EIRC ICAI Zoom Meeting a… · CARO 2016 has replaced into CARO 2015 with additional focus on...

Common Non Compliances observed in Companies

(Auditor's Report) Order, 2003* and Schedule III

Vivek Agarwal - FCA | ACS | DISA Audit | Ind AS | IFC | Forensic Auditor | Digital Transformer

EIRC – ICAI – Zoom Meeting

*Observations are still relevant in CARO, 2016.

www.skagrawal.co.inSKA [email protected] I

“The more you learn, you

learn that you still have lot

to learn”

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Agenda Points

Companies (Auditor's Report) Order, 2016

Common Non Compliances in CARO

Common Error in Schedule III

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www.skagrawal.co.inSKA [email protected] I 5

Introduction

1965

MAOCARO

1975

MAOCARO

1988

CARO

2003

CARO

2015

CARO

2016

TIMELINE OF CARO


INTRODUCTION

✓Came into Enforcement on 29th March 2016.

✓CARO 2016 has replaced into CARO 2015 with additional focus on Frauds

committed by company, Fund raising & its utilization etc.

✓Applicable for reporting for the FY 2015-16 i.e. as it was made applicable from

the 1st April 2016.

✓CARO 2020 has replaced into CARO 2016 with additional reporting and focus

of loans, intergroup loans etc.

✓Applicable for reporting for the FY 2020-21 i.e. as it was made applicable from

the 1st April 2020.


APPLICABILITY OF CARO 2016

• CARO applies to all companies except the following

• a banking company as defined in the Banking Regulation Act, 1949; and

• an insurance company as defined in the Insurance Act, 1938 ; and

• a company licensed to operate under Section 8 of the Act ;

• One person company as defined under section 2(62) of the Act and a small company as defined under 2(85)

of the Act ;and

• a private limited company

• not being a subsidiary or holding company of a public company with a paid-up capital and reserves &

surplus not more than INR 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 Schedule III to the Act, (including revenue from

discontinuing operations) exceeding rupees ten crores during the financial year as per financial

statements

Also applies to foreign companies defined in section 2(42) of the Act


Fixed Assets

MATTERS TO BE INCLUDED IN AUDIT REPORTInventories

Loans Given1. FIXED ASSETS

Sec 185, 186

Deposit (a) whether the company is maintaining proper records showing full particulars,

including quantitative details and situation of fixed assets;

(b) whether these fixed assets have been physically verified by the management

at reasonable intervals; whether any material discrepancies were noticed on such

verification and if so, whether the same have been properly dealt with in the

books of account;

(c) whether the title deeds of immovable properties are held in the name of the

company. If not, provide the details thereof;

Cost Records

Statutory Dues

Loan Repayment

Public Issue

Fraud

Remuneration

Nidhi

Related Party Transaction

Private Placement

Non Cash Transaction

NBFC



Fixed Assets


Loans Given2. INVENTORIES

Sec 185, 186

Deposit whether physical verification of inventory has been conducted at reasonable

intervals by the management and whether any material discrepancies were

noticed and if so, whether they have been properly dealt with in the books of

account

Cost Records

Statutory Dues

Loan Repayment

Public Issue

Fraud

Remuneration

Nidhi


Private Placement


NBFC



Fixed Assets


Loans Given3. SECURED AND UNSECURED LOAN

Sec 185, 186

Deposit whether the company has granted any loans, secured or unsecured to companies,

firms, Limited Liability Partnerships or other parties covered in the register

maintained under section 189 of the Companies Act, 2013. If so,

(a) whether the terms and conditions of the grant of such loans are not prejudicial

to the company’s interest;

(b) whether the schedule of repayment of principal and payment of interest has

been stipulated and whether the repayments or receipts are regular;

(c) 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;

Cost Records

Statutory Dues

Loan Repayment

Public Issue

Fraud

Remuneration

Nidhi


Private Placement


NBFC



Fixed Assets


Loans Given4. SECTION 185 & 186

Sec 185, 186

Deposit In respect of loans, investments, guarantees, and security whether provisions of

section 185 and 186 of the Companies Act, 2013 have been complied with. If not,

provide the details thereof

Cost Records

Statutory Dues

Loan Repayment

Public Issue

Fraud5. ACCEPTANCE OF DEPOSITS

Remuneration

Nidhi In case, the company has accepted 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, 2013 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?


