Hello Folks,
In my previous blogs, I had mentioned about contents of Financial Statements and matters that are required to be reported under CARO, 2015. Now, I would like to analyze all the matters that are to be taken care of by the auditor while reporting under respective clauses of CARO, 2015 -
1. FIXED ASSETS
The clause requires the auditor to comment whether:-
a) The fixed assets of the company have been physically verified by the management at reasonable intervals;
b) Any material discrepancies were noticed on such verification & if yes, the same have been properly dealt with in the books of accounts;
c) Physical verification of the assets has to be made by the management and not by the auditor. It is, however, necessary that the auditor satisfies himself that such verification was done and that there is adequate evidence on the basis of which he can arrive at such a conclusion.
d) “Reasonable intervals” depends upon the circumstances of each case and perception of the management.
Auditor’s Duty
> To examine the instructions given by the management to the staff for verification and manner in which verification was conducted;
> To be physically present at the time of verification, if possible;
> In case it is impracticable for the auditor to attend the physical verification, the auditor should examine the working papers of the staff to substantiate the fact that the verification was done,
> To examine whether the method of verification was reasonable,
> To obtain Management Representation Letter from the management confirming that the assets are physically verified by the company.
> Check whether Fixed Asset register is maintained properly or not
2. INVENTORY
The clause requires the auditor to report upon “Reasonability” of the following matters:-
a) Frequency with regard to physical verification of inventory;
b) Procedures adopted by the management for physical verification of inventory.
c) Inventory Records
3. LOAND AND ADVANCES GIVEN BY THE COMPANY
a) This clause is applicable where the company has granted any type of loan to any person covered in the register maintained u/s 189 of the Companies Act,2013
b) Auditor is required to report upon the regularity of principal amount and interest due thereon i.e. principal and interest should be received as and when they fall due
c) Auditor is also required to state whether in case amount of such loan or interest exceeds Rs. 1 Lacs then reasonable steps have been taken by the company for recovery. Steps taken might be legal steps or some other measures as the facts & circumstances warrants.
4. ADEQUACY OF INTERNAL CONTROLS
a) This clause requires the auditor to comment upon the adequacy of internal control system with regards to the :-
- Purchase of Inventory,
- Purchase of fixed assets &
- Sales of goods & services
b) The requirement of this clause is confined only to internal control procedures related to areas as mentioned above. But auditor is also required to comment any weaknesses that he identifies in other areas other than those mentioned above.
c) Special emphasis has to be given by the auditor on internal control system with regards to the items specified in the clause
d) Above mentioned clause has two aspects i.e. adequacy of internal controls and continuing failure to correct major weakness(es).
e) The first aspect requires the auditor to comment on the adequacy of internal controls with regard to specified areas whereas the second aspects requires the auditor to comment whether there was a continuing failure to correct major weakness in internal control system.
5. DEFAULT IN REPAYMENT OF DEPOSITS
The clause, in addition to requiring the auditors to report on compliance with the requirements of section 73 to 76 of the Companies Act,2013 and the directives of the Reserve Bank of India for acceptance of public deposits, also requires the auditor to:
a) Report on compliance with the provisions of section 58AA of the Act; and
b) Report on compliance with the order, if any, passed by the Company Law Board or National Company Law Tribunal or Reserve Bank of India or any Court or any other Tribunal.
6. ADEQUACY OF COST RECORDS
a) The CARO requires the auditor to report whether cost accounts and records have been made and maintained. 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.
b) The auditor has to report under the clause irrespective of whether a cost audit has been ordered by the Central Government or not.
c) Where the auditor finds that the records have not been written up or are not prima facie complete, it will be necessary for the auditor to make a suitable comment in his report.
7. PAYMENT OF STATUTORY DUES
a) This clause requires the auditor to report upon the regularity of the company in depositing undisputed statutory dues.
b) As per this clause, the scope of the auditor’s enquiry is restricted to only those statutory dues, which the company is required to deposit regularly to the authority.
c) Obligation to pay a statutory due is created or arises out of a statute, rather than being based on an independent contractual or legal relationship.
d) Any sum, which is to be regularly paid to an appropriate authority under a statute (whether Central, State or Local or foreign) applicable to the company, should be considered as a “statutory due” for the purpose of this clause.
e) Auditor is also required to report non-payment of statutory dues on account of any dispute.
f) It is clarified here that mere representation to the concerned Department does not constitute dispute. According to the Order, it is necessary that there should be an appeal before the relevant appellate authority.
g) The amounts to be reported under clause 4(ix)(b) of the Order are those which have not been deposited on account of any dispute, irrespective of the treatment of such disputed tax in accounts.
h) It is also possible that an amount is disputed, has been deposited and on consideration of the likely outcome of the dispute, has been shown as a recoverable. Though such an amount is not contemplated for reporting under the clause, since it has been deposited, the fact of such deposit having been made under protest should be brought out by the auditor in his report under the clause
8. LOSSES BY THE COMPANY
a) This clause is applicable to all the companies that have been in existence for 5 years or more from the date of registration till the last day of financial year covered by the audit report.
b) The clause requires the auditor to report whether :-
> The accumulated losses at the end of the financial year are not less than 50% of its net worth; &
> The company has incurred cash losses during the period covered by the report & in the immediately preceding financial year
9. ANY DEFAULT BY COMPANY IN REPAYMENT OF LOANS
This clause is applicable only when company has defaulted in repayment of dues to financial institutions, banks or debenture holders.
10. GUARANTEE GIVEN BY THE COMPANY
a) This clause is applicable when the company has given guarantee on account of loan taken by others from financial institution.
b) But the scope of the auditor’s inquiry under the clause does not extend to the guarantees given by the Auditee company for loans taken by “others” from any sources other than bank or financial institutions.
c) The clause requires the auditor to determine :-
> whether the company has given any guarantee for loans taken by others from bank or financial institutions and if yes,
> Whether the terms and conditions of the guarantee are prejudicial to the interest of the company
11. TERM LOAN APPLICATION
a) Term loan means a loan that have normally a fixed or predetermined maturity period repayment schedule.
b) This clause is applicable only when the company is availing any term loan facility. However the above clause is silent as to whether the clause will be applicable on the company which has obtained a term loan from persons/entities other than banks/ financial institutions.
12. FRAUDS
a) This clause requires to auditor to report on 2 things:-
> Whether any fraud on or by the company has been noticed or reported during the year;
> If yes, the nature and the amount involved should be reported by the auditor
b) The point to be noted is that this clause does not require the auditor to discover the frauds of the company & by the company. The scope of auditor’s enquiry under this is clause is restricted to frauds noticed & reported during the year i.e. The use of the words “noticed or reported” indicates that the management of the company should have the knowledge about the frauds on the company or by the company that have occurred during the period covered by the auditor’s report.
c) On the other hand, this clause doesn’t relieve the auditor from his responsibility to consider fraud & error in an audit of financial statements i.e. the auditor is mandatorily required to comply with the requirements of SA 240,”The Auditor’s Responsibility to Consider Fraud and Error in an Audit of Financial Statements"
Therefore, looking at the above mentioned areas covered under CARO and provisions laid down in the New Companies Act, 2013 a lot of duties and responsibilities have been casted upon the auditor. Now, auditors are required to develop special skill set and regularly update himself with the latest amendments, challenges and issues which are popping up day by day.
CA Mahershi Vijay
(mahershi@akvassociate.com)
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