix)(d) 696 16.1 Matters required to be verified and reported as per Clause 3(ix)(d) 697 16.2 Long-term applications/sources of funds 697 16.3 Short-term sources of funds 698 16.4 Short-term application of funds 698 16.5 Comparison of long-term sources and long-term application 698 16.6 Company’s system of funds deployment 699 16.7 Nature of application of funds 699 16.8 Audit Procedures - Auditor’s Checklist 700 16.9 Disclosure requirements of amended Schedule III as regards diversion of funds borrowed from banks and financial institutions 701 16.10 What are the matters to be covered by auditor’s remarks under clause 3(ix)(d) 701 16.11 Sample drafts of comments under clause 3(ix)(d) 702 16.12 Checklist on Clause 3(ix )( d ): Asset Liability Maturity Mismatch 702 16.13 Documentation - Working papers to be retained 703 16.14 Corporate Practices (Extract from annual reports) 703 16.15 Clause 3( ix )( d ) is not applicable to audit report on consolidated financial statements 704 16.16 Case Studies 704 16.17 Multiple Choice Questions 705 17
‘ASSET-LIABILITY
17.0 Map of Clause 3(ix)(e) 707 17.1 Matters required to be verified and reported as per Clause 3(ix)(e) 708 CONTENTS I-36
PAGE 17.1A “Whether the company has taken any funds from any entity or person” 708 17.2 “Entity” 708 17.3 “Funds” 708 17.4 “Obligation” 709 17.5 Disclosure requirements of amended Schedule III as regards end-use of funds borrowed from banks and financial institutions 709 17.6 Audit procedures and reporting 710 17.7 What are the matters to be covered by auditor’s remarks under clause 3(ix)(e) 711 17.8 Suggested format for reporting details under clause 3(ix)(e) 712 17.9 Corporate Practices (Extracts from annual reports) 712 17.10 Checklist for clause 3(ix)(e) Funds taken from other entities by company to meet obligations of subsidiaries, associates or JVs 723 17.11 Clause 3( ix )( e ) is not applicable to audit report on consolidated financial statements 724 17.12 Multiple Choice Questions 724 18 WHETHER COMPANY HAS RAISED LOAN ON PLEDGE OF SECURITIES IN SUBSIDIARIES, ASSOCIATES OR JVs 18.0 Map of clause 3(ix)(f) 726 18.1 Reporting as regards loans taken by pledge of securities held in its subsidiaries/JVs/associate companies 727 18.2 “Pledge” 727 18.3 “Securities held in its subsidiaries, joint ventures or associate companies” 727 18.4 What are the matters to be covered by auditor’s remarks under clause 3(ix)(f) 728 18.5 Sample draft of comments under clause 3(ix)(f) 729 18.6 Suggested format for reporting details under clause 3(ix)(f) 730 18.7 Linkage with clause 3(ix)(a) of CARO 730 18.8 Linkage with clause 3(xix) of CARO 730 18.9 Corporate Practices (Extracts from annual reports) 730 I-37 CONTENTS
PAGE 18.10 Checklist on Clause 3(ix)(f) as regards Loans raised by company during the year on the pledge of securities held in its subsidiaries, JVs or associate companies 733 18.11 Clause 3( ix )( f ) is not applicable to audit report on consolidated financial statements 734 18.12 Multiple Choice Questions 734 19 END USE OF MONEYS RAISED BY WAY OF IPO/FPO 19.0 Map of clause 3(x)(a) 736 19.1 Matters required to be verified and reported as per clause 3(x)(a) 737 19.2 Initial Public Offer (IPO) 737 19.3 Further Public Offer 738 19.4 Temporary investment of moneys raised by IPO/FPO pending end use 738 19.5 Audit Procedures and reporting 738 19.6 What are the matters to be covered by auditor’s remarks under clause 3(x)(a) 740 19.7 Suggested format for reporting details under clause 3(x)(a) 741 19.8 Sample drafts of comments under clause 3(x)(a) 742 19.9 Corporate Practices (Extracts from the Annual Reports of Companies) 742 19.10 Checklist on clause 3(x)(a) as regards End use of moneys raised by way of IPO/FPO 744 19.11 Documentation - Working papers to be retained 745 19.12 Clause 3(x)(a) is not applicable to audit report on consolidated financial statements 746 19.13 Multiple Choice Questions 746 20 PRIVATE PLACEMENT/PREFERENTIAL ALLOTMENT OF SHARES/FCDs/PCDs/OCDs 20.0 Map of clause 3(x)(b) 748 CONTENTS I-38
PAGE 20.1 Matters required to be verified and reported as per Clause 3(x)(b) 749 20.2 Requirements of section 42 regarding private placement 749 20.3 Preferential allotment of shares 757 20.4 Audit Procedures and Reporting 760 20.5 What are the matters to be covered by auditor’s remarks under clause 3(x)(b) 761 20.6 Reporting of non-compliances with provisions of section 42/section 62/the Rules 763 20.7 Reporting on end-use of funds raised 763 20.8 Linkage with Clause 29 of Form No. 3CD 764 20.9 Corporate Practices (Extracts from annual reports) 764 20.10 Checklist on clause 3(x)(b) on Private placement/preferential allotment on shares/ FCDs/OCDs/PCDs 766 20.11 Clause 3(x)(b) is not applicable to audit report on consolidated financial statements 767 20.12 Case Studies 768 20.13 Multiple Choice Questions 768 21 FRAUDS NOTICED/REPORTED 21.0 Map of Clause 3(xi) 770 21.1 Reporting requirements as regards frauds noticed/reported 771 21.2 Clause 3(xi)(a) of CARO, 2020 vis-a-vis section 143(12) 772 21.2-1 Frauds in the company by its officers or employees 773 21.2-2 Requirements of Rule 13 of the Companies (Audit and Auditors) Rules, 2014 774 21.2-3 Difference between the requirements of CARO and section 143(12) 777 21.2-4 Requirements under section 143(12) and under CARO, 2020 are not substitutes of one another 777 21.3 Concept of fraud 778 21.4 What are the matters to be covered by auditor’s remarks under clause 3(xi)(a) 781 21.5 Audit Procedures and Reporting [Clause 3(xi)(a)] 782 I-39 CONTENTS
PAGE 21.6 Sample draft under Clause 3(xi)(a) 783 21.6A Section 143(12) as well as CARO, 2020 deals with fraud reporting and not fraud detection 783 21.7 Whether report under Form ADT-4 filed by auditors 783 21.8 Audit Reporting under clause 3(xi)(b) 784 21.9 Whistleblower complaints 784 21.10 Audit procedures [Clause 3(xi)(c)] 785 21.11 Example of reporting by auditor under clause 3(xi)(c) - For companies required to establish vigil mechanism u/s 177/ SEBI (LODR) Regulations 787 21.12 Example of reporting by auditor under clause 3(xi)(c) - For companies for which vigil mechanism is not mandated by the Act/SEBI LODR 787 21.13 Example of reporting by auditor in case no whistleblower complaints are received during the year 787 21.14 Corporate Practices (Extracts from annual reports) 787 21.15 Checklist on Clause 3(xi)(a) as regards frauds noticed or reported during the year 791 21.15A Checklist on Clause 3(xi)(b) as regards Form ADT-4 filed during the year 792 21.16 Checklist on Clause 3(xi)(c) as regards whistleblower complaints 792 21.17 Clauses 3(xi)(a) to 3(xi)(c) are not applicable to audit report on consolidated financial statements 794 21.18 Case Studies 794 21.19 Frequently Asked Questions 798 21.20 Multiple Choice Questions 800 22 REPORTING OF COMPLIANCES BY NIDHI COMPANIES 22.0 Map of Clause 3(xii) 803 22.1 Reporting requirements as regards Nidhi companies 804 22.2 Definition of Nidhi company 805 22.3 Net owned funds to deposit liability ratio of 1:20 805 22.3-1 Definition of ‘Net Owned Funds’ 805 22.4 Unencumbered term deposits 806 CONTENTS I-40
23 RELATED PARTY TRANSACTIONS
