CA Rishabh Jain Audit Report Chapter - 8

AUDIT
REPORT

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CARO – 2020

In exercise of the powers conferred by sub-section (11) of section 143 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, hereby makes the following Order,
namely:

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 the Companies Act, 2O13.
However, the Order specifically exempts the following classes of companies:
1) a banking company as defined in the Banking Regulation Act, 1949 ;
2) an insurance company as defined under the Insurance Act,1938 ;
3) a company licensed to operate under section 8 of the Companies Act;
4) a One Person Company as defined in clause (62) of section 2 of the Companies Act and a small
company as defined in clause (85) of section 2 of the Companies Act; and
5) a private limited company,
a) not being a subsidiary or holding company of a public company,
b) having a paid up capital and reserves and surplus not more than one crore rupees as on
the balance sheet date and
c) which does not have total borrowings exceeding one crore rupees from any bank or
financial institution at any point of time during the financial year and
d) which does not have a total revenue as disclosed in Scheduled III to the Companies Act
(including revenue from discontinuing operations) exceeding ten crore rupees during the
financial year as per the financial statements.

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 on the accounts of every
company audited by him, to which this Order applies, for the financial years commencing on or after
the 1st April, 2019, shall in addition, contain the matters specified in paragraphs 3 and 4, as may be
applicable:
Provided this Order shall not apply to the auditor's report on consolidated financial statements
except clause (xxi) of paragraph 3.

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CA Rishabh Jain Audit Report Chapter - 8

MATTERS TO BE INCLUDED IN 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) Property, Plant and Equipment

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 Whether Period held Reason for

of property carrying name of promoter, – indicate not being held
value director or range, where in name of
their relative appropriate company*
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, whether the company has appropriately disclosed
the details in its financial statements;

(ii) Inventory
a) whether physical verification of inventory has been conducted at reasonable intervals by

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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;
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;

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(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) Statutory Dues

a) whether the company is regular in depositing undisputed statutory dues including
(i) Goods and Services Tax,
(ii) provident fund,
(iii) employees' state insurance,
(iv) income-tax,
(v) sales-tax,
(vi) service tax,
(vii) duty of customs,
(viii) duty of excise,
(ix) value added tax,
(x) 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 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

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(43 of 1961), if so, whether the previously unrecorded income has been properly recorded in
the books of account during the year;

(ix) Default in Repayment

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 No. of

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

(x) Usage of Funds

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

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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) Frauds
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) Nidhi Company

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 percent 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;

(xiv) Internal Audit

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) NBFC
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;

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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;
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.

Reasons to be stated for unfavourable or qualified answers

1) 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.
2) Where the auditor is unable to express any option 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 in the same.

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SECTION 143 – DUTIES OF AUDITORS

Reporting a) Whether loans and advances made by the company on the basis of
requirement security have been properly secured and whether the terms on which
relating to they have been made are prejudicial to the interests of the company or
matters stated its members.
in Section b) Whether transactions of the company which are represented merely by
[Sec.143(1)] book entries are prejudicial to the interests of the company.
c) Where the company not being an investment company or a banking
company, whether so much of the assets of the company as consist of
shares, debentures and other securities have been sold at a price less
than that at which they were purchased by the company.
d) Whether loans and advances made by the company have been shown as
deposit.
e) Whether personal expenses have been charged to revenue account.
f) Where it is stated in the books and documents of the company that any
shares have been allotted for cash, whether cash has actually been
received in respect of such allotment, and if no cash has actually been so
received, whether the position as stated in the account books and the
balance sheet is correct, regular and not misleading.
Note:
The opinion of the Research Committee of the Institute of Chartered
Accountants of India on section 143(1) is reproduced below:
(i) The auditor is not required to report on the matters specified in sub-
section (1) unless he has any special comments to make on any of the
items referred to therein.
(ii) If he is satisfied as a result of the inquiries, he has no further duty to
report that he is so satisfied.
(iii) Therefore, it could be said that the auditor should make a report to
the members in case he finds answer to any of these matters in
adverse.

Reporting Under provisions of Section 143(2), the auditor shall make a report to the
on accounts members of the company on the accounts examined by him and on every
examined financial statements which are required by or under this Act to be laid before
Sec. 143(2) the company in general meeting and the report shall after taking into account
the provisions of this Act, the accounting and auditing standards and matters
which are required to be included in the audit report under the provisions of
this Act or any rules made thereunder or under any order made under
subsection (11).
Further, auditor has to report whether to best of his information and

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knowledge, the said accounts, financial statements give a true and fair view of
the state of the company’s affairs as at the end of its financial year and
profit or loss and cash flow for the year and such other matters as
prescribed under Rule 11 of the Companies (Audit and Auditors) Rules,
2014.