Private Placement


NBFC



Fixed Assets


Loans Given6. COST RECORDS

Sec 185, 186

Deposit Whether maintenance of cost records has been specified by the Central

Government under sub-section (1) of section 148 of the Companies Act, 2013 and

whether such accounts and records have been so made and maintained.

Cost Records

Statutory Dues

Loan Repayment7. STATUTORY DUES

Public Issue

Fraud (a) whether the company is regular in depositing undisputed statutory dues including

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;

(b) where dues of income tax or sales tax or service tax or duty of customs or duty of excise

or value added tax 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).

Remuneration

Nidhi


Private Placement


NBFC



Fixed Assets


Loans Given8. LOAN REPAYMENT

Sec 185, 186

Deposit whether the company has defaulted in repayment of loans or borrowing to a

financial institution, bank, Government or dues to debenture holders? If yes, the

period and the amount of default to be reported (in case of defaults to banks,

financial institutions, and Government, lender wise details to be provided).

Cost Records

Statutory Dues

Loan Repayment

Public Issue

Fraud9. INITIAL PUBLIC OFFER

Remuneration

Nidhi whether moneys raised by way of initial public offer or further public offer

(including debt instruments) and term loans 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;


Private Placement


NBFC



Fixed Assets


Loans Given10. FRAUD

Sec 185, 186

Deposit whether any fraud by the company or any fraud on the Company by its officers or

employees has been noticed or reported during the year; If yes, the nature and the

amount involved is to be indicatedCost Records

Statutory Dues

Loan Repayment

Public Issue

Fraud11. MANAGERIAL REMUNERATION

Remuneration

Nidhi whether managerial remuneration has been paid or provided in accordance with

the requisite approvals mandated by the provisions of section 197 read with

Schedule V to the Companies Act? If not, state the amount involved and steps

taken by the company for securing refund of the same;


Private Placement


NBFC



Fixed Assets


Loans Given12. NIDHI COMPANY

Sec 185, 186

Deposit whether the Nidhi Company has complied with the Net Owned Funds to Deposits

in the ratio of 1: 20 to meet out the liability and whether the Nidhi Company is

maintaining ten per cent unencumbered term deposits as specified in the Nidhi

Rules, 2014 to meet out the liability;

Cost Records

Statutory Dues

Loan Repayment

Public Issue

Fraud13. RELATED PARTY TRANSACTION

Remuneration

Nidhi whether all transactions with the related parties are in compliance with sections

177 and 188 of Companies Act, 2013 where applicable and the details have been

disclosed in the Financial Statements etc., as required by the applicable

accounting standards;


Private Placement


NBFC



Fixed Assets


Loans Given14. PRIVATE PLACEMENT

Sec 185, 186

Deposit whether the company has made any preferential allotment or private placement of

shares or fully or partly convertible debentures during the year under review and if

so, as to whether the requirement of section 42 of the Companies Act, 2013 have

been complied with and the amount raised have been used for the purposes for

which the funds were raised. If not, provide the details in respect of the amount

involved and nature of non-compliance;

Cost Records

Statutory Dues

Loan Repayment

Public Issue

Fraud

Remuneration

Nidhi


Private Placement


NBFC



Fixed Assets


Loans Given15. NON CASH TRANSACTION

Sec 185, 186

Deposit 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, 2013 have been complied withCost Records

Statutory Dues

Loan Repayment

Public Issue

Fraud16. NBFC

Remuneration

Nidhi whether the company is required to be registered under section 45-IA of the

Reserve Bank of India Act, 1934 and if so, whether the registration has been

obtained.


Private Placement


NBFC



Reasons to be stated for unfavorable or qualified answers.-

✓ Where, in the auditor’s report, the answer to any of the questions referred to in paragraph 3 is

unfavorable or qualified, the auditor’s report shall also state the basis for such unfavorable or qualified

answer, as the case may be.

