Preface to Ninth Edition This book is prepared exclusively for the requirements of Final Level of Chartered accountancy Examinations. It covers the entire revised syllabus as per ICAI. As regards subject matter, an attempt has been made to make a systematic representation of the subject so that reader has not to consciously mug up various provisions. The entire syllabus has been divided into Six Modules. Module I
Auditing Concepts and Engagement Standards
Module II
Professional Ethics
Module III
Company Audit
Module IV
Different Types of Audit
Module V
Audit of Different Entities
Module VI
Guidance Notes, Accounting Standards and Schedule III
a b c d
In order to make these notes as useful as possible, the discussion is characterized by: ( ) Tabular and Pictorial Presentation of Subject Matter. ( ) Use of Simple & Concise language for easy understanding. ( ) Inclusion of Past Examination Questions at the end of every topic/chapter. ( ) Examination weightage is given at the end of every chapter to determine relative importance. I hope that readers will be satisfied with the contents of this book. Still, there always remains scope for improvement. I will be grateful to the readers for their valuable feedback for improvement of this book. Wishing every success to the readers. CA. PANKAJ GARG
e-mail: cacs.gargpankaj@gmail.com
I-5
Contents PAGE
Preface to Ninth Edition
I-5
Chapter-wise Marks Distribution
I-11
Syllabus (New Course)
I-13
Modification in the scope of syllabus (ICAI Announcement dated 24-6-2019)
I-17
Abbreviations I-19 MODULE I
AUDITING CONCEPTS AND ENGAGEMENT STANDARDS Chapter 1 1.3
Quality Control and Engagement Standards
Chapter 2 2.1
Auditing Planning, Strategy and Execution
Chapter 3 3.1
Risk Assessment and Internal Control
Chapter 4 4.1
Audit in an Automated Environment
MODULE II
PROFESSIONAL ETHICS Chapter 5 5.3
Professional Ethics (Chartered Accountants Act, 1949)
MODULE III
COMPANY AUDIT Chapter 6 6.3
Company Audit
Chapter 7 7.1
Audit Reports
I-7
S T N E T N O C
I-8
PAGE
Chapter 8
8.1
CARO, 2020
Chapter 9 9.1
Audit of Consolidated Financial Statements
Chapter 10 10.1
Audit of Dividends
Chapter 11 11.1
Audit Committee & Corporate Governance
Chapter 12 12.1
Liabilities of Auditor
MODULE IV
DIFFERENT TYPES OF AUDIT Chapter 13 13.3
Internal Audit
Chapter 14 14.1
Management and Operational Audit
Chapter 15 15.1
Audit under Fiscal Laws
Chapter 16 16.1
Due Diligence, Investigation & Forensic Audit
Chapter 17 17.1
Peer Review & Quality Review
MODULE V
AUDIT OF DIFFERENT ENTITIES Chapter 18 Audit of Banks
18.3
Chapter 19 Audit of Non-Banking Financial Companies
19.1
Chapter 20 Audit of Insurance Companies
20.1
Chapter 21 Audit of Public Sector Undertakings
21.1
S T N E T N O C
I-9 PAGE
MODULE VI
QUESTIONS ON IND-AS AND SCHEDULE III Chapter 22 Questions on Ind-AS
22.3
Chapter 23 Questions on Schedule III Past Exam Paper (Dec. 2021 – New Syllabus)
23.1 P.1
8
CARO, 2020
8.1 - Applicability of Companies (Auditor Report) Order, 2020 Application of CARO, 2020
CARO, 2020 shall apply to every company including a foreign company as defined in Sec. 2(42) of the Companies Act, 2013, except: (i) a banking company; (ii) an insurance company; (iii) a company licensed to operate u/s 8 of the Companies Act; (iv) a One-Person Company as defined in Sec. 2(62) of the Companies Act and a Small Company as defined in Sec. 2(85) of the Companies Act; and (v) a private limited company, not being a subsidiary or holding of a public company,
having a Paid-up capital & Reserves & Surplus not more than ₹1 Cr. as on the balance sheet date, and
which does not have total borrowings exceeding ₹1 Cr. from any bank or financial institution at any point of time during the financial year, and
which does not have a total revenue as disclosed in Schedule III to the Companies Act, 2013 (including revenue from discontinuing operations) exceeding ₹10 Cr. during the financial year as per the financial statements.
Every report made by the auditor u/s 143 of the Companies Act, 2013 on the accounts of every company examined by him to which this Order applies for the financial years commencing on or after 1st April, 2021, shall contain the matters specified in paragraphs 3 and 4, as may be applicable. The Order shall not apply to the auditor’s report on consolidated financial statements except Para 3(xxi). Points to remember (a) Provisions of CARO are equally applicable in case of branches also, because under sec. 143(8), a branch auditor has same duties as of company auditor. (b) A company is covered under the definition of small company, it will remain exempted from the applicability of the Order even if it falls under any of the criteria specified for private company. (c) Paid up capital includes equity as well as preference. (d) Amount originally paid up on forfeited shares should be added to the figure of paid up capital. (e) Share Application money should not be considered as part of paid up capital. (f) Reserves includes Capital reserves, revenue reserves as well as Revaluation Reserves. (g) Credit Balance of Profit and Loss Account will form part of reserve. (h) In case of debit balance of profit or loss, same shall be netted for computing reserves & surplus. (i) Loans from banks and financial institutions are to be considered in aggregate. Financial Institutions will include NBFC. (j) Loans may be in any form like term loan, demand loans, cash credit overdraft, export credit, bill purchased/discounted.