Duty to Report a) Whether he has sought and obtained all the information and
on principal explanations which to the best of his knowledge and belief were
assertions necessary for the purpose of his audit and if not, details thereof and the
[Sec. 143 (3)] effect of such information on the financial statements.
b) Whether, in his opinion, proper books of account as required by law have
been kept by the company so far as appears from his examination of those
books and proper returns, adequate for the purposes of his audit have
been received from branches not visited by him.
c) Whether the report on the accounts of any branch office of the company
audited by a person other than the company's auditor has been sent to
him and the manner in which he has dealt with it in preparing his report.
d) Whether the company's balance sheet and profit and loss account dealt
with in the report are in agreement with the books of account and
returns.
e) Whether, in his opinion, the financial statements comply with the
accounting standards.
f) The observations or comments of the auditors on financial transactions or
matters which have any adverse effect on the functioning of the
company.
g) Whether any director is disqualified from being appointed as a director
under sub - section (2) of section 164.
h) Any qualification, reservation or adverse remark relating to the
maintenance of accounts and other matters connected therewith.
i) Whether the company has adequate Internal Financial Control with
reference to Financial Statements in place and the operating
effectiveness of such controls.

Applicability of Reporting on IFC's under Section 143(3)(i)

Section 143(3)(i) shall not apply to a private limited company which is:
(i) A one-person company or
(ii) A small company or
(iii) Company having turnover less than rupees fifty crore as per latest
audited financial statements AND
Which has aggregate borrowings from banks or financial institutions or
anybody corporate at any point of time during the financial year less than

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rupees twenty-five crore.

j) Such other matters as are prescribed in Rule 11 of the Companies (Audit
and Auditors) Rules, 2014
Rule 11 The auditor shall include in his report, his views and comments on the
Sec.143(3)(j) following matters:
a) Whether the company has disclosed the impact, if any, of pending
litigations on its financial position in its financial statement.
b) Whether the company has made provision, as required under any law or
accounting standards, for material foreseeable losses, if any, on long
term contracts including derivative contracts.
c) Whether there has been any delay in transferring amount, required to be
transferred, to the Investor Education and Protection Fund by the
company.
d)
i) Whether the management has represented that, to the best of it's
knowledge and belief, other than as disclosed in the notes to the
accounts, no funds have been advanced or loaned or invested
(either from borrowed funds or share premium or any other
sources or kind of funds) by the company to or in any other person(s)
or entity(ies), including foreign entities (“Intermediaries”), with the
understanding, whether recorded in writing or otherwise, that the
Intermediary shall, whether, directly or indirectly lend or invest in
other persons or entities identified in any manner whatsoever by or
on behalf of the company (“Ultimate Beneficiaries”) or provide any
guarantee, security or the like on behalf of the Ultimate
Beneficiaries;

ii) Whether the management has represented, that, to the best of it's
knowledge and belief, other than as disclosed in the notes to the
accounts, no funds have been received by the company from any
person(s) or entity(ies), including foreign entities ("Funding
Parties"), with the understanding, whether recorded in writing or
otherwise, that the company shall, whether, directly or indirectly,
lend or invest in other persons or entities identified in any manner
whatsoever by or on behalf of the Funding Party ("Ultimate
Beneficiaries") or provide any guarantee, security or the like on
behalf of the Ultimate Beneficiaries; and

iii) Based on such audit procedures that the auditor has considered
reasonable and appropriate in the circumstances, nothing has come
to their notice that has caused them to believe that the

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representations under sub-clause (i) and (ii) contain any material

mis-statement.
e) Whether the dividend declared or paid during the year by the company is
in compliance with section 123 of the Companies Act, 2013.
f) [Whether the company, in respect of financial years commencing on or
after the 1st April, 2022,] has used such accounting software for
maintaining its books of account which has a feature of recording audit
trail (edit log) facility and the same has been operated throughout the
year for all transactions recorded in the software and the audit trail
feature has not been tampered with and the audit trail has been
preserved by the company as per the statutory requirements for record
retention.]

Duty to state Where any of the matters required to be included in the audit report is
the Reasons for answered in the negative or with a qualification, the report shall state the
qualification or reasons thereof.
negative report
[Sec. 143(4)]

Power to appoint a) In the case of a Government company, CAG shall direct the auditor the
Government manner in which the accounts of the Government company are required to
Company be audited.
Auditor b) The auditor shall submit a copy of his audit report to CAG.
[Sec. 143 (5)]
c) The audit report shall, among other things, include the directions, if any,
issued by CAG, the action taken thereon and its impact on the accounts
and financial statement of the company.