PAGE 22.5 Audit Procedures 806 22.6 What are the matters to be covered by auditor’s remarks under Clause 3(xii) 808 22.7 Auditor’s certificate as to compliance with Nidhi Rules, 2014 808 22.8 Distinction between reporting under clause 3( xii ) of CARO, 2020 and certification under Rule 22 809 22.9 When clause 3(v) of CARO becomes applicable to Nidhis? 809 22.10 Corporate Practices (Extracts from annual reports) 810 22.11 Checklist for certification of Compliances with Nidhi Rules, 2014 as required under Rule 22 810 22.12 Checklist for Clause 3(xii) applicable to compliances by Nidhis 821 22.13 Documentation - Audit working papers to be retained 823 22.14 Documentation - Audit working papers to be retained in connection with Certification under Rule 22 823 22.15 Multiple Choice Questions 824
23.0 Map of Clause 3(xiii) 826 23.1 Requirements of Clause 3(xiii) 827 23.2 Definition of ‘related party’ 827 23.3 Comparison of the provisions of section 177(4)(iv) and section 188 828 23.3-1 Companies to which applicable 828 23.3-2 Approvals required for RPTs 829 23.3-3 Whether applicable to RPTs in OCB and at arm’s length 834 23.3-4 RPTs to which provisions are applicable 835 23.4 NFRA’s observations in AQRRs regarding auditor’s reporting under clause 3(xiii) of CARO, 2016 which was identical to this clause 837 23.4-1 Just examining agenda of Audit Committee is not sufficient; Auditor should check the minutes of audit committee 837 I-41 CONTENTS
PAGE 23.4-2 Conversion of loan to subsidiary into Fully Convertible Debenture (FCD) is an RPT and requires prior approval of audit committee 839 23.4-3 Where leasing transactions with component entity exceeds 10% threshold, same requires prior approval of shareholders u/s 188 840 23.4-4 Auditor must himself verify management assertion that RPTs are at Arm’s Length; cannot blindly rely on internal audit/expert 844 23.4-5 Auditor must report non-compliance with sections 177(4)( iv ) and 188 regardless of company’s practical difficulties in complying 847 23.4-6 Document everything in audit file 848 23.4-7 Obtaining Legal opinion is no substitute for verification of compliances and reporting of non-compliances 848 23.5 Audit Procedures 848 23.6 What are the matters to be covered by auditor’s remarks under Clause 3(xiii) 851 23.7 Suggested format for reporting details under Clause 3(xiii) 851 23.8 Corporate Practices (Extracts from Annual Reports) 851 23.9 Checklist on Clause 3(xiii) as regards RPT Compliances 852 23.10 Clause 3(xiii) is not applicable to audit report on consolidated financial statements 857 23.11 Frequently Asked Questions 857 23.12 Case Studies 863 23.13 Multiple Choice Questions 864 24 INTERNAL AUDIT 24.0 Map of Clause 3(xiv) 866 24.1 Reporting requirements of CARO, 2020 as regards internal audit system 867 24.2 Companies mandatorily required to appoint an internal auditor [Section 138 read with rule 13] 867 24.2-1 Applicability of mandatory internal audit to unlisted companies 868 CONTENTS I-42
PAGE 24.2-2 Every listed company is legally obligated by section 138 to have an internal audit system 869 24.3 For which companies reporting requirement under clause 3(xiv)(a)/(b) is applicable 869 24.4 If company is legally obligated to have an internal auditor u/s 138 but does not have an internal auditor 870 24.5 Evaluation of adequacy of internal audit system with reference to size and nature of its business 871 24.6 What are the matters to be covered by auditor’s remarks under Clause 3(xiv) 873 24.7 Sample drafts of remarks under clause 3(xiv)(a) 873 24.8 Consideration of reports of the internal auditors for the period under audit [Clause 3(xiv)(b)] 874 24.9 Sample drafts of comments under clause 3(xiv)(b) 875 24.10 Corporate Practices (Extracts from annual reports) 875 24.11 Checklist on Clause 3(xiv)(a) on internal audit system 877 24.12 Checklist on Clause 3(xiv)(b) on consideration of internal audit reports 880 24.13 Clauses 3(xiv)(a) and 3(xiv)(b) are not applicable to audit report on consolidated financial statements 881 24.14 Case Studies 881 24.15 Frequently Asked Questions 881 24.16 Multiple Choice Questions 882 25 NON-CASH TRANSACTIONS INVOLVING DIRECTORS OR CONNECTED PERSONS 25.0 Map of Clause 3(xv) 884 25.1 Requirements of clause 3(xv) 885 25.2 Non-cash transaction 885 25.3 “Acquire assets” 885 25.4 “Consideration other than cash” 885 25.5 Requirements of section 192 of the Companies Act, 2013 886 25.5-1 “Person connected with him” 886 25.5-2 Valuation of assets by registered valuer 887 I-43 CONTENTS
PAGE 25.6 Audit procedures/checklist [Clause 3(xv)] 888 25.7 What are the matters to be covered by auditor’s remarks under Clause 3(xv) 889 25.8 Is auditor required to make any adverse comment if there is adverse variance between deal price and registered valuer’s valuation? 890 25.9 Suggested paragraph on reporting non-compliance with section 192 890 25.10 Corporate Practices (Extracts from annual reports) 891 25.11 Checklist of clause 3(xv): Non-cash transactions with directors or persons connected with him 891 25.12 Clause 3(xv) is not applicable to audit report on consolidated financial statements 893 25.13 Frequently Asked Questions 893 25.14 Multiple Choice Questions 893 26 REPORTING IN RESPECT OF NBFCs, HFCs AND CICs 26.0 Map of Clause 3(xvi) 897 26.1 Requirements of clause 3(xvi) 898 26.2 Interpretation of requirements of Clause 3(xvi)(a) 899 26.2-1 Non-Banking Financial Company 899 26.2-2 A Non-Banking Institution 900 26.2-3 Criteria for registration as NBFC-conducting financial activity as principal business 900 26.2-4 Nature of activity of NBFCs 900 26.2-5 Financial Institution 901 26.2-6 Net Owned Fund 901 26.2-7 NBFCs exempted by RBI from registration under Chapter III-B (i.e. under section 45-IA) 902 26.3 Audit Procedures and Reporting [Clause 3(xvi)(a)] 905 26.4 Interpretation of requirements of clause 3(xvi)(b) 906 26.4-1 Housing Finance Activities 906 26.4-2 Housing Finance Institution 907 26.4-3 Housing Finance Companies 907 CONTENTS I-44
PAGE 26.5 Audit Procedures and Reporting [Clause 3(xvi)(b)] 908 26.6 Interpretation of requirements of clause 3(xvi)(c) - Whether the company is a Core Investment Company 908 26.6-1 Core Investment Company (CIC) – Definition 908 26.6-2 “Systemically important Core Investment Company (CIC-ND-SI)” 909 26.6-3 Registration of CICs 909 26.6-4 Unregistered CIC or CIC exempt from registration 909 26.7 Audit Procedures and Reporting [Clause 3(xvi)(c)] 910 26.8 Interpretation of requirements of clause 3( xvi )( d )Whether the group has more than one CIC 911 26.8-1 Companies in the Group 911 26.9 Audit Procedures and Reporting under clause 3(xvi)(d) 911 26.10 Exception report to RBI in respect of non-compliances reported in clause 3(xvi) 912 26.10A Linkage with tax audit report 912 26.11 Corporate Practices (Extracts from annual reports) 912 26.11-1 Reporting in case of NBFC registered with RBI 912 26.11-2 Reporting under clause (xvi)(a) 913 26.11-3 Reporting in case of a CIC exempt from registration u/s 45-IA of the Reserve Bank of India Act, 1934 914 26.11-4 Reporting in case of a Housing Finance Company 915 26.11-5 Clause 3(xvi)(c): Whether company is CIC? If so, whether it fulfils criteria of a CIC/exempted CIC? 916 26.11-6 Clause 3(xvi)(d): Whether more than one CIC is part of the Group 916 26.11-7 Clause 3(xvi)(d) is not applicable 916 26.12 Checklist on Clause 3(xvi)(a) as to whether company is NBFC required to be registered with RBI and so registered 917 26.13 Checklist on clause 3(xvi)(b) as to whether any NBFC/HFC activities conducted by Company without holding CoR 918 26.14 Checklist on clause 3(xvi)(c) as to whether Company is CIC and fulfils criteria of CIC or of unregistered or exempted CIC 919 I-45 CONTENTS