8.1
CARO, 2020
Chapter 8 (k) Non fund-based credit facilities have devolved and have been converted into fund based credit facilities should also be considered as outstanding loan. (l) Long term loans as well as short term loans, secured as well as unsecured will be considered. (m) Outstanding dues in respect of credit cards will also be considered. (n) Interest accrued as well as due does form part of outstanding loan, whereas interest accrued but not due is not considered as loan. (o) Total revenue as disclosed in Schedule III comprises of Revenue from operations and Other Income. (p) In respect of a company other than a finance company revenue from operations shall consists of revenue from (a) Sale of products; (b) Sale of services; and (c) Other operating revenues, as reduced by Excise duty. (q) In respect of a finance company, revenue from operations shall consists of revenue from (a) Interest; and (b) Other financial services. (r) Other income shall consist of the followings:
Interest Income (in case of a company other than a finance company);
Dividend Income;
Net gain/loss on sale of investments;
Other non-operating income (net of expenses directly attributable to such income). IMPORTANT QUESTIONS
Q. No. 1: ABC Pvt. Ltd. is a holding company of XYZ Ltd. Whether CARO is applicable to ABC Pvt. Ltd.? HINT: CARO is applicable. Q. No. 2: Astha Pvt. Ltd. has fully paid capital of ₹ 140 lakh. During the year, the company had borrowed ₹ 15 lakh each from a bank and a financial institution independently. It has the turnover (Net of GST ₹ 50 lakhs which is credited to a separate account) of ₹ 475 lakhs. Will Companies (Auditor’s Report) Order, 2020 be applicable to Astha Pvt. Ltd.? HINT: CARO is applicable as paid up capital exceeds ₹1 Cr. Q. No. 3: E-Tech Pvt. Ltd., which has an aggregate outstanding loan of ₹ 20 lakhs from Banks and ₹ 30 lakhs from Financial Institutions, defaulted in repayment thereof to the extent of 50%. The company holds that it being a private limited company, the Companies (Auditor’s Report) Order, 2020 is not applicable. You are required to state the list of companies to which CARO is not applicable and state how would you deal with the given situation as an auditor of the company. HINT: Contention of the E-Tech Pvt. Ltd., is correct that CARO, 2020 will not be applicable on it as outstanding loan from banks and financial institution in aggregate does not exceeds ₹ 1 Cr. Q. No. 4: A Pvt. Ltd. is incorporated on 1st July, 2021. During the year, it had issued shares (fully paid up) of ₹ 80 lakhs, had borrowed ₹ 60 lakhs each from 2 financial institutions and its turnover (Net of GST ₹100 lakhs which is credited to a separate account) is ₹ 950 lakhs. Will Companies (Auditors Report) Order, 2020 (CARO) be applicable to A Pvt. Ltd.? HINT: Contention of the A Pvt. Ltd. is not correct as total borrowings exceeds ₹ 1 Cr., hence reporting under CARO, 2020 will be required. Q. No. 5: As an auditor, how would you deal with the following: L Private Ltd., which has outstanding loan of more than ₹ 100 lakhs from Financial Institution defaulted in repayment thereof to the extent of 50%. The company holds that it being a private limited company, the Companies (Auditors Report) Order is not applicable.
8.2
Chapter 8
CARO, 2020
HINT: Contention of L Pvt. Ltd. is not correct as borrowings from financial institution exceeds ₹ 1 Cr., and auditor is required to report the period and amount of default in repayment of dues under Para 3(viii) of CARO, 2020. Q. No. 6: T Pvt. Ltd.’s paid up Capital & Reserves are less than ₹ 1 Cr. and it has no outstanding loan exceeding ₹ 1 cr. from any bank or financial institution. Its sales are ₹ 12 Crores before deducting Trade discount ₹ 20 lakhs and Sales returns ₹ 90 Cr. The services rendered by the company amounted to ₹20 lakhs. The company contends that reporting under Companies Auditor’s Reports Order (CARO) is not applicable. Discuss. HINT: Contention of the company that CARO is not applicable is not correct, as revenue of the company as per Schedule III including value of service rendered, after deducting trade discount and sales returns amounts to ₹10.10 Cr. (i.e. 12 - 0.20 – 1.90 + 0.20 crore). Q. No. 7: A Private limited company reports the following position as at end of current financial year: Paid up capital
60 Lacs
Revaluation reserves
20 Lacs
Capital reserves
22 Lacs
P & L A/c (Dr. Balance)
4 Lacs.
The management of the company contends that CARO, 2020 is not applicable to it. HINT: CARO is not applicable as paid up capital and reserves does not exceed ₹ 1 cr. (60 Lacs + 20 Lacs + 22 Lacs – 4 Lacs). Q. No. 8: Under CARO, 2020, how as a statutory auditor would you comment on the following: X Pvt. Ltd. is a subsidiary of a listed entity. The management of the company believes that since X Pvt. Ltd. is a private company and satisfies all conditions under CARO, 2020, reporting under CARO is not applicable. HINT: CARO is applicable as exemption is not available to a private company which is a subsidiary or holding of a public company. Q. No. 9: H Private Ltd. had taken overdrafts from two banks with a limit of ₹ 40 lacs each against the security of fixed deposit it had with those banks and an unsecured overdraft from a financial institution of ₹36 lacs. The said loans were outstanding as at the end of current financial year. The paid-up capital and reserves of the company as at the end of financial year was ₹ 80 lacs and its revenue for the current financial year was ₹ 6 crores. The management of the company is of the opinion that CARO, 2020 is not applicable to it because turnover and paid up capital were within the limits prescribed and loans taken against the fixed deposits cannot be considered. The company further contended that loan limit is to be reckoned per bank or financial institution and not cumulatively. Comment. HINT: The contention of the company is not correct as total borrowings exceeds ₹1 cr., hence reporting under CARO, 2020 will be required. Q. No. 10: A Private Limited Company reports the following position as at end of current financial year: Paid up Capital
₹ 70 Lacs
Revaluation Reserve
₹ 24 Lacs
Capital Reserve
₹ 20 Lacs
Profit & Loss (Dr.) Balance
₹ 24 Lacs
The Management of the Company contends that CARO, 2020 is not applicable to it. Comment. HINT: CARO, 2020 is not applicable to the Company, as paid up capital and reserves amounts to ₹ 0.90 Cr.
8.3
CARO, 2020
Chapter 8
8.2 - Matters to be included in Auditor’s Report Property, Plant and Equipment
Adequacy of Records
Whether the company is maintaining proper records showing full particulars, including quantitative details and situation of Property, Plant and Equipment. Whether the company is maintaining proper records showing full particulars of intangible assets.
[Para 3(i)]
Points to remember The Order does not define as to what constitutes ‘proper records’. Thus, what constitutes proper records is a matter of professional judgment made by the auditor after considering the facts and circumstances of each case. Physical verification
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. Points to remember What constitutes “reasonable intervals” depends upon the circumstances of each case. The factors to be taken into consideration in this regard include the number of assets, the nature of assets, the relative value of assets, difficulty in verification, situation and geographical spread of the location of the assets, etc. The management may decide about the periodicity of physical verification of fixed assets considering the above factors. While an annual verification may be reasonable, it may be impracticable to carry out the same in some cases. Even in such cases, the verification programme should be such that all assets are verified at least once in every three years. Where verification of all assets is not made during the year, it will be necessary for the auditor to report that fact, but if he is satisfied regarding the frequency of verification, he should also make a suitable comment to that effect.
Title Deeds
Whether the title deeds of all the immovable properties (Other than properties where the company is the lessee and the lease agreements are duly executed in favour of the lessee) disclosed in the financial statements are held in the name of the company. If not, provide details thereof in the below mentioned format: Description of Property
Gross carrying value
*also indicate if in dispute.
8.4
Held in name of
Whether promoter, director or their relative or employee
Period held – indicate range, where appropriate
Reason for not being held in name of company*
Chapter 8
CARO, 2020 Points to remember The Order is silent as to what constitutes ‘title deeds’. In general, title deeds mean a legal deed or document constituting evidence of a right, especially to the legal ownership of the immovable property. Title deeds of the immovable property may be: (a) Registered sale deed/transfer deed/conveyance deed, etc. of land, land & building together, etc. purchased, allotted, transferred by any person including any government, government authority/body/ agency/corporation, etc. to the company. (b) In case of leasehold land and land & buildings together, covered under the head fixed assets, the lease agreement duly registered with the appropriate authority. Revaluation
Whether the company has revalued its Property, Plant and Equipment
of Property,
(including Right of Use assets) or intangible assets or both during the year and,
Plant and Equipment
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;
Proceedings for holding Benami Property
Whether any proceedings have been initiated or are pending against the company for holding any benami property under the Benami Transactions (Prohibition) Act, 1988 and rules made thereunder, if so, whether the company has appropriately disclosed the details in its financial statements.
IMPORTANT QUESTIONS Q. No. 11: X Ltd. closed its manufacturing operations and sold all its property, plant and equipment relating to manufacturing operations during the current financial year. However, it intends continue its operations as a trading company. In respect of other fixed assets, the company carried out a physical verification as at the end of current financial year and found a material discrepancy to the tune of ₹1 lac, which was written off and is disclosed separately in the profit and loss account. Kindly incorporate the above in your audit report. HINT: Reporting required w.r.t. Property, Plant and Equipment: “The property, plant and equipment have been physically verified by the management at reasonable intervals; material discrepancies were noticed on such verification and the same have been properly dealt with in the books of account;” Auditor is also required to perform procedures covered in SA 570 so as to ensure appropriateness of use of Going concern basis of accounting. Q. No. 12: Under CARO, 2020, as a statutory auditor, how would you report: NSP Limited has its factory building, appearing as property, plant and equipment in its financial statements in the name of one of its director who was overlooking the manufacturing activities. HINT: Auditor shall report under Clause (i)(c) of Para 3 of the CARO, 2020.
8.5
CARO, 2020
Chapter 8
Q. No. 13: ABC Ltd. owns a piece of Land and Building situated at IP road, Mumbai which was purchased before 30 years. The title deeds for the same are deposited with State Bank of India for obtaining credit facilities by the company. As the statutory auditor of the company, what are the audit procedures to be followed and what is the reporting under CARO, 2020? HINT: Auditor shall report under Clause (i)(c) of Para 3 of the CARO, 2020. Q. No. 14: The Property, Plant and Equipment of Amir Ltd. included ₹ 25.75 crores of earth removing machines of outdated technology which had been retired from active use and had been kept for disposal after knock down. These assets appeared at residual value and had been last inspected ten years back. As an Auditor, what may be your reporting concern in view of CARO, 2020 on matters specified above? [MTP-April 21] HINT: Auditor shall report under Clause (i)(b) of Para 3 of the CARO, 2020. Inventories [Para 3(ii)]
(a) whether physical verification of inventory has been conducted at reasonable intervals by the management and whether, in the opinion of the auditor, the coverage and procedure of such verification by the management is appropriate; whether any discrepancies of 10% or more in the aggregate for each class of inventory were noticed and if so, whether they have been properly dealt with in the books of account; (b) whether during any point of time of the year, the company has been sanctioned working capital limits in excess of ₹5 crores, in aggregate, from banks or financial institutions on the basis of security of current assets; whether the quarterly returns or statements filed by the company with such banks or financial institutions are in agreement with the books of account of the Company, if not, give details. Points to remember
Physical verification of inventory is the responsibility of the management of the company which should verify all material items at least once in a year and more often in appropriate cases.
What constitutes “reasonable intervals” depends on circumstances of each case. The periodicity of the physical verification of inventories depends upon the nature of inventories, their location and the feasibility of conducting a physical verification. The management of a company normally determines the periodicity of the physical verification of inventories considering these factors. Normally, wherever practicable, all the items of inventories should be verified by the management of the company at least once in a year. IMPORTANT QUESTIONS
Q. No. 15: What are the reporting requirements for closing stock in the CARO, 2020. HINT: Refer Para 3(ii) of CARO 2020. Q. No. 16: As the statutory auditor of B Ltd. to whom CARO, 2020 is applicable, how would you report in the following situations: Physical verification of only 50% (in value) of items of inventory has been conducted by the company. The balance 50% will be conducted in next year due to lack of time and resources. HINT: Procedure of physical verification followed by management is not reasonable and hence the auditor should point out the inadequacies in physical verification procedures, under Para 3(ii) of CARO, 2020.
8.6
Chapter 8
CARO, 2020
Investments,
Whether during the year the company has made investments in, provided any guarantee or
Guarantee / Security,
security or granted any loans or advances in the nature of loans, secured or unsecured, to companies, firms, Limited Liability Partnerships or any other parties, if so,
Loans or
(a) whether during the year the company has provided loans or provided advances in the nature
Advances
of loans, or stood guarantee, or provided security to any other entity [not applicable to companies whose principal business is to give loans], if so, indicate-
[Para 3(iii)]
(A) the aggregate amount during the year, and balance outstanding at the balance sheet date with respect to such loans or advances and guarantees or security to subsidiaries, joint ventures and associates; (B) the aggregate amount during the year, and balance outstanding at the balance sheet date with respect to such loans or advances and guarantees or security to parties other than subsidiaries, joint ventures and associates; (b) whether the investments made, guarantees provided, security given and the terms and conditions of the grant of all loans and advances in the nature of loans and guarantees provided are not prejudicial to the company’s interest; (c) in respect of loans and advances in the nature of loans, whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular; (d) if the amount is overdue, state the total amount overdue for more than 90 days, and whether reasonable steps have been taken by the company for recovery of the principal and interest; (e) whether any loan or advance in the nature of loan granted which has fallen due during the year, has been renewed or extended or fresh loans granted to settle the overdues of existing loans given to the same parties, if so, specify the aggregate amount of such dues renewed or extended or settled by fresh loans and the percentage of the aggregate to the total loans or advances in the nature of loans granted during the year [not applicable to companies whose principal business is to give loans]; (f)
whether the company has granted any loans or advances in the nature of loans either repayable on demand or without specifying any terms or period of repayment, if so, specify the aggregate amount, percentage thereof to the total loans granted, aggregate amount of loans granted to Promoters, related parties as defined in Sec. 2(76) of the Companies Act, 2013. IMPORTANT QUESTIONS
Q. No. 17: In the course of audit of Y Ltd., as the auditor of the company you observe the following: The company has advanced a loan to a firm in which a director was interested at a rate lower than the prevailing market rate as well as there was no agreement on terms of repayment. How auditor will report in CARO, 2020? HINT: Reporting required under Para 3(iii) of CARO, 2020. Auditor should also ensure compliance of disclosure requirements of AS 18 and perform procedures as prescribed under SA 550. Q. No. 18: H Ltd. granted unsecured loan of ₹1 crore @ 15% p.a. to two of its subsidiaries during the current financial year. Before the year end both the companies repaid the loan. The management of H Ltd. is of the opinion that since no balance is outstanding as at the end of financial year, these loans are not required to be reported in CARO, 2020. Comment and draft a suitable report.
8.7
CARO, 2020
Chapter 8
HINT: Draft Report: “The Company has granted loan of ₹1 Crore @ 15% p.a. to 2 of its subsidiaries during the current Financial Year. The maximum amount involved during the year was ₹ 1.00 crore and the year-end balance of such loans was Nil”. Q. No. 19: ABC Ltd. has granted a loan of ₹20 crores to its associate XYZ (P.) Ltd. at the beginning of the financial year and it remain outstanding at the year end. How the auditor should report the fact? HINT: Reporting required under Para 3(iii) of CARO, 2020. Auditor should also ensure compliance of disclosure requirements of AS 18 and perform procedures as prescribed under SA 550. Compliance of provisions of Secs. 185 & 186 – Para 3(iv)
In respect of loans, investments, guarantees, and security whether provisions of Sections 185 and 186 of the Companies Act, 2013 have been complied with. If not, provide details thereof. Points to remember
For this purpose of ensuring compliance of Sec. 185, the auditor should carry out the following procedures: (i)
Obtain from the management the details of the directors or any other person in whom the director is interested. He may also check the details of the persons covered under this clause from Form MBP-1 and from the Register maintained u/s 189 of the Act.
(ii) Obtain and check the details of the transactions carried out with such persons, including of any guarantee given and security provided. (iii) Further examine the details to find out whether any of the transaction is attracting the provisions of section 185 of the Act. (iv) In case of transactions that are covered under the exceptions as provided under section 185, the auditor should obtain the necessary evidence in support of such exception.
The auditor should report the nature of non-compliance of Sec. 185, the maximum amount outstanding during the year and the amount outstanding as at the balance sheet date in respect of: (i) the Directors; and (ii) persons in whom directors are interested (specify the relationship with the Director concerned).
For this purpose of ensuring compliance of Sec. 186, the auditor should: 1.
Obtain the details of, loans given to any person or other body corporate, guarantee given or security provided in connection with a loan to any other body corporate or person and securities acquired of any other body corporate by way of subscription, purchase or otherwise, made during the year as well as the outstanding balances as at the beginning of the year.
2.
Check whether, at any point of time during the year in case of aforesaid transactions, the company has exceeded the limit of 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more. If it exceeds the limits specified above, whether prior approval by means of a special resolution passed at a general meeting has been obtained.
3.
Check whether the company has made investments through more than two layers of investment companies
4.
Check whether the company has disclosed the full particulars of the loan given, investment made or guarantee given or security provided in the financial statement including the purpose for which the same is proposed to be utilized by the recipient.
8.8
Chapter 8
CARO, 2020
5.
Check whether the company has passed the board resolution as prescribed and obtained the prior approval, wherever required, from the public financial institution concerned where any term loan is subsisting.
6.
Check whether rate of interest is not lower than the prevailing yield of one year, threeyear, five years or ten-year government security closest to the tenor of the loan granted.
7.
Check if the company is in default in the repayment of any deposits accepted or in payment of interest thereon, then the company is not allowed to give any loan or guarantee or any security or an acquisition till such default is subsisting.
8.
Check whether the company has maintained a register (as per Form MBP-2) in the manner as prescribed and also check the compliances of other provisions and relevant rules.
Non-compliance of Sec. 186 may be reported incorporating following details: S. No.
Non-compliance of Section 186 Name of Company/Party
1
Investment through more than two layers of investment companies
2
Loan given or guarantee given or security provided or acquisition of securities exceeding the limits without prior approval by means of a special resolution
3
Loan given at rate of interest lower than prescribed
4
Any other default
Amount Involved
Balance as at Balance Sheet Date
Remarks, if any
IMPORTANT QUESTIONS Q. No. 20: As a Company auditor you noticed that there is an inter-corporate loan granted by the company. What are the reporting requirements as regard the matters concerning terms of interest on the inter-corporate loan? HINT: Reporting required under Para 3(iv) of CARO, 2020. Public Deposits [Para 3(v)]
In respect of deposits accepted by the company or amounts which are deemed to be deposits, whether the directives issued by the RBI and the provisions of sections 73 to 76 or any other relevant provisions of the Companies Act and the rules framed thereunder, where applicable, have been complied with. If not, the nature of such contraventions be stated;
If an order has been passed by Company Law Board or National Company Law Tribunal or Reserve Bank of India or any Court or any other Tribunal, whether the same has been complied with or not?
8.9
CARO, 2020
Chapter 8 Points to remember
Cost Records [Para 3(vi)]
It may be difficult for the auditor to ascertain that deposits accepted by the company are within the limits on each day of the accounting year. He would, therefore, be justified in making a reasonable test check to ensure that the company has not accepted deposits during the year in excess of the limits.
In case where the auditor is of the view that any kind of contravention of sections 73 to 76 or any other relevant provisions of the Act or relevant rules or directives from Reserve Bank of India, if any, has taken place, the auditor should state in his report that the provisions of that section(s) and/or relevant rules, as the case may be, have not been complied with. The auditor should also report the nature of contraventions.
Whether maintenance of cost records has been specified by the CG u/s 148(1) of the Companies Act, 2013 and whether such accounts and records have been so made and maintained. Points to remember The word “made” applies in respect of cost accounts (or cost statements) and the word “maintained” applies in respect of cost records relating to materials, labour, overheads, etc. The auditor has to report under the clause irrespective of whether a cost audit has been ordered by the Central Government. The auditor should obtain a written representation from the management stating: (a) whether cost records are required to be maintained for any product(s) or services of the company u/s 148 of the Act, and the Companies (Cost Records and Audit) Rules, 2014; and (b) whether cost accounts and records are being made and maintained regularly. The auditor should also obtain a list of books/records made and maintained in this regard. The Order does not require a detailed examination of such records. The auditor should, therefore, conduct a general review of the cost records to ensure that the records as prescribed are made and maintained. He should, of course, make such reference to the records as is necessary for the purposes of his audit. It is necessary that the extent of the examination made by the auditor is clearly brought out in his report. The following wording is, therefore, suggested: “We have broadly reviewed the books of account maintained by the company pursuant to the Rules made by the Central Government for the maintenance of cost records under section 148 of the Act, and are of the opinion that prima facie, the prescribed accounts and records have been made and maintained.”
IMPORTANT QUESTIONS Q. No. 21: CARO, 2020 requires the auditor of the company to report whether maintenance of cost records has been specified by the Central Government under section 148 of the Companies Act, 2013 and whether such accounts and records have been so made and maintained. You are required to briefly explain the audit procedure to be followed by the auditor and suggest the reporting pattern. HINT: Refer Clause (vi) of Para 3 of CARO, 2020 and related points of Guidance Note on CARO.
8.10
Chapter 8 Statutory Dues [Para 3(vii)]
CARO, 2020 (a) Whether the company is regular in depositing undisputed statutory dues including Goods and Services Tax, provident fund, employees’ state insurance, income-tax, sales-tax, service tax, duty of customs, duty of excise, value added tax, cess and any other statutory dues to the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than 6 months from the date they became payable, shall be indicated. (b) Where statutory dues referred above have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending shall be mentioned. (A mere representation to the concerned Department shall not be treated as a dispute). Points to remember
“Any other statutory dues” indicates that the clause covers all type of dues under various statutes which may be applicable to a company having regard to its nature of business.
With reference to regularity, auditor should clearly understand the nature of each statutory due payable by the company before commenting on the same. For instance, the regularity is a normal feature in case of certain statutory dues such as, provident fund, employees’ state insurance, sales tax, etc., but this is not the case in respect of, say, duty of customs on import of goods or demands arising on account of assessment orders etc., Such dues should be construed to have been paid regularly if the company deposits them as and when they become due.
In respect of goods imported earlier and placed in a bonded warehouse the interest and rent that are required to be incurred under section 61 of the Customs Act, 1962 would come under other statutory dues and the auditor would have to examine and comment upon the regularity of the company in depositing such interest and rent.
Non-payment of advance income tax would constitute default in payment of statutory dues.
In cases where there are no arrears on the balance sheet date but the company has been irregular during the year in depositing the statutory dues, the auditor should state this fact while reporting under this clause.
For the purpose of this clause, the auditor should consider a matter as “disputed” where there is a positive evidence or action on the part of the company to show that it has not accepted the demand for payment of tax or duty, e.g., where it has gone into appeal.
The auditor should obtain a written representation with reference to the date of the balance sheet from the management: (i) specifying the cases and the amounts considered disputed; (ii) containing a list of the cases and the amounts in respect of the statutory dues which are undisputed and have remained outstanding for a period of more than six months from the date they became payable; and (iii) containing a statement as to the completeness of the information provided by the management.
Statement of Arrears of Statutory Dues Outstanding for More than 6 Months can be in following format: Name of the Statute
Nature of the Dues
Amount (₹)
8.11
Period to which the amount relates
Due Date
Date of Payment
Remarks, if any
CARO, 2020
Chapter 8
Statement of Disputed Dues can be in the following format: Name of the Statute
Nature of the Dues
Amount (₹)
Period to which the amount relates
Forum where dispute is pending
Remarks, if any
IMPORTANT QUESTIONS Q. No. 22: As a statutory auditor, how would you deal with the following case: During the course of audit of ABC Ltd. it is noticed that out of ₹12 Lacs of provident fund contribution accounted in the books, only ₹2 Lacs has been remitted to the authorities during the year. On enquiry the Chief Accountant informed that due to financial problems they have not remitted but will remit the same as and when the position improves. Or During the course of Audit of M/s CT Ltd., it has noticed that ₹ 2.00 lakhs of employee contribution and ₹ 9.50 lakhs of employer contribution towards employee state insurance contribution have been accounted in the books of account in respective heads. Whereas, it was found that ₹4.00 lakhs only have been deposited with ESIC department during the year. The Finance Manager informed that auditor that due to financial crunch they have not deposited the amount due, but will deposit the amount overdue along with interest as and when financial position improves. Comment as a statutory auditor. HINT: Non-payment of PF/ESI contribution needs to be disclosed by the auditor in his audit report as per requirement of Para 3(vii)(a) of CARO, 2020. Auditor should also perform the procedures as covered in SA 250. Q. No. 23: As a Statutory Auditor, how would you deal with the following: PQR Ltd. has not deposited Provident Fund contribution of ₹10 lakhs with the authorities till the year-end. HINT: Non-payment of provident fund of ₹ 10 Lacs needs to be disclosed by the auditor in his audit report as per requirement of Para 3(vii)(a) of CARO, 2020. Auditor should also perform the procedures as covered in SA 250. Q. No. 24: Comment on the following: Is the company regular in depositing undisputed statutory dues including Provident Fund, Employees State Insurance, Income Tax, Sales Tax, Wealth Tax, Customs duty, Excise duty, Value added Tax, Cess and any other statutory dues with the appropriate authorities and if not, the extent of arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they became payable shall be indicated by the auditor. HINT: Refer Para 3(vii)(a) of CARO, 2020. Auditor should also perform the procedures as covered in SA 250. Q. No. 25: Big and Small Ltd. received a show cause notice from GST department intending to levy a demand of ₹ 25 lakhs in December 2021. The company replied to the above notice in January 2022 contending that it is not liable for the levy. No further action was initiated by the GST department upto the finalization of the audit for the year ended on 31st March, 2022. As the auditor of the company, what is your role in this? HINT: The auditor needs not to report on this, as required under Para 3(vii) of CARO, 2020. Auditor should also perform the procedures as covered in SA 250.