Power to conduct CAG shall, within 60 days from the date of receipt of the audit report, have
Supplementary the following rights:
Audit & comment
thereupon Supplementary To conduct a supplementary audit under section 143(6)(a),
[Sec. 143 (6)] Audit of the financial statement of the company
a) by such person or persons as he may authorize in this
behalf; and
b) for the purposes of such audit, require information or
additional information to be furnished to any person or
persons, so authorised, on such matters,
c) by such person or persons, and in such form, as the
Comptroller and Auditor-General of India may direct;
Supplement / a) Comment upon or Supplement such audit report under
comment section 143(6)(b).
b) It may be noted that any comments given by the

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Comptroller and Auditor-General of India upon, or

supplement to, the audit report shall be sent by the
company to every person entitled to copies of audited
financial statements under sub-section (1) of section 136
i.e. and
c) Also be placed before the annual general meeting of the
company at the same time and in the same manner as the
audit report.

Test Audit a) Further, without prejudice to the provisions relating to audit and auditor,
[Sec. 143 (7)] the Comptroller and Auditor- General of India may, in case of any company
covered under sub-section (5) or sub-section (7) of section 139, if he
considers necessary, by an order, cause test audit to be conducted of the
accounts of such company and the provisions of section 19A of the
Comptroller and Auditor-General's (Duties, Powers and Conditions of
Service) Act, 1971, shall apply to the report of such test audit.
b) As stated above, in the case of a government company, audit is conducted
by professional auditors appointed on the advice of the C&AG and the later
is authorised under section 143 of the Companies Act, 2013 to conduct
supplementary or test audit.
c) The C&AG shall direct the manner in which the company's accounts shall
be audited by the statutory auditors and give such auditors instructions
in regard to any matter relating to the performance of his functions as
such. The directions under section 143(6) broadly covers the system of
book-keeping and accounts, internal control etc.
d) The C&AG has power to conduct a supplementary or test audit of the
company's accounts by such person as he may authorise in this behalf and
for the purposes of such audit require information or additional
information to be furnished to any person or persons so authorised on such
matters by such person or persons and in such form as the C&AG may by
general or special order, direct.
e) The statutory auditors shall submit a copy of their audit report to the
C&AG who shall have a right to comment upon or supplement the audit
report submitted by the statutory auditors in such manner as he may think
fit. Section 134(3) of the Companies Act, 2013 imposes a duty on the board
of directors of a company to give an explanation or comments on every
reservation, or adverse remarks or disclaimer contained in the auditors'
report and secretarial audit report of the Company Secretary in practice.
In the absence of similar provisions requiring the company to give reply on
the reservation made by the C&AG, the board of directors of such a
company is not bound to give information or explanation in respect of such
comments.

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The general standards, principles, techniques and procedures for audit

adopted by the C&AG are a mixture of government audit and commercial
audit as known and practiced by professional auditors. The concepts of
autonomy and accountability of the institution / bodies / corporations /
companies have influenced the nature and scope of audit in applying the
conventional audit from the angle of economy, efficiency and effectiveness.

Duty to comply a) Every auditor shall comply with the auditing standards.
with Auditing
b) Further, as per sub-section 10 of section 143 of the Companies Act
Standards
2013, the Central Government may prescribe the standards of auditing as
[Sec. 143(9)]
recommended by the Institute of Chartered Accountants of India, in
consultation with and after examination of the recommendations made by
the National Financial Reporting Authority.

Reporting on As per section 143(11), the Central Government may, in consultation with the
any other National Financial Reporting Authority, by general or special order, direct, in
matter specified respect of such class or description of companies, as may be specified in the
by Central order, that the auditor’s report shall also include a statement on such matters
Government: as may be specified therein
[Sec. 143(11)]

Reporting on a) Reporting to the Central Government-

frauds:
As per section 143(12) of the Companies Act, 2013 read with Rule 13 of
[Sec. 143(12)-
the Companies (Audit and Auditors) Rules, 2014, if an auditor of a
(15)]
company in the course of the performance of his duties as auditor, has
reason to believe that an offence of fraud, which involves or is expected
to involve individually an amount of Rs. 1 crore or above, is being or has
been committed in the company by its officers or employees, the auditor
shall report the matter to the Central Government within such time and in
such manner as prescribed.
b) Reporting to the Audit Committee or Board-
In case of a fraud involving lesser than the specified amount [i.e. less
than ` 1 crore], the auditor shall report the matter to the audit
committee constituted under section 177 or to the Board in other cases
within such time and in such manner as prescribed.
c) Besides, auditor has also to report matters pertaining to fraud at point
(xi) of paragraph 3 of CARO,2020

REFER SA 299, 600, 700, 701, 705,

706 & 710 FROM SA MODULE 1.

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