PAGE 26.15 Checklist of Clause 3(xvi)(d) as to whether the Group has more than one CIC 921 26.16 Clause 3(xvi)(a) to (d) is not applicable to audit report on consolidated financial statements 921 26.17 Frequently Asked Questions 922 26.18 Multiple Choice Questions 922 27 WHETHER COMPANY HAS INCURRED CASH LOSS 27.0 Map of Clause 3(xvii) 924 27.1 Reporting requirement of Clause 3(xvii) as regards cash losses 925 27.2 ‘Cash Loss’ in the case of a company preparing its financial statements as per Accounting Standards (AS) 925 27.3 Determination of ‘cash loss’ in case of a company preparing its financial statements according to Ind AS 926 27.4 Audit Procedures 926 27.5 What are the matters to be covered by auditor’s remarks under Clause 3(xvii) 927 27.6 Corporate Practices (Extracts from annual reports) 928 27.7 Checklist of Clause 3(xvii) as regards cash losses incurred by company 930 27.8 Clause 3(xvii) is not applicable to audit report on consolidated financial statements 931 27.9 Case Studies 931 27.10 Frequently Asked Questions 931 27.11 Multiple Choice Questions 932 28 RESIGNATION OF STATUTORY AUDITORS 28.0 Map of Clause 3(xviii) 934 28.1 Reporting requirements of clause 3(xvii) of CARO, 2020 with regard to resignation of auditor 935 28.2 What constitutes “resignation” of auditor? 935 28.3 Duties of auditor who resigns 935 CONTENTS I-46
PAGE 28.4 Compliances by listed companies if auditor resigns 937 28.5 Duties of incoming statutory auditor when predecessor auditor has resigned 937 28.6 Audit Procedures [Clause 3(xviii)] 938 28.7 What are the matters to be covered by auditor’s remarks under Clause 3(xviii) 939 28.8 Sample draft of comments under clause 3(xviii) 939 28.9 Corporate Practices (Extracts from annual reports) 939 28.10 Checklist of Clause 3(xviii) as regards resignation of auditor 940 28.11 Clause 3( xviii ) is not applicable to audit report on consolidated financial statements 941 28.12 Frequently Asked Questions 941 28.13 Case Studies 942 28.14 Multiple Choice Questions 943 29 MATERIAL GOING CONCERN UNCERTAINTY 29.0 Map of Clause 3(xix) 945 29.1 Reporting requirements of clause 3(xix) with respect to material going concern uncertainty 946 29.2 Financial Ratios 947 29.3 “Financial assets” and “Financial liabilities” 950 29.4 Other Information accompanying financial statements 950 29.5 Audit Procedures and Reporting [Clause 3(xix)] 950 29.6 Auditor to state his opinion on going concern status in audit report of every company to which CARO, 2020 applies 954 29.7 Opinion of no material uncertainty in clause 3(xix) is not a guarantee as to going concern status of Co. 954 29.8 Auditor’s duties if material uncertainty exists 954 29.9 Standard of auditing SA 570 Going Concern 954 29.10 What are the matters to be covered by auditor’s remarks under Clause 3(xix) 981 29.11 Linkage with section 143(3)(f) 981 I-47 CONTENTS
PAGE 29.12 Corporate Practices (Extracts from annual reports of Companies) 983 29.12-1 Where auditors opined that there is a material uncertainty that may cast doubt about the Company’s ability to continue as going concern 983 29.12-2 Where there is no material uncertainty as to going concern 991 29.12-3 Reporting in case of NBFCs 992 29.13 NFRA’s views on lapses by audit firms in complying with SA 570 (Revised) Going Concern 993 29.13-1 File No. NF-20011/5/2019-O/o Chairman AQR Report No. 1/2020 dated 17-8-2020 994 29.13-2 AQR Report No. 1/2019 dated 12-12-2019 (DHS) 1001 29.14 Checklist on Clause 3(xix) on Material going concern uncertainty 1008 29.15 Clause 3(xix) is not applicable to audit report on consolidated financial statements 1012 29.16 Frequently Asked Questions 1012 29.17 Case Studies 1013 29.18 Multiple Choice Questions 1015 30 TRANSFER OF UNSPENT CSR FUNDS 30.0 Map of clause 3(xx) 1017 30.1 Requirements of clause 3(xx) of CARO 1018 30.2 Reporting requirements of CARO, 2020 as regards unspent CSR funds applicable only to companies covered by section 135 1018 30.3 Reporting on compliance with the second proviso to section 135(5) [Clause 3(xx)(a)] 1019 30.4 Reporting on compliance with section 135(6) as regards transfer of unspent CSR amount relating to ongoing projects [Clause 3(xx)(b)] 1019 CONTENTS I-48
REASONS TO BE STATED BY AUDITOR FOR QUALIFIED OR ADVERSE REMARKS IN CARO REPORT
PAGE 30.5 No requirement under CARO to report on utilisation of amount transferred to special bank account within 3 financial years 1020 30.6 Audit Procedures [Clause 3(xx)(a)] 1020 30.7 Audit documentation: Clause 3(xx)(a) 1021 30.8 Suggested Format for reporting under clause 3(xx)(a) 1022 30.9 Suggested draft of comment under clause 3(xx)(a) where time period specified under 2nd proviso to sub-section (5) of section 135 has not elapsed at the time of the issue of the auditor’s report 1022 30.10 Audit Procedures [Clause 3(xx)(b)] 1022 30.11 Audit Documentation: Clause 3(xx)(a) 1023 30.12 Suggested Format for reporting under clause 3(xx)(b) 1024 30.13 Suggested draft of comment under clause 3(xx)(a) where time period specified u/s 135(6) has not yet elapsed at the time of the issue of the auditor’s report 1024 30.14 Corporate Practices (Extracts from annual reports) 1025 30.15 Checklist on Clause 3(xx)(a) regarding transfer of unspent funds in respect of other than ongoing projects to a Specified Fund 1037 30.16 Checklist on Clause 3(xx)(b) regarding transfer of unspent funds in respect of ongoing projects to a Special account 1038 30.17 Clause 3(xx)(a) and 3(xx)(b) are not applicable to audit report on consolidated financial statements 1040 30.18 Frequently Asked Questions 1040 30.19 Multiple Choice Questions 1041
31
31.1 Reasons to be stated for unfavourable or qualified answers [Clause 4(1) of CARO, 2020] 1043 31.2 Where auditor is unable to express opinion on any matter, that fact and the reasons are also to be stated [Clause 4(2) of CARO, 2020] 1043 I-49 CONTENTS
PAGE DIVISION
CARO REPORT ON CONSOLIDATED FINANCIAL STATEMENTS UNDER CARO, 2020 32 QUALIFIED/ADVERSE REMARKS IN CARO REPORTS OF COMPANIES INCLUDED IN CONSOLIDATED FINANCIAL STATEMENTS 32.0 Map of Clause 3(xxi) 1047 32.1 This is the only CARO requirement applicable to audit reports of consolidated financial statements 1048 32.2 Clause applicable to audit report on consolidated financial statements only 1048 32.3 Reporting requirements of CARO, 2020 as regards qualified/adverse remarks in CARO reports of companies included in consolidated financial statements 1048 32.4 Checklist on Clause 3(xxi) regarding any qualifications or adverse remarks by the respective auditors CARO reports of the companies included in CFS 1050 32.5 Frequently Asked Questions 1051 32.6 Case Studies 1052 32.7 Multiple Choice Questions 1052 APPENDICES SCHEDULE III OF COMPANIES ACT, 2013 1057 COMPANIES (AUDITOR'S REPORT) ORDER, 2020 1162 RELEVANT PROVISION OF COMPANIES ACT, 2013 1170 CONTENTS I-50
THREE
CARO, 2020 in nutshell
Resume of reporting requirements contained in clauses (i) to (xx) of Para 3 of CARO, 2020
Clauses ( i ) to (xx) of Para 3 of CARO, 2020
Applicable to audit report on the accounts of every company, to which this Order applies, for the financial years commencing on or after the 1st April, 2021.