✓ 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.


COMMON NON- COMPLIANCES OBSERVED

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Clause (i) (a) of CARO, 2003Matter contained in report:“a) The Company has generally maintained proper records showing full particularsincluding quantitative details and situation of fixed assets.”

Observation : The auditor has used the word ‘generally’ while reporting on clause 4(i) (a)of CARO, 2003. It was viewed that usage of term ‘generally’ by an auditor givesimpression to the reader that there might exists certain instances when proper records ofFixed Assets have not been maintained. It was viewed that in such conditions, an auditor isunder the obligation to report such details.

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Clause (i) (b) of CARO, 2003

Matter contained in report:“As explained to us, the fixed assets are physically verified by the management inaccordance with a phased program designed to cover all items of fixed assets over aperiod of three years, which, in our opinion, is reasonable having regard to the size of thecompany and nature of its fixed assets. In accordance with this program, certaincategories of fixed assets at certain locations have been physically verified by themanagement during the year and no material discrepancies were noticed on suchverification, which have been properly dealt within the books of account.”


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Observation: It was noted from the reported clause that the auditor had simply relied on the explanation of the management rather than using his own judgment to comment on this paragraph.

It was viewed from paragraph 45 (b) of CARO, 2003 that the duty is cast upon the auditorto satisfy himself that the physical verification of fixed asset was done by the management.He is also required to verify the instruction issued to staff and ensure that the personmaking such verification possesses necessary technical knowledge. However, it appearsfrom the reported clause that the auditor had simply relied on the explanation of themanagement rather than using his own judgment to comment on this paragraph.


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Matter contained in report:“As informed to us, the management in accordance with a phased program of verificationadopted by the company has physically verified a major portion of these assets. In ouropinion the frequency of verification is reasonable. We are informed that the companyphysically verifies its assets over a three year period, … In our opinion, this periodicity ofphysical verification is reasonable having regard to the size of the company and the natureof its assets. In accordance with this policy, the company has physically verified certainfixed assets during the year.”

Observation : It was observed in both the cases that the auditors have reported on thereasonableness of the frequency of physical verification of fixed assets but are silent aboutthe result of such verification i.e. whether any material discrepancies have been noticed onsuch verification, and if so, whether the same have been properly dealt with in the books ofaccount. Hence, it was viewed that the auditor has not strictly complied with therequirements of clause (i)(b).



Clause (ii) (a) of CARO, 2003

Matter contained in report:“‘The inventory (excluding stocks with third parties) has been physically verified duringthe year by the management. In our opinion, the frequency of verification is reasonable.”


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It may be noted that paragraph 23 of “Guidance Note on Audit of Inventories” issued bythe Institute of Chartered Accountants of India, provides as under;

“23. Where significant stocks of the entity are held by third parties, the auditor shouldexamine that the third parties are not such with whom it is not proper that the stocks ofthe entity are held. The auditor should also directly obtain from the third parties writtenconfirmation of the stocks held. Arrangements should be made with the entity forsending requests for confirmation to such third parties. Similarly, the auditor should alsoobtain confirmation from such third parties for whom the entity is holding significantamount of stocks.”

It was observed that the stocks lying with third parties have not been physically verifiedby the management and it was not clear from the report whether any confirmations havebeen obtained from third parties for the stocks held by them. Hence, it was viewed thatthe auditor’s reporting in pursuance CARO, 2003 cannot be considered to be complete.

Companies (Auditor's Report) Order, 2003Observation


Clause (ii) (a) of CARO, 2003

Matter contained in report:“‘As explained to us the stocks of work in progress has been physical verified by themanagement. According to the information & explanations given us, no discrepancieswere noticed on physical verification of work in progress.”


Observation : It was observed that though the auditor has commented that inventorieshave been physically verified by the management, he has not commented as to whethersuch verification has been conducted at reasonable intervals.