8.12
Chapter 8
CARO, 2020
Q. No. 26: XYZ Pvt. Ltd. has submitted the financial statements for the current financial year for audit. The audit assistant observes and brings to your notice that the company’s records show following dues: Income Tax relating to Assessment Year 2017-18 ₹125 lacs – Appeal is pending before ITAT since 30-9-2018. Customs duty ₹85 lakhs – Demand notice received on 15-9-2021 but no action has been taken to pay or appeal. As an auditor, how would you bring this fact to the members? HINT: (a) Matter related with Income Tax: In the present case an appeal relating to income tax is pending with the ITAT, which need to be reported as under: S. No.
Name of the Statute
Nature of Dues
Amount (in Lacs)
Period to which amount relates
Forum where dispute is pending
1
Income-tax Act, 1961
Income Tax
125.00
AY 2017-18
ITAT
(b) Matter related with Customs Duty: Demand Notice has been received for ₹85 Lacs but the company has not taken any action yet. Auditor may state the fact accordingly. Auditor should also perform the procedures as covered in SA 250. Q. No. 27: As an auditor, how will you report under CARO in each of the following situation? (i) Since more than seven months, payment of electricity bills to company established under statute is outstanding. (ii) The company had imported goods 5 years back and were placed in bonded warehouse till the end of financial year under Audit. The company has not paid import duty as goods have not been removed from such warehouse. The company has also not paid rent and interest expenditure payable on the amount of customs duty. (iii) The company has received income tax assessment order along with demand notice from Assessing Officer. The company has not paid dues payable as the same is not acceptable to the company. The company has neither preferred appeal against the order nor an application for rectification of mistake has been made. The company has just merely represented to the Assessing Officer. (iv) The company in view of voluminous pay-roll data consistently follows the method of making lump sum deposit of estimated amount of ESI collections and adjust the excess or deficit against next following months’ deposit and the difference of the said amount always remains insignificant. [Jan. 21 – Old Syllabus (5 Marks)] HINT: Refer Para 3(vii)(a) of CARO, 2020. (i)
Reporting not required as dues has arisen on account of contract of supply of goods or services between the parties.
(ii) Reporting not required for customs duty as it is not yet due; Interest and rent that are required to be incurred u/s 61 of the Customs Act, 1962 would come under other statutory dues and the auditor would have to examine and comment upon the regularity of the company in depositing such interest and rent. (iii) Auditor is required to check whether time limit for filing the appeal or application for rectification of mistake has expired or not and report accordingly. (iv) Reporting not required.
8.13
CARO, 2020
Chapter 8
Unrecorded Income
Whether any transactions not recorded in the books of account have been surrendered or disclosed as income during the year in the tax assessments under the Income-tax Act, 1961,
Para 3(viii)
if so, whether the previously unrecorded income has been properly recorded in the books of account during the year;
Repayment of Dues– Para 3(ix)
(a) Whether the company has defaulted in repayment of loans or other borrowings or in the payment of interest thereon to any lender, if yes, the period and amount of default to be reported as per the format below: Nature of borrowing, including debt securities
Name of lender*
Amount not paid on due date
Whether principal or interest
No. of days delay or unpaid
Remarks, if any
*lender wise details to be provided in case of defaults to banks, financial institutions and Government. (b) whether the company is a declared wilful defaulter by any bank or financial institution or other lender; (c) whether term loans were applied for the purpose for which the loans were obtained; if not, the amount of loan so diverted and the purpose for which it is used may be reported; (d) whether funds raised on short term basis have been utilised for long term purposes, if yes, the nature and amount to be indicated; (e) whether the company has taken any funds from any entity or person on account of or to meet the obligations of its subsidiaries, associates or joint ventures, if so, details thereof with nature of such transactions and the amount in each case; (f) whether the company has raised loans during the year on the pledge of securities held in its subsidiaries, joint ventures or associate companies, if so, give details thereof and also report if the company has defaulted in repayment of such loans raised. Points to remember
Auditor should report the period and amount of all defaults existing at the balance sheet date irrespective of when those defaults have occurred.
Financial Institution includes all Banks, Public Financial Institutions, as well as Non-Banking Institutions and also includes Non-Banking Financial Companies.
Submission of application for re-schedulement/restructuring does not mean that no default has occurred.
Terms loans are generally provided by banks and financial institutions for acquisition of capital assets which then become the security for the loan, i.e., end use of funds is normally fixed.