Not applicable to audit report on consolidated financial statements.
Chapters 3 to 31
Clause (xxi) of Para 3 of CARO, 2020
Applicable to audit report on consolidated financial statements of financial year commencing on or after 1-4-2021.
Para-wise resume of CARO, 2020
2,
)
not applicable to auditor’s report on consolidated financial statements except clause (xxi) of paragraph 3.
The auditor’s report on the accounts of a company to which this Order applies shall include a statement on the matters specified in clauses (i) to (xx) of Para 3, as may be applicable. Clauses (i) to (xx) are not applicable to audit report on consolidated financial statements.
or
Chapter 32
4 to 31
Para No. of CARO CoverageChapter No. of this book 1 Short title, application and commencement 2
CARO, 2020 applies for the financial years commencing on or after 1-4-2021.
2
3
3(xxi
CARO
3, 32 3( i ) to 3(xx)
I-51
4 Reasons to be stated for unfavourable
qualified answers or for auditor’s inability to comment on a particular matter required by Para 3. 33
Clause of CARO 2020
CARO, 2020 Clause-wise Ready Reckoner
Matter to be reported on by auditor
3(i)(a) (A) Proper records of PPE-whether maintained
Corresponding disclosure requirements of amended Schedule III of the Companies Act, 2013 (‘the Act’)
Applicable provisions of the Act and Rules/ Orders thereunder
-------Rule 3 of the Companies (Accounts) Rules, 2014
Other applicable requirements of the Act and rules regarding audit reporting
Section 143(3) (h)/(i)/(j) of the Act
Rule 11(g) of the Companies(Audit and Auditors) Rules, 2014
Chapter/ Para No. of this book
Para 3.3
3(i)(a) (B) Proper records of intangible assets
-------Rule 3 of the Companies (Accounts) Rules, 2014
Section 143(3) (h)/(i)/(j) of the Act
Rule 11(g) of the Companies(Audit and Auditors) Rules, 2014
Para 4.3
3(i)(b)Physical verification of PPE by management at reasonable intervals
3(i)(c)Title deeds of immovable properties disclosed in FS.. whether in company’s name
3(i)(d)Revaluation of PPE (including Right of use assets)/intangible assets
-------(3)(i)(a)(A) of CARO, 2020 Section 143(3) (h)/(i) of the Act
Para 6Y(i). I.I. Notes. GIPBS
Para 6L( i ). II.I. Notes.
GIPBS
Para (WB)(i). III.I. Notes.
GIPBS [Para 1.2-1 & Para 1.2-2]
Para 6I( iii ). I.I. Notes.
GIPBS
Para 6Y( ii ). I.I. Notes.
GIPBS
Para 6J(ii). I.I. Notes. GIPBS
Para 6A.IV.( ii ). I. Notes.
GIPBS
Para 6L.( iv ). II.I. Notes.
GIPBS
Para 3.4
Para 3.5
------Section 143(3) (i) of the Act Chapter 5
-------Section 143(3) (e) of the Act Para 3.6
Para 4.4
I-53
Clause of CARO 2020
Matter to be reported on by auditor
Corresponding disclosure requirements of amended Schedule III of the Companies Act, 2013 (‘the Act’)
Para(H)( iii ). III.I. Notes.
GIPBS
Para(WB)(iii). III.I. Notes.
GIPBS
Para(J)( ii ). III.I. Notes.
GIPBS
Para(WB)(iv). III.I. Notes.
GIPBS
[See Para 1.3-1 & Para 1.3-2]
Applicable provisions of the Act and Rules/ Orders thereunder
Other applicable requirements of the Act and rules regarding audit reporting
Chapter/ Para No. of this book
3(i)(e)Pending Proceedings against the company for holding benami property
Para 6Y( vi ). I.I. Notes.
GIPBS
Para 6L(viii). II.I. Notes.
GIPBS
Para (WB)(viii). III.I. Notes.
GIPBS
[Para 1.4-1 & Para 1.4-2]
1
3(ii)(a)Physical verification of inventory by management at reasonable intervals
3(ii)(b)Quarterly statements submitted to Banks/FIs by companies enjoying sanctioned working capital limits on the security of current assets
3(iii) (a) Whether during the year company has given loans or advances in the nature of loans or stood guarantee or provided security
3(iii) (b) Terms & conditions of loan, advances in the nature of loans , guarantees and security provided and investments madewhether prejudicial to the company
Section 143(3) (j) of the Act
Rule 11(a) of the Companies (Audit and Auditors) Rules, 2014
----------Section 143(3) (b)/(h) and (i) of the Act
Para 6Y( ii ). I.I. Notes.
GIPBS
Para 6L( ix ). II.I. Notes.
GIPBS
Para(WB) (ix) III.I. Notes.
GIPBS
[Para 1.5-1 & Para 1.5-2]
-----Clause 3(iii) (b), Clause 3(iv) and Clause 3(ix)(e) of CARO, 2020
------Sections 185 and 186 of the Act
Clause 3(iv) of CARO, 2020
Section 143(1) (a)/(d)
Section 143(3) (j)
Rule 11(e) of the Companies(Audit and Auditors)Rules, 2014
Chapter 7
Chapter 8
Para 9.6
Para 9.7
1. Sections 2(8), 2(9), 24, 53 of Prohibition of Benami Property Transactions Act, 1988
CARO, 2020 CLAUSE-WISE READY RECKONER I-54
I-55 CARO, 2020 CLAUSE-WISE READY RECKONER
Clause of CARO 2020
Matter to be reported on by auditor
3(iii) (c) Regularity of repayments of loans and advances in the nature of loans and receipt of interest thereon
3(iii) (d) Overdues for more than 90 days and reasonability of steps taken for recovery of overdues
3(iii) (e) Evergreening of loans or advances in the nature of loans which have fallen due or become overdue
3(iii) (f) Loans granted by the company repayable on demand or without specifying terms of repayment
Corresponding disclosure requirements of amended Schedule III of the Companies Act, 2013 (‘the Act’)
Applicable provisions of the Act and Rules/ Orders thereunder
------Clause 3(iii)(a), Clause 3(iii)(e) & (f) of CARO, 2020
------Clauses 3(iii) (c), 3(iii)(e) & 3(iii)(f) of CARO, 2020
-----Clause 3(xi)(a) of CARO, 2020
Para 6Y( iii ). I.I. Notes. GIPBS
Para 6L( v ). II.I. Notes.
GIPBS
Para (WB)(v) III.I. Notes.
GIPBS
[Para 1.6-1 & Para 1.6-2]
Clauses 3(iii) (c) to 3(iii)(e) of CARO, 2020
Other applicable requirements of the Act and rules regarding audit reporting
Para No. of this book
9.8/ Para9.9
Para 9.13
3(iv)Reporting on compliance with sections 185 and 186 of the Act as regards loans, investments, guarantees and security provided
3(v)Acceptance of public deposits and deemed deposits
-----Clause 3(iii)(b) of CARO, 2020
Chapter 10
3(vi)Maintenance of cost records
--------Clause 3(xii), Clause 3(ix)(d), Clause 3(iii) and Clause 3(xix) of CARO, 2020
Sections 73 and 76 Companies (Acceptance of Deposits) Rules, 2014
Section 406 & Nidhi Rules, 2014 in case of Nidhis)
-------Section 148 Companies (Cost Records and Audit) Rules, 2014
Section 143(3) (b) and (h) of the Act
Chapter 11
Chapter 12
Chapter/
Para
Para
9.10/Para 9.11
Para
9.12
Clause of CARO 2020
CARO, 2020 CLAUSE-WISE READY RECKONER I-56
Matter to be reported on by auditor
3(vii)Payment or non-payment of undisputed/disputed statutory dues
Corresponding disclosure requirements of amended Schedule III of the Companies Act, 2013 (‘the Act’)
Applicable provisions of the Act and Rules/ Orders thereunder
Other applicable requirements of the Act and rules regarding audit reporting
======------Section 143(3) (j) of the Act
Rule 11(a) of the Companies (Audit and Auditors)Rules, 2014
Chapter/ Para No. of this book
Chapter 13
3(viii)Transactions not recorded in the books and surrendered or disclosed in income-tax assessment-whether properly recorded in books
3(ix)(a)Default by company in repayment to any lender
3(ix)(b)Whether company declared a wilful defaulter
Para 5(ix). I.II. Notes, GIPSPL
Para 7(l). II.II. Notes. GIPSPL
Para 11( v ). III.II. Notes.
GIPSPL
-----Section 143((3) (b)/(h) of the Act
-----Clause 3(ix)(b), Clause 3(ix)(f ) and Clause 3(xix) of CARO, 2020
Para 6Y( viii ). I.I. Notes.
GIPBS
Para 6L( x ). II.I. Notes.
GIPBS
Para(WB)(x) III.I. Notes.
GIPBS
Clause 3(ix) (a) and Clause 3(xix) of CARO, 2020
Chapter 14
Para 15.1
Paras 15.2 to 15.5
3(ix)(c)End use of term loans
3(ix)(d)Asset Liability Maturity mismatch
3(ix)(e)Funds taken from other entities by company to meet obligations of subsidiaries, associates or JVs
3(ix)(f)Loan raised by co. on pledge of securities in subsidiaries, associates or JVs
3(x)(a)End use of monies raised by way of IPO/FPO
Para 6VA. I.I. Notes. GIPBS
Para 6JA. II.I. Notes. GIPBS
Para (WA). III. Notes.
GIPBS
Para 6VA. I.I. Notes. GIPBS
Para 6JA. II.I. Notes. GIPBS
Para (WA).III. Notes. GIPBS
Para 6VA. I.I. Notes. GIPBS
Para 6JA. II.I. Notes. GIPBS
Para (WA). III. Notes.
GIPBS
Clause 3(xi)(a) of CARO, 2020
Chapter 16
Clause 3(iii) and Clause
3(xix) of CARO, 2020
Clause 3(iii) and Clause 3(xix) of CARO, 2020
-----Clause 3(ix) (a) and Clause
3(xix) of CARO, 2020
Chapter 17
Chapter 18
Chapter 19
Chapter 20
I-57 CARO, 2020 CLAUSE-WISE READY RECKONER
Clause of CARO 2020
Matter to be reported on by auditor
3(x)(b)Private placement-compliance with provisions and end-use of monies raised
3(xi)(a)Frauds by or on the company noticed or reported
Corresponding disclosure requirements of amended Schedule III of the Companies Act, 2013 (‘the Act’)
Applicable provisions of the Act and Rules/ Orders thereunder
-----Sections 42 & 62 Rules 13 &14 of Companies (Share Capital & Debentures) Rules, 2014
-----Clauses 3(xi) (b), 3(xi)(c), 3(xiv), 3(iii) (e), 3(ix)(b) and 3(ix)(c), 3(viii), 3(xi)(b), 3(xi) (c), 3(xiv)(b) and 3(xiii) of CARO, 2020
Section 447 of the Act
Other applicable requirements of the Act and rules regarding audit reporting
Chapter/ Para No. of this book
Chapter 21
Section 143(12) of the Act
Rule 13 of the Companies (Audit and Auditors) Rules, 2014
Chapter 22
3(xi) (b) Whether any ADT-4 report filed by auditors under section 143(12)
3(xi) (c) Whistleblower complaints
-----Section 143(12) of the Act
Clause 3(xi)(a) of CARO, 2020
-----Clause 3(xi)(a) of CARO, 2020
Clause 3(xi)(b) of CARO, 2020 Section 177(9) of the Act
Rule 7 of the Companies (Meetings of Board and its Powers) Rules, 2014
Chapter 22
Chapter 22
3(xii)Compliances by Nidhi companies
-----Clause 3(v) of CARO, 2020 Section 406 Nidhi Rules, 2014
Auditor’s certificate as to compliance with Nidhi Rules-Rule 22 of Nidhi Rules, 2014
Chapter 23
3(xiii)Related Party Transactions
-----Clause 3(xi)(a) and 3(xi)(b) of CARO, 2020
Sections 2(76), 177 and 188
Rules 6, 6A and 15 of the Companies (Meetings of Board and its Powers) Rules, 2014
Chapter 24
Clause of CARO 2020
CARO, 2020 CLAUSE-WISE READY RECKONER I-58
Matter to be reported on by auditor
3(xiv) (a) Existence and Adequacy of Internal Audit system
3(xiv) (b) Consideration of internal audit reports
3(xv)Non-cash transactions involving directors or connected persons
3(xvi) (a) Certificate of Registration of NBFC
3(xvi) (b) Carrying on activities of NBFC/HFC without valid CoR
3(xvi) (c) Core Investment Company
3(xvi) (d) Number of CICs in the Group
3(xvii)Whether company has incurred cash loss
3(xviii)Resignation of statutory auditors
Corresponding disclosure requirements of amended Schedule III of the Companies Act, 2013 (‘the Act’)
Applicable provisions of the Act and Rules/ Orders thereunder
-----Section 138 Rule 13 of the Companies (Accounts) Rules, 2014
-----Clauses 3(xi) (a), 3(xi)(b) and 3(xiv)(a) of CARO, 2020
Other applicable requirements of the Act and rules regarding audit reporting
Chapter/ Para No. of this book
Chapter 25
Section 143(3) (i) of the Act
-----Section 192-----
Chapter 25
Chapter 26
Chapter 27
-----Clause 3(xix) of CARO, 2020
Chapter 27
Chapter 27
Chapter 27
3(xix)Material going concern uncertainty
-----Clause 3(xix) of CARO, 2020
-----Section 140(2)&(3)
Rule 6 of the Companies (Audit and Auditors) Rules, 2014
----------Section 143(2), 143(3)(f) and 143(3)(h)
3(xxi)Unspent CSR funds-----Section 135
Schedule VII Companies (Corporate Social Responsibility Policy) Rules, 2014
Chapter 28
Chapter 29
Chapter 30
Chapter 31
PROPERTY, PLANT AND EQUIPMENT
CLAUSE 3(i)(a)(A), 3(i)(b) AND 3(i)(d) OF CARO, 2020
(i)(a) (A) Whether the company is maintaining proper records showing full particulars, including quantitative details and situation of Property, Plant and Equipment;
(B)Whether the company is maintaining proper records showing full particulars of intangible assets;
(
b)Whether these Property, Plant and Equipment have been physically verified by the management at reasonable intervals; whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the books of account;
(d)Whether the company has revalued its Property, Plant and Equipment (including Right of Use assets) or intangible assets or both during the year and, if so, whether the revaluation is based on the valuation by a Registered Valuer; specify the amount of change, if change is 10% or more in the aggregate of the net carrying value of each class of Property, Plant and Equipment or intangible assets;
** ** **
2 49
Systematic
Analysis of clauses 3(i)(a)(A), 3(i)(b) and 3(i)(d)
2.0 Map of clause 3(i)(a)(A), clause 3(i)(b) and clause 3(i)(d) of CARO
(A) Matters of fact to be reported
(
a) whether company is maintaining records of Property, Plant and Equipment (PPE) items showing full particulars including quantitative details and situation of PPE items [Clause 3(i)(a)(A)]
(
b) whether the management have physically verified these PPE items [Clause 3(i)(b)] ?
(
c) whether any discrepancies have been noticed on physical verification? [Clause 3(i)(b)]
(
d) whether the company has revalued its PPE (including Right of Use assets) or intangible assets or both during the year and,
Whether 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 PPE or intangible assets [Clause 3(i)(d)].
(B) Matters of opinion to be reported
(
a) Whether the records of PPE in (A)(a) above are ‘proper records’? [Clause 3(i)(a)(A)]
(
b) Whether the intervals of physical verification in (A)(b) above are ‘reasonable intervals’ [Clause 3(i)(b)]
(
c) Whether the discrepancies in (A)(c) above are ‘material’ discrepancies? If so, whether the same have been properly dealt with in the books of account [Clause 3(i)(b)].
(C) Data to be reported
If company has revalued its PPE (including Right of Use assets) or intangible assets or both during the year, specify the amount of change, if change is 10% or more in the aggregate of the net carrying value of each class of PPE or intangible assets.
Cl. 3(i)(a)(A), 3(i)(b) & 3(i)(d) DIV. 2: REPORTING UNDER CARO, 2020 50
If so,
The auditor must cross check the amount of change in net carrying value of PPE/intangible assets due to revaluation (where change is 10% or more in aggregate value of each class of PPE/intangible assets) with amount of change in the “reconciliation of the gross and net carrying amounts of each class of assets at the beginning and end of the reporting period” disclosed in notes to accounts in accordance with Division I, Division II and Division III of Schedule III. The requirements regarding disclosure of “reconciliation of the gross and net carrying amounts of each class of assets at the beginning and end of the reporting period” in respect PPE/tangible assets in notes to accounts in Division I, Division II and Division III have been substituted by Notification No. 207(E), dated 24-2-2021 with effect from 01-04-2021 so as to require distinct disclosure in the reconciliation of amount of change due to revaluation (if change is 10% or more in the aggregate of the net carrying value of each class of Property, Plant and Equipment/intangible assets).
(D) Inter-Linkages between Clauses 3(i)(a)(A) and 3(i)(b) of CARO
Clause 3(i)(a)(A) is inter-linked with Clause 3(i)(b). If Company is not maintaining proper records of PPE, then it is not possible for auditor to comment whether any material discrepancies were noticed on physical verification of PPE by management and whether the same have been properly dealt with in books of account.
(E) Linkages with other reporting requirements of section 143 of Companies Act, 2013
Section 143(3)(i)
Section 143(3)(j) read with Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014
Section 143(3)(e).
(F) Corresponding disclosure requirements of Schedule III
Para 6Y (ii). I.I. Notes. GIPBS, Para 6L (iii) I.I. Notes. GIPBS, Para 6L (iv) II.I. Notes. GIPBS,
Para (WB) (iii). III. I. Notes. GIPBS and Para (WB) (iv) III. I. Notes GIPBS of amended Schedule III.
(G) Linkages to tax audit report in Form No. 3CD:
Clause 18 of Form No. 3CD.
(H) Relevant Professional Pronouncements: Guidance Note on Audit of Plant, Property and Equipment issued by ICAI, Revised 2022 Guidance Note issued by ICAI.
51 CH. 2: PROPERTY, PLANT AND EQUIPMENT Cl. 3(i)(a)(A), 3(i)(b) & 3(i)(d)
Verification and Reporting Requirements of Clause
3(i)(a)(A), Clause 3(i)(b) and Clause 3(i)(d)
2.1 Matters required to be verified and reported as per Clause
3(i)(a)(A)
Clause 3(i)(a)(A) requires auditor to verify and report whether the company is maintaining proper records showing full particulars, including quantitative details and situation of Property, Plant and Equipment.
2.2 Matters required to be verified and reported as per Clause
3(i)(b)
Clause 3(i)(a)(A) requires auditor to verify and report:
(
a) whether Property, Plant and Equipment have been physically verified by the management;
(
b) whether the physical verification by Management has been carried out at reasonable intervals;
(
c) whether any material discrepancies were noticed on such verification and
(d) if answer to (c) above is “yes”, whether the same have been properly dealt with in the books of account.
Auditor must verify all four aspects as above. His comment must cover all the four aspects as above. If not, reporting would be incomplete and would not be in accordance with Clause 3(i)(b).
For example, a comment in CARO report on Clause 3(i)(b) is incomplete if it mentions that physical verification of PPE has been carried out by Management but does not mention whether the verification is at reasonable intervals. Merely mentioning the periodicity of verification (all items covered once in 3 years according to a program or all items verified once in 2 years) will not suffice. Auditor must clearly and categorically opine whether the stated periodicity is reasonable in his opinion or not having regard to the size of the company and the nature of the assets.
Clause 3(i)(a)(A) is inter-linked with Clause 3(i)(b). If Company is not maintaining proper records of PPE, then it is not possible for auditor to comment whether any material discrepancies were noticed on physical verification of PPE by management and whether the same have been properly dealt with in books of account.
Cl. 3(i)(a)(A), 3(i)(b) & 3(i)(d) DIV. 2: REPORTING UNDER CARO, 2020 52
2.3 Matters required to be verified and reported as per Clause
3(i)(d)
Clause 3(i)(d) requires the auditor to verify and report :
(a) whether the company has revalued its Property, Plant and Equipment (including Right of Use assets) or intangible assets or both during the year and,
(b) if so,
whether the revaluation is based on the valuation by a Registered Valuer;
specify the amount of change, if change is 10% or more in the aggregate of the net carrying value of each class of Property, Plant and Equipment or intangible assets;
Clause 3(i) (a)(A) and Clause 3(i)(b)
2.4 Applicability/non-applicability of requirements of
Clauses 3(i)(a)(A) and 3(i)(b) will not apply where Company has no PPE or Capital Work-in-Progress or Investment Properties or held for sale assets or ROU assets. ICAI has clarified that these clauses will apply to Investment Properties, ROU assets and held for sale assets. CWIP is part of PPE shown on the face of the balance sheet.
2.5 Applicability/non-applicability of requirements of Clause
3(i)(d)
Clause 3(i)(d) will not apply in the following situations:
(1) Company has no PPE or Capital Work-in-Progress or Investment Properties or Held for sale assets or ROU assets; and
(2) Company has not revalued any of these assets during the year.
2.6
Comparison of reporting requirements under
Clause 3(i)(a)/ (b) PPE Assets and Clause 3(ii
) Inventories
A comparison of the reporting requirements of Clause 3(i) and Clause 3(ii) is given in the Table below:
Sr. No.Matters to be commented upon Whether applicable to fixed assets under Clause 3(i)
Whether applicable to Inventories under Clause 3(ii) 1.Maintenance of proper recordsYesNo 2.Whether physically verified by management at
53 CH. 2: PROPERTY, PLANT AND EQUIPMENT Cl. 3(i)(a)(A), 3(i)(b) & 3(i)(d)
YesYes
reasonable intervals
Sr. No.Matters to be commented upon
3.Adequacy and coverage of physical verification procedures
4.Material discrepancies noticed on physical verification-whether properly dealt with in the books of account
Whether applicable to fixed assets under Clause 3(i)
Whether applicable to Inventories under Clause 3(ii)
NoYes
YesYes (if discrepancy exceeds 10% for each class of inventory)
Interpretation of the requirements of Clause
3(i)(a)(A)/3(i)(b)/3(i)(d)
2.7 Property, plant and equipment
(AS)10 Property, Plant and Equipment defines the term ‘Property, Plant and Equipment’ as under:
Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
(b) are expected to be used during more than a period of twelve months.
Ind AS 16 Property, Plant and Equipment defines the term ‘Property, Plant and Equipment’ as under:
Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
(
b) are expected to be used during more than one period. Thus, intangible assets as defined in (AS) 26 or Ind AS 38 are not covered under PPE. PPE covers only tangible assets.
2.8 Whether ‘PPE’ covers ROU assets, investment properties and held for sale assets
According to the Revised 2022 Guidance Note, the following items are also to be considered for reporting under Clause 3(i)(a)(A) though these items are covered by AS/Ind AS other than AS 10/Ind AS 16:
Right of Use (RoU) assets covered under Ind AS 116, “Leases” where the auditee-company, under a lease agreement, obtains the right to use an asset.
investment property (as defined under Ind AS 40, Investment Property), and
Cl. 3(i)(a)(A), 3(i)(b) & 3(i)(d) DIV. 2: REPORTING UNDER CARO, 2020 54
non-current assets held for sale (as defined under Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations).
A class of property, plant and equipment is a grouping of assets of a similar nature and use in operations of an enterprise. The following are examples of separate classes:
(a) land;
(b) land and buildings;
(c) machinery;
(d) ships;
(e) aircraft;
(f) motor vehicles;
(g) furniture and fixtures;
(h) office equipment; and
(i) bearer plants.
2.9 Distinction between PPE and Fixed Assets
The term “Fixed Assets” covers both “tangible items” (PPE) as well as “intangible assets”.
2.10 PPE covers ‘bearer plants’ also
The term ‘Property, Plant and Equipment’ covers bearer plants also. Bearer plant is a plant that
(a) is used in the production or supply of agricultural produce;
(b) is expected to bear produce for more than a period of twelve months; and
(c) has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.
The following are not bearer plants:
(
(
i) plants cultivated to be harvested as agricultural produce (for example, trees grown for use as lumber);
ii) plants cultivated to produce agricultural produce when there is more than a remote likelihood that the entity will also harvest and sell the plant as agricultural produce, other than as incidental scrap sales (for example, trees that are cultivated both for their fruit and their lumber); and
(iii) annual crops (for example, maize and wheat).
When bearer plants are no longer used to bear produce they might be cut down and sold as scrap, for example, for use as firewood. Such incidental scrap sales would not prevent the plant from satisfying the definition of a bearer plant.
55 CH. 2: PROPERTY, PLANT AND EQUIPMENT Cl. 3(i)(a)(A), 3(i)(b) & 3(i)(d)
Bearer plants are accounted for in the same way as self-constructed items of property, plant and equipment before they are in the location and condition necessary to be capable of operating in the manner intended by management. Consequently, references to ‘construction’ should be read as covering activities that are necessary to cultivate the bearer plants before they are in the location and condition necessary to be capable of operating in the manner intended by management.
2.11 PPE acquired under finance/operating lease
PPE acquired under financial lease are covered [See para 34(c) of the Guidance Note on CARO, 2016] but not assets acquired under operating lease. (As per AS-19, assets acquired under operating lease will not be recognized as assets in the books of account).
2.12 Is project under sale PPE or current asset ?
The Accounting Standards Board (ASB) has opined that project under sale which was originally treated as a PPE would continue to be so treated even if it is under sale and will not, therefore, be classified as a current asset. However, if an enterprise is a dealer of projects, then the project under sale would be an inventory and will be classified as a current asset and would be covered by clause 3(ii)(a) of the Order rather than clause 3(i)(a)(A)/clause 3(i)(b)/clause 3(i)(d).
2.13 Whether ‘PPE’ includes CWIP
The Revised 2022 Guidance Note also does not clarify whether requirements of CARO 2020 applicable to PPE also apply to CWIP Schedule III sub-head for disclosure on the face of the Balance Sheet under ‘Non-current Assets’ is ‘Plant, Property and Equipment including Intangible Assets’. Under this subhead, PPE, Intangible Assets, CWIP and Intangible Assets under development are the separate liar items.
Thus, in view of the above, ‘PPE’ should be taken to include CWIP also.
Schedule III requires the following disclosures for CWIP under ARI disclosures in notes to accounts :
Ageing Schedule; and Completion Schedule for CWIP where there is time-over run/cost overrun.
Management will not be able to make these disclosures without proper physical verification. Therefore, it appears that the requirements in clause 3(i)(a) (A), clause 3(i)(b) and clause 3(i)(d) shall apply to CWIP also. This is what follows from a purposive interpretation.
Cl. 3(i)(a)(A), 3(i)(b) & 3(i)(d) DIV. 2: REPORTING UNDER CARO, 2020 56
2.14 If any PPE item has been obtained free of cost as a Government grant, are Clauses 3(i)(a)(A), 3(i)(b) and 3(i)(d) applicable to it ?
Yes.
2.15/16 Clause 3(i)(a)(A) of the Order does not require the auditor to comment on records maintained for intangible assets
Clause 3(i)(a)(A) of the Order requires the auditor to report “whether the company is maintaining proper records showing full particulars, including quantitative details and situation of Property, Plant and Equipment”. As such, the requirement as regards proper records in Clause 3(i)(a)(A) of the Order is only with reference to records for tangible assets.
Clause 3(i)(a)(A) of the Order does not require the auditor to comment on records maintained for intangible assets. Requirement is to report only on records maintained for PPE i.e. tangible assets. The requirement to report on records for intangible assets is separately contained in another distinct clause of the Order - Clause 3(i)(a)(B) [See Chapter 4].
2.17 What is meant by ‘proper records’ ?
Clause 3(i)(a)(A) provides no guidance as to what constitutes proper records of PPE assets beyond stating that PPE records should contain full particulars including quantitative details and situation of PPE assets. Therefore, what constitutes “proper records” is a matter of matter of professional judgment made by the auditor after considering the facts and circumstances of each case. The purpose of maintaining proper records of PPE items is to physically verify them and compare the results of the physical verification with PPE items in hand as per records. This enables exercise of proper internal control over the PPE items. Whether the records are proper or not will have to be judged from whether or not the above objective is facilitated. Also, the records maintained should ensure that details as regards revaluation of PPE items which are required to be reported by auditor under Clause 3(i)(d) are readily available. Certain general guidelines on what constitutes proper records, can be laid down based on the Order as well as the Revised 2022 Guidance Note on CARO issued by ICAI. These are as under:
(1) The records should contain full particulars about the PPE items including—
- Sufficient description of the PPE (colour, model, make, etc.) for easy identification
- Classification i.e., relevant account head under which it is shown (e.g. land, land and buildings, machinery, ships, aircrafts, motor vehicles, furniture and fixtures, office equipment, bearer plants)
57 CH. 2: PROPERTY, PLANT AND EQUIPMENT Cl. 3(i)(a)(A), 3(i)(b) & 3(i)(d)
- Situation (i.e., location)
- Quantity, i.e., number of units
- Original cost
- Year of purchase [It would be advisable that the PPE register should indicate date of purchase also (from income-tax point of view)]
- Date the asset became available for use [It would be advisable if PPE register indicates ‘date put to use’ (from income-tax point of view)]
- Useful Life
- Residual Value
- Component-wise breakup (wherever applicable)
- Adjustment for revaluation or for any increase or decrease in cost;
- Date of revaluation, if any;
- Details of Registered Valuer’s report if revaluation based on it;
- Rate(s)/basis of depreciation, as the case maybe;
- Depreciation for the current year;
- Accumulated depreciation;
- Particulars regarding impairment;
- Particulars regarding sale, discarding, demolition, destruction, etc.
(2) The records should contain the abovementioned particulars in respect of all items of PPE, whether self-financed or right to use assets (See Ind AS 116) acquired through finance lease.
(3) These records should also contain particulars in respect of: items of PPE that have been fully depreciated; items retired from active use and held for disposal; items that have been fully impaired during the period covered by the audit report; and items that have been fully depreciated/written off in the year of purchase/acquisition itself.
(4) The aggregate original cost, depreciation to date, and impairment loss, if any, as per these records under individual heads should reconcile with the figures shown in the books of account.
(5) Situation of PPE has to be shown in PPE register to facilitate physical verification possible.
(6) Where location of certain classes of PPE items may keep changing, for example, construction equipment which has to be moved to sites, it would not be possible to show location in PPE register. In such cases, it is sufficient if record of movement/custody of the equipment is maintained.