It was further observed that with regard to paragraph (c), the auditor has commented thatno discrepancies have been noticed on physical verification; however, he has notcommented as to whether the company was maintaining proper records of inventory.Accordingly, it was viewed that the reporting requirements of paragraphs CARO, 2003have not been strictly complied with.

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Clause (vi) of CARO, 2003

Matter contained in report:“The Company has not accepted deposits from the public, under the directives issued bythe Reserve Bank of India and the provisions of the section 58A and 58AA of the Act andthe rules framed there under. However, temporary loans have been taken from employeewelfare trust without adequate records.”

Observation: It was noted that the auditor has also reported about inadequate records fortemporary loans taken from employee welfare trust. The context due to which such factwas included in the aforesaid clause was however, not clear.

It was viewed that in case those temporary loans falls within purview of 58 A or 58 AA ofRBI Act, it should have been reported clearly. However if those loans falls outside thepurview of said sections, still auditor wants to draw attention of reader to such facts then itshould have been reported as a matter of emphasis rather than reporting under this clause.


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Clause (viii) of CARO, 2003

Matter contained in report:“The Central Government has prescribed maintenance of cost records under section209(1)(d) of the Companies Act, 1956. As explained to us such records are at the advancestage of preparation.”

Observation : It was observed that the auditor has given the status ‘as explained to him’which indicates that he has not examined the facts being reported. On the contrary hehad simply relied on the explanation of the management regarding the maintenance ofcost records. Accordingly, it was viewed that the audit procedures as adopted by him arenot adequate.


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Clause (ix) (a) and (b) of CARO, 2003

Matter contained in report:

“(a) The company is regular in depositing statutory dues including Provident Fund,Employees State Insurance, Income Tax, Sales Tax/Value Added Tax, Excise Duty & otherstatutory dues with the appropriate authorities and at the end of last financial year therewere no amounts outstanding which were due for more than 6 months from the datethey became payable.

(b) According to the information and explanations given to us, no undisputed amountsare payable in respect of PF, ESI, Income Tax, cess and any other statutory dues as at theend of the period, for a period more than six months from the date they becamepayable.”


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Observation: As per the requirement of Paragraph (ix) (b) of CARO, 2003, the auditor isrequired to provide details of disputed amount, if any, relating to sales tax / income tax /customs duty / wealth tax / excise duty and cess which have not been deposited by thecompany. However, the auditor has stated under paragraph (ix) (b) that no undisputedamounts are payable in respect of PF / ESI / Income Tax / Cess and any other statutorydues at the end of the period for a period more than six months from the date theybecome payable. It was further noted that the auditor has commented only onundisputed dues under paragraph (ix) but omit to report on paragraph (ix) (b) of CARO,2003.

Thus, the auditor has not complied with the reporting requirement of the applicableclause of CARO.


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Clause (ix) (b) of CARO, 2003

Matter contained in report:

“According to information and explanation given to us there are no dues relating to

sales tax, wealth tax, income tax, service tax etc. which have not been deposited on

account of any dispute.”

Observation : Auditor has commented on dues relating to sales tax, wealth tax,

income tax, service tax, but omitted to comment on customs duty, excise duty and

cess. It was observed that although the word ‘etc.’ has been used, however, the auditor

should specifically comment on each of the stated statutory dues. In case, if they are

not applicable, it should be mentioned accordingly.


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Clause (ix) (b) of CARO, 2003

Matter contained in the report :“The company has disputed the dues of income tax, customs tax, and excise duty asmentioned in the notes of accounts. In case of income tax the appeal is pending beforeITAT, in case of excise duty the case is pending before CESTAT and in case of Customsduty the appeal is preferred before Supreme Court of India.”

Observation: It was observed that the “period to which the amount” relates had not beenmentioned. It may be noted that as per para 4(ix)(b) where Statutory dues of tax has notbeen deposited on account of any dispute, then the amount involved and the forumwhere dispute is pending shall be mentioned. Statement of Disputed Dues may be

disclosed as follows:


Name of the

Statute

Nature of the

Dues

Amount (Rs.) Period to which

the amount relates

Forum Where Dispute

Is Pending

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Clause (xxi) of CARO, 2003

Matter contained in report :“During the course of our examination of the books and records of the company,carried out in accordance with the generally accepted auditing practices in India, andaccording to the information and explanation given to us, we have neither come acrossany instance of any fraud on or by the company, impact of which is not material,noticed or reported during the year, nor have we been informed of any such case by themanagement”

Observation: It was noted that Annexure to the Auditor’s Report had not been draftedproperly. It was viewed that the auditors might have used the words “Impact of whichis material” instead of “impact of which is not material” to convey his opinion in moreclear and better manner.


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Clause (xxi) of CARO, 2003

Matter contained in report : “According to information and explanations given to us, nofraud on or by the Company has been noticed or reported during the course of ouraudit.” (emphasis supplied)

Observation: It may be noted that as per clause 4(xxi) of Companies (Auditor’s Report)Order (CARO), 2003 the auditor is required to report on following:

“Whether any fraud on or by the company has been noticed or reported during the year.If yes, the nature and the amount involved is to be indicated.”


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It was noted from paragraph (xxi) of annexure to the Auditors Report that auditor hasreported that no fraud on or by the company has been noticed or reported during thecourse of our audit.

It was viewed that the auditor should have reported on all frauds noticed ‘during theyear’ rather than reporting only on frauds that were noticed during the course of hisaudit.

Accordingly, it was viewed that the auditor has not complied with the reportingrequirement of CARO, 2003.


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Common errors in Schedule III


❑ Omission of disclosures required for Share Capital

❑ Showing debit balance of profit and loss in excess of uncommitted reserves

on the assets side of the balance sheet

❑ Non-disclosure or partial disclosure of repayment terms of vehicle loans, issue

of bond or debentures etc.

❑ Reporting substantial amount of long term liabilities under the head 'others'

without specifying the nature of such liabilities



❑ Presentation of 'Sundry creditors' as separate line item under the head 'current

liabilities', instead of as 'Trade payables’

❑ Using the term 'Sundry Creditors', as it may include dues other than that in the

nature of trade payables, such as, statutory dues payables, other contractual

obligations that may not have occurred due to goods purchased or services

received

❑ Presentation of liabilities towards employee benefits as 'Short term provisions'

only



❑ Grouping of expenses incurred on the intangible assets still under

development under the head 'Capital work-in-progress’

❑ Presentation of addition and deletion to fixed assets on net basis

❑ Omission to report comparative figures of the previous year relating to

opening balance of fixed assets, addition of fixed assets, depreciation

charged for each class of assets



❑ Non-classification of investments into Trade and other investments. Further,

it is noted that classification is done incorrectly between Trade and other

investments

❑ Classification of Long-term investments as non-current investments

invariably

❑ Classification of Capital advances paid under capital work-in-progress

❑ Omission to sub-classify long-term loans and advances into secured

considered good, unsecured considered good and doubtful, indicating their

degree of realisability



❑ Error in classification of trade receivables, considering the date when they

become due for payments

❑ Error in classification of 'term deposits' under Cash and cash equivalent, other

bank balances and other non-current assets

❑ Disclosure of loans and advances given to related parties without stating any

details thereof



❑ Classification of assets in the nature of 'loans and advances' as 'other

current assets', such as, advance tax, MAT credit entitlement, etc.

❑ Non-disclosure of Uncalled liability of shares and other investments partly

paid.

❑ Omission of disclosure of dividend per share distributed

❑ Incomplete disclosure of details related to delay payment to MSME. If all the

disclosures required stand at Nil, the fact is not disclosed



❑ Non-disclosure of guarantees given by KMPs of the company on behalf of

the company as related party transactions

❑ Book overdraft in current account is netted off with Bank balances

❑ Consumption of intermediates and components which are internally

manufactured are included in 'Cost of material consumed'



Learning in a continuous journey


THANK YOU


Since 1968

S. K. AGRAWAL & CO.CHARTERED ACCOUNTANTS

www.skagrawal.co.in

For further information please contact

VIVEK AGARWAL

Partner

Email: [email protected]

Handheld : +91 96817 06868

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