CA FINAL AUDIT AMENDMENTS MODULE

Transcription

1 CA FINAL AUDIT AMENDMENTS MