5.

76 ADVANCED AUDITING AND PROFESSIONAL ETHICS

k) Profit sharing ratio.

F
4. If partners maintain minute book he shall refer it for any resolution passed regarding the
accounts.
(Source: LLP Rules 2009 and
http://www.mca.gov.in/MinistryV2/disclosureauditandfilingrequirements.html)http://www.mca.gov.in
/MinistryV2/llpefiling.html

19. AUDIT REPORT

Auditor’s Report - An audit report should be clear, specific and complete, in order that anyone who
reads it may know clearly about the company. An auditor who gives the shareholders “the means of
information” in respect of company’s financial position, does so, at his peril and runs the serious risk
of being held judicially to have failed to discharge his duty (Lindley L.J in Re London and General
Bank).
The auditor should review and assess the conclusions drawn from the audit evidence obtained as
the basis for the expression of an opinion on the financial statements. This review and assessment
involves considering whether the financial statements have been prepared in accordance with an
acceptable financial reporting framework applicable to the entity under audit. It is also necessary to
consider whether the financial statements comply with the relevant statutory requirements.
The auditor’s report should contain a clear written expression of opinion on the financial statements
taken as a whole.
(Students may refer Chapter 6 on Audit Report for detailed reporting requirements as
prescribed under Standards on Auditing).

19.1 Reporting Under CARO, 2020

In exercise of the powers conferred by section 143(11) of the Companies Act, 2013, the Central
Government, after consultation with the National Financial Reporting Authority constituted under
section 132 of the Companies Act, 2013, has issued the Companies (Auditor’s Report) Order, 2020,
(CARO, 20) dated 25th February, 2020.

1. Applicability of the Order: The CARO, 2020 is an additional reporting requirement. The
order applies to every company including a foreign company as defined in clause (42) of
section 2 of the Companies Act, 2013. However, the Order specifically exempts the
following classes of companies:

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 conditions As on Bls Date
Pus c s se r At Any Pointof time
COMPANY AUDIT5 . 5.77

i During fit
t
if
Private limited
company
subject to Banking
Borrowing fulfilment of
specified
conditions
company
MT 7 OBC IPS
Tl of loer

During
the financial Exempted
Small company
Classes of
fear
Insurance
as per the
company
Companies Act Companies

Company
licensed to
One Person
operate under
Company
section 8 of the
Companies Act

(i) a banking company as defined in clause (c) of section 5 of the Banking Regulation
Act, 1949 (10 of 1949);
(ii) an insurance company as defined under the Insurance Act,1938 (4 of 1938);
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company as defined under clause (62) of section 2 of the
Companies Act and a small company as defined under clause (85) of section 2 of
the Companies Act; and
(v) a private limited company, not being a subsidiary or holding company of a public
company, having a paid up capital and reserves and surplus not more than rupees
one crore as on the balance sheet date and which does not have total borrowings
exceeding rupees one crore 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 Scheduled III to the Companies Act, 2013 (including revenue from
discontinuing operations) exceeding rupees ten crore during the financial year as
per the financial statements.

2. Auditor's report to contain matters specified in paragraphs 3 and 4 - Every report made
by the auditor under section 143 of the Companies Act, 2013 on the accounts of every
company audited by him, to which this Order applies, for the financial year, shall in addition,
contain the matters specified in paragraphs 3 and 4, as may be applicable.

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 5.78 ADVANCED AUDITING AND PROFESSIONAL ETHICS

It may be noted that the Order shall not apply to the auditor’s report on consolidated financial
statements except clause (xxi) of paragraph 3.
3. Matters to be included in the auditor's report - The auditor's report on the accounts of a
company to which this Order applies shall include a statement on the following matters,
namely:-
(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;
(c) whether the title deeds of all the immovable properties (other than
properties where the company is the lessee and the lease agreements are
duly executed in favour of the lessee) disclosed in the financial
statements are held in the name of the company, if not, provide the details
thereof in the format below:-