Cl. 3(i)(a)(A), 3(i)(b) & 3(i)(d) DIV. 2: REPORTING UNDER CARO, 2020 58
(7) Where assets like furniture, Air-conditioner, car etc. are located in the residential premises of members of the staff (especially where these are provided as perquisite), name & designation of the person who has custody of the asset for the time being should be indicated in the PPE register.
(8) Generally, the quantity, value and situation have to be recorded item-wise. However, assets of small individual value, e.g., chairs, tables, etc. may be conveniently grouped for purposes of entry in the PPE register.
(9) For assets having same useful life, it may not be necessary to indicate the accumulated depreciation for each item; instead, depreciation for the group as a whole may be shown.
(10) Quantitative details of PPE may be maintained on the following lines:
(
a) Land can be identified by survey numbers and by conveyance deeds.
(
b) Leaseholds can be identified by individual leases.
(
c) Buildings may be classified into: factory buildings, office buildings, township buildings, service buildings (like water works), etc. The above may be further reclassified as follows: Factory buildings into individual buildings which house a manufacturing unit or a plant or sub-plant. Service buildings according to nature of service and location. Township buildings into individual units or into groups of units taking into consideration the type of construction, the location and the year of construction. For example, if a company’s township has four categories of quarters, e.g., A, B, C and D, the PPE register may not record each individual quarter but may have a single entry for all ‘A’ type quarters constructed in a particular year and located in a particular area and show only the number of quarters covered by the entry.
(d) Railway sidings can be identified by length and location.
(e) Plant and machinery may be sub-divided into immovable and movable.
(f) For movable machinery, a separate record may be kept for each individual item.
Movable machinery would include, for this purpose, items of plant which are for the moment fixed to the shop-floor but which can be moved, e.g., machine tools.
59 CH. 2: PROPERTY, PLANT AND EQUIPMENT Cl. 3(i)(a)(A), 3(i)(b) & 3(i)(d)
(g) In respect of immovable plant and machinery, a sub-division can be made according to the process, a plant for each separate process being considered as a separate identifiable unit. A further sub-division may be useful when within a process, there are plants which are capable of working independently of each other. The degree of sub-division depends upon the circumstances of each case bearing in mind the objectives of sub-division, namely, the determination of individual cost and the facility for physical verification and componentisation [See Schedule II to Companies Act, 2013]
(h) Furniture and fittings and assets like office appliances, air-conditioners, water coolers, etc., consist of individual items which can be easily identified. However, there is a practical difficulty as there may be numerous items and these may be moved from one location to another. Therefore, individual identification may be made for high-value items and identification by groups may be made for other items.
(i) Development of property is an asset head which can be easily sub-divided according to the buildings or plant for which the development work is undertaken.
(j) Vehicles can be identified by reference to the registration books.
(11) Details regarding allocation of cost over identified units of assets may not be are available in some cases. In such cases, identification would have to be made by an analysis of the purchases and the disposals of the preceding years.
(12) There may be practical difficulties in identifying the cost of each individual asset such as:
(i) non-availability of records for some of the years;
(ii) incomplete description of the asset in the records;
(iii) details of disposals not properly recorded;
(iv) subsequent additions to an existing asset may have been shown as a separate asset;
(v) a single figure of cost may be assigned to a number of assets which have to be separately identified;
(vi) assets purchased for one department may have been moved to other departments, and so on.
In such situations, the management, in consultation with the auditor, should make the best effort possible under the circumstances to identify the cost of each asset by making reasonable assumptions or approximations where necessary. For example, when details of disposals are not available, it may be assumed that sale is on FIFO basis (i.e. the asset
Cl. 3(i)(a)(A), 3(i)(b) & 3(i)(d) DIV. 2: REPORTING UNDER CARO, 2020 60
sold is the asset which was acquired earliest in point of time was sold). Similarly, when the individual cost of a large number of small items is not available, one can estimate the cost of each item and pro-rate the total cost in the proportion of the estimated cost of the item to the aggregate estimated cost.
(13) Initial identification of assets should be done by persons who are familiar with them, e.g., the maintenance staff. At the point of identification, a code number may be affixed on the asset which would give sufficient details for future identification.
(14) The initial identification of assets will often reveal a number of discrepancies between the assets as verified and the details compiled from the records. This may be on account of the features already considered in (11) above. This may also be due to the fact that assets might have been scrapped in earlier years but proper documentation may not have been made or that assets may have been broken up into smaller units or amalgamated into larger units or otherwise modified without changing the asset records. The degree of further inquiry necessary to reconcile these discrepancies would depend upon the nature of the asset, its cost, the age of the asset, the extent of accounting or other records available and other relevant factors.
However, the concept of materiality should be borne in mind in making these further inquiries, greater attention being devoted to assets which are of large value or of relatively recent purchase. Any adjustments that finally have to be made should be properly documented. The auditor should request the appropriate level of management to carry out necessary adjustments.
(15) Non-maintenance of PPE register by the company is a serious documentation and control lacuna. This should be mentioned by the auditor while reporting under this clause.
(16) In view of sub-clause (c) of clause 3(i) [See Chapter 4], details of title deeds of PPE which are immovable properties disclosed in the financial statements of the company should be entered. Also, details to regarding custody of title deeds should be mentioned. The following details regarding title deeds of PPE in the form of immovable properties should be readily available from the records of PPE:
Description of property
Gross carrying value
Held in the name of
Whether promoter, director or their relative or employee
Period held Reason for not being held in the name of company (also indicate if in dispute)
61 CH. 2: PROPERTY, PLANT AND EQUIPMENT Cl. 3(i)(a)(A), 3(i)(b) & 3(i)(d)
CARO with Corporate Practices
AUTHOR : SRINIVASAN ANAND G
PUBLISHER : TAXMANN
DATE OF PUBLICATION : AUGUST 2023
EDITION : 10TH EDITION
ISBN NO : 9789356227286
NO. OF PAGES : 1232
BINDING TYPE : PAPERBACK
Description
This book provides a para-wise commentary on the Companies (Auditors Report) Order (CARO). It is a complete guide on the applicability and the matters that need to be reported by an Auditor on CARO. This book will be helpful for Auditors.
The Present Publication is the 10th Edition and has been amended up to August 2023. This book is authored by CA Srinivasan Anand G and divided into three divisions:
u [Division One] Features of CARO 2020 & its Applicability
u [Division Two] CARO Reporting as Applicable to Standalone Financial Statements
u [Division Three] CARO Reporting as Applicable to Consolidated Financial Statements
The noteworthy features of this book are as follows:
u [Corporate Practices] from published annual reports of FYs 2021-22 & 2022-23 are included in the book
u [All-about CARO 2020] which includes the following topics:
Features of CARO 2020
Audit Requirements (Other Audits vs Reporting Requirements u/s 143 of the Companies Act 2013)
Clause-wise Analysis & Commentary on Clauses (i) to (xx) of Para 3 & 4 along with Clause (xxi) of Para 3 of CARO 2020
u [Para-wise Commentary] dealing with clauses (i) to (xx)
Interpretation Requirements of the Clause in light of the following:
Applicable Legal Provisions
Relevant Standards on Auditing
Revised 2022 Guidance Note of ICAI on CARO 2020
Applicable Requirements of Schedule III of the Companies Act 2013
Requirements of Section 143(1) to (3) applicable to the Clause’
NFRA’s Interpretation of the Reporting Requirements of the Clauses and lapses on the part of auditors pointed out by NFRA in Audit Quality Review Reports (AQRR)
Forward Linkages to the following:
Tax Audit Report in Form No. 3CD
Requirements under Section 143(1)/143(3) of the Income-tax Act
Audit Checklists covering the following
Checklist in respect of each CARO Clause
DPT 3 Return Certification
Nidhi Rules Compliances
SA 570 (Revised)
Audit Documentation
Sample Auditors’ Remarks under the relevant Clause
Corporate Practices (extracts from the annual reports)
u [FAQs & Case Studies] on CARO 2020
u [Clause-wise Ready Reckoner] on CARO 2020
NOW
ORDER
Rs. 2995 | USD 73