The Order is silent as to term loans obtained from entities/persons other than banks/financial institutions. A strict interpretation of the clause would mean that the term loan obtained from entities/persons other than banks/financial institutions would also have to be examined.
In case of term loans, raised against title deeds, long term FDRs, NSCs etc., where the lender is not concerned with the purpose for which it is being obtained, the auditor should clearly mention the fact that in absence of any stipulation regarding the utilization of loans from the lender, he is unable to comment as to whether the term loans have been applied for the purposes for which they were obtained.
8.14
Chapter 8
CARO, 2020
Sometimes, companies, may, temporarily invest the surplus funds pending utilization for the purpose for which funds were arranged. In such cases, the auditor should mention the fact that pending utilisation of term loans for the stated purpose, the funds were temporarily used for the purpose other than for which they were raised but were ultimately utilised for the stated enduse.
Reporting Format: In Our opinion and according to the information and explanations given to us, the Company has utilized the term loans during the year for the purposes for which they were raised, except for: Nature of the fund Raised
Details of default (Reason/Delay)
Amount (₹)
Subsequently rectified (Yes/No) and details
IMPORTANT QUESTIONS Q. No. 28: OK Ltd. has taken a term loan from a nationalized bank in 2017 for ₹ 200 lakhs repayable in five equal instalments of ₹ 40 lakhs from 31st March, 2018 onwards. It had repaid the loans due in 2018 & 2019, but defaulted in 2020, 2021 & 2022. As the auditor of OK Ltd. what is your responsibility assuming that company has sought reschedulement of loan? HINT: The auditor has to report in his audit report that the Company has defaulted in its repayment of dues to the bank to the extent of ₹ 120 lakhs, as required under Para 3(ix) of CARO, 2020. Q. No. 29: R Ltd. as at 31st March 2022 defaulted in the repayment of interest and principal due to a financial institution. The due date was 28th Feb. 2022. However, the defaulted amount was paid on 5th April 2021. The company’s management is of the opinion that since the default is set right before the audit completion these need not be reported in CARO, 2020. Comment & draft a suitable report. Or C Limited has defaulted in repayments of dues to a financial institution during the financial year 2021-22 and the same remained outstanding as at March 31, 2022. However, the Company settled the total outstanding dues including interest in April, 2022 subsequent to the year end and before completion of the audit. Discuss how you would deal with this matter and draft a suitable Auditor's Report. HINT: Draft Report: “The company has defaulted in repayment of principal and interest to the financial institution amounted to ₹………, that become due on _________________. Also the period of default is ________days”. Q. No. 30:Under CARO how, as a statutory auditor how would you comment on the following: A Term Loan was obtained from a bank for ₹ 75 lakhs for acquiring R&D equipment, out of which ₹ 12 lakhs were used to buy a car for use of the concerned director, who was overlooking the R&D activities. HINT: As per requirement of Para 3(ix) of CARO, 2020, auditor is required to report the fact that out of the term loan obtained for R & D equipment, ₹ 12 Lacs was not utilized for the purpose of acquiring the R & D equipment. Q. No. 31: As a Statutory Auditor, how would you deal with the following: LM Ltd. had obtained a Term Loan of ₹ 300 lakhs from a bank for the construction of a factory. Since there was a delay in the construction activities, the said funds were temporarily invested in short term deposits. HINT: Auditor is required to report the fact that the pending utilisation of term loan, the funds are temporarily invested in short term deposits, in his audit report as per requirement of Para 3(ix) of CARO, 2020.
8.15
Advanced Auditing & Professional Ethics AUTHOR PUBLISHER DATE OF PUBLICATION EDITION ISBN NO NO. OF PAGES BINDING TYPE
: : : : : : :
PANKA J GARG TAXMANN JANUARY 2022 9TH EDITION 9789393656346 736 PAPERBACK
Rs. 1440 | USD 56 Description This book is prepared exclusively for the requirement of the Final Level of Chartered Accountancy Examination. It covers the entire revised syllabus as per the ICAI. This book aims to make a systematic representation of the subject so that the reader does not have to consciously mug up various provisions. The Present Publication is the 9th Edition & Updated till 31st October 2021 for CA-Final | New Syllabus, with the following noteworthy features: u
[Tabular & Pictorial Presentation] of the subject matter
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[Simple & Concise Language] for easy understanding
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[Examination Weightage] is given at the end of every topic/chapter to determine the relative importance
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[900+ Question & Case Studies with Hints] are provided for self-practice. n
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Detailed answers are provided in the 9th Edition of Taxmann’s Cracker for Advanced Auditing & Professional Ethics for CA-Final | New Syllabus
[Coverage] of this book includes: n
All Past Exam Questions at the end of every topic/chapter, till December 2021 Exam
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Questions from RTPs and MTPs of ICAI
[Most Updated & Amended] This book is updated & amended as per the following: n
Companies (Amendment) Act 2020
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Companies (Auditor’s Report) Order [CARO] 2020
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SEBI (LODR) Regulation 2015 (as amended)
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Form 3CD (as amended)
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Revised Statement of Peer Review 2020
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Relevant Illustrations of AS, Ind-AS and Schedule III
[Student-Oriented Book] The authors have developed this book, keeping in mind the following factors: n
Interaction of the authors with their students, with specific emphasis on difficulties faced by students in the examinations
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