Description Gross Held in name Whether Period held – Reason for

of property carrying of promoter, indicate not being
value director or range, where held in name
their appropriate of company*
relative or
employee
- - - - - *also
indicate if
in dispute
(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;
(e) whether any proceedings have been initiated or are pending against the
company for holding any benami property under the Benami Transactions
(Prohibition) Act, 1988 (45 of 1988) and rules made thereunder, if so,

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whether the company has appropriately disclosed the details in its

financial statements;
(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 five crore rupees, in aggregate, from banks
or financial institutions on the basis of security of current assets; whether the
quarterly returns or statements filed by the company with such banks or
financial institutions are in agreement with the books of account of the
Company, if not, give details;
(iii) whether during the year the company has made investments in, provided any
guarantee or security or granted any loans or advances in the nature of loans,
secured or unsecured, to companies, firms, Limited Liability Partnerships or any
other parties, if so,-
(a) whether during the year the company has provided loans or provided advances
in the nature 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-
(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;

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 5.80 ADVANCED AUDITING AND PROFESSIONAL ETHICS

(d) if the amount is overdue, state the total amount overdue for more than
ninety 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 clause (76) of section 2 of the
Companies Act, 2013;
(iv) in respect of loans, investments, guarantees, and security, whether provisions
of sections 185 and 186 of the Companies Act have been complied with, if not,
provide the details thereof;
(v) in respect of deposits accepted by the company or amounts which are deemed
to be deposits, whether the directives issued by the Reserve Bank of India and
the provisions of sections 73 to 76 or any other relevant provisions of the
Companies Act and the rules made 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;
(vi) whether maintenance of cost records has been specified by the Central
Government under sub-section (1) of section 148 of the Companies Act and
whether such accounts and records have been so made and maintained;
(vii) (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 on 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;

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(b) where statutory dues referred to in sub-clause (a) 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);
(viii) 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 (43 of 1961), if so, whether the previously
unrecorded income has been properly recorded in the books of account during
the year;
(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 the amount of default to be reported as per the format below:-

Nature of Name of Amount Whether No. of Remarks,

borrowing, lender* not principal days if any
including paid on or delay
debt due interest or
securities date unpaid
*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

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 5.82 ADVANCED AUDITING AND PROFESSIONAL ETHICS

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;
(x) (a) whether moneys raised by way of initial public offer or further public offer
(including debt instruments) during the year were applied for the
purposes for which those are raised, if not, the details together with
delays or default and subsequent rectification, if any, as may be
applicable, be reported;
(b) whether the company has made any preferential allotment or private placement
of shares or convertible debentures (fully, partially or optionally convertible)
during the year and if so, whether the requirements of section 42 and section
62 of the Companies Act, 2013 have been complied with and the funds raised
have been used for the purposes for which the funds were raised, if not, provide
details in respect of amount involved and nature of non-compliance;
(xi) (a) whether any fraud by the company or any fraud on the company has been
noticed or reported during the year, if yes, the nature and the amount
involved is to be indicated;
(b) whether any report under sub-section (12) of section 143 of the Companies Act
has been filed by the auditors in Form ADT-4 as prescribed under rule 13 of
Companies (Audit and Auditors) Rules, 2014 with the Central Government;
(c) whether the auditor has considered whistle-blower complaints, if any, received
during the year by the company;
(xii) (a) whether the Nidhi Company has complied with the Net Owned Funds to
Deposits in the ratio of 1:20 to meet out the liability;
(b) whether the Nidhi Company is maintaining ten per cent. unencumbered term
deposits as specified in the Nidhi Rules, 2014 to meet out the liability;
(c) whether there has been any default in payment of interest on deposits or
repayment thereof for any period and if so, the details thereof;
(xiii) whether all transactions with the related parties are in compliance with sections
177 and 188 of Companies Act where applicable and the details have been
disclosed in the financial statements, etc., as required by the applicable
accounting standards;

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(xiv) (a) whether the company has an internal audit system commensurate with
the size and nature of its business;
(b) whether the reports of the Internal Auditors for the period under audit were
considered by the statutory auditor;
(xv) whether the company has entered into any non-cash transactions with directors
or persons connected with him and if so, whether the provisions of section 192
of Companies Act have been complied with;
(xvi) (a) whether the company is required to be registered under section 45-IA of
the Reserve Bank of India Act, 1934 (2 of 1934) and if so, whether the
registration has been obtained;
(b) whether the company has conducted any Non-Banking Financial or Housing
Finance activities without a valid Certificate of Registration (CoR) from the
Reserve Bank of India as per the Reserve Bank of India Act, 1934;
(c) whether the company is a Core Investment Company (CIC) as defined in the
regulations made by the Reserve Bank of India, if so, whether it continues to
fulfil the criteria of a CIC, and in case the company is an exempted or
unregistered CIC, whether it continues to fulfil such criteria;
(d) whether the Group has more than one CIC as part of the Group, if yes, indicate
the number of CICs which are part of the Group;
(xvii) whether the company has incurred cash losses in the financial year and in the
immediately preceding financial year, if so, state the amount of cash losses;
(xviii) whether there has been any resignation of the statutory auditors during the year,
if so, whether the auditor has taken into consideration the issues, objections or
concerns raised by the outgoing auditors;
(xix) on the basis of the financial ratios, ageing and expected dates of realisation of
financial assets and payment of financial liabilities, other information
accompanying the financial statements, the auditor’s knowledge of the Board of
Directors and management plans, whether the auditor is of the opinion that no
material uncertainty exists as on the date of the audit report that company is
capable of meeting its liabilities existing at the date of balance sheet as and
when they fall due within a period of one year from the balance sheet date;
(xx) (a) whether, in respect of other than ongoing projects, the company has
transferred unspent amount to a Fund specified in Schedule VII to the
Companies Act within a period of six months of the expiry of the financial
year in compliance with second proviso to sub-section (5) of section 135
of the said Act;

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 5.84 ADVANCED AUDITING AND PROFESSIONAL ETHICS

(b) whether any amount remaining unspent under sub-section (5) of section 135 of
the Companies Act, pursuant to any ongoing project, has been transferred to
special account in compliance with the provision of sub-section (6) of section
135 of the said Act;
(xxi) whether there have been any qualifications or adverse remarks by the respective
auditors in the Companies (Auditor's Report) Order (CARO) reports of the
companies included in the consolidated financial statements, if yes, indicate the
details of the companies and the paragraph numbers of the CARO report
containing the qualifications or adverse remarks.

18. Physical verification of only 30% (in value) of items of inventory has been
conducted by the company. The balance 70% will be conducted in next year
due to lack of time and resources.
Reporting for Physical Verification of Inventory: clause (ii) of Para 3 of CARO, 2020
requires the auditor to state in his report whether physical verification of inventory has
been conducted at reasonable interval by the management and whether, in the opinion
of the auditor, the coverage and procedure of such verification by the
management is appropriate.. What constitutes “reasonable intervals” depends on
circumstances of each case. The periodicity of the physical verification of inventories
depends upon the nature of inventories, their location and the feasibility of conducting
a physical verification. The management of a company normally determines the
periodicity of the physical verification of inventories considering these factors. Normally,
wherever practicable, all the items of inventories should be verified by the management
of the company at least once in a year. The auditor in order to satisfy himself about
verification at reasonable intervals and about coverage and procedures applied,
should examine the adequacy of evidence and records of verification.
In the given case, the management conducted the physical verification of inventory
only upon 30% (in value) of the total inventory for the reason of lack of time and
resources. The above requirement of CARO, 2020 has not been fulfilled as such and
the auditor should point out the specific areas where he believes the procedures of
inventory verification are inadequate and unreasonable. He may also consider the
impact on financial statements and report accordingly.
19. K Ltd. took a term loan from a nationalized bank in 2015 for ` 200 lakhs repayable
in five equal instalments of ` 40 lakhs from 31st March, 2016 onwards. It repaid the
loans due in 2016 & 2017, but defaulted in 2018, 2019 & 2020. As the auditor of K
Ltd, what is your responsibility assuming that company has sought
reschedulement of loan?
Reporting for Default in Repayment of Dues: As per clause (ix) of Para 3 of CARO,
2020, the auditor of a company has to report whether the Company has defaulted
in repayment of loans or other borrowings or in the payment of interest thereon

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to any lender, and if yes, the nature of borrowing, name of lender , period and
amount of default to be reported. The Auditor is also required to report whether
the company is a declared wilful defaulter by any bank or financial institution or
other lender.
In this case, K Ltd. has defaulted in repayment of dues for three years. Application for
rescheduling will not change the default position. Hence, the auditor shall report in his
CARO report that the Company has defaulted in its repayment of dues to the bank to
the extent of ` 120 lakhs and evaluate its consequential impact on the audit report as
well.
20. 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.
Term loan invested in short term deposits: As per clause (ix) of Para 3 of CARO,
2020, an auditor needs to state in his report that whether the term loans were applied
for the purpose for which the loans were obtained.
In the present case, the proceeds of the term loan obtained by LM Ltd. have not been
put to use for construction activities and have been temporarily invested in short term
deposit.
Here, the auditor should report the fact in his report that pending utilization of the term
loan for construction of a factory, the funds were temporarily used for the purpose other
than the purpose for which the loan was sanctioned, as per clause (ix) of Para 3 of
CARO, 2020.
21. For the purpose of assessing applicability of CARO, what kind of loans need to be
considered?
Borrowings from banks or financial institutions can be long term or short term and are
normally in the form of term loans, demand loans, export credits, cash credits, overdraft
facilities, bills purchased or discounted. Outstanding balances of such borrowings
should be considered as borrowing outstanding for the purpose of computing the limit
of rupees one crore. Non-fund based credit facilities, to the extent such facilities have
devolved and have been converted into fund-based credit facilities, should also be
considered as outstanding borrowings. The figures of outstanding borrowing would also
include the amount of bank guarantees issued by the company where such guarantee(s)
has (have) been invoked and encashed or where, say, a letter of credit has been
devolved on the company. In case of term loans, interest accrued and due is considered
as a borrowing whereas interest accrued but not due is not considered as a borrowing.
Further, in case the company enjoys a facility, say, a cash credit facility, whose balance
is fluctuating in nature, the Order would apply to the company in case on any day during
the financial year concerned, the amount outstanding in the cash credit facility exceeds
Rs. one crore as per books of the company along with other borrowings. The aggregate

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 5.86 ADVANCED AUDITING AND PROFESSIONAL ETHICS

borrowings disclosed in the financial statements would need to be considered

based on applicable generally accepted accounting principles in India (Ind AS/
AS).
22. Whether CARO is Applicable to the auditor of consolidated financial statement?
Order shall not apply to the auditor’s report on consolidated financial statements except
clause (xxi) of paragraph 3.
23. What documents constitute title deed?
Following documents mainly constitute title deeds of the immovable property:-
(i) 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.
(ii) In case of leasehold land and land & buildings together, covered under the head
property, plant and equipment (fixed assets), the lease agreement duly registered
with the appropriate authority.
24. Should the auditor examine the cost record in detail while reporting under CARO?
CARO does not require a detailed examination of Cost Records. The Auditor should,
therefore, conduct a general review of Cost Records to ensure that the records as
prescribed are made and maintained. The word "made" applies in respect of Cost
Accounts, and the word "maintained" applies in respect of Cost Records relating to
Materials, Labour, Overheads, etc.

4. Reasons to be stated for unfavourable or qualified answers-

(a) Where, in the auditor's report, the answer to any of the questions referred to in paragraph 3
is unfavourable or qualified, the auditor's report shall also state the basis for such
unfavourable or qualified answer, as the case may be.
(b) Where the auditor is unable to express any opinion on any specified matter, his report shall
indicate such fact together with the reasons as to why it is not possible for him to give his
opinion on the same.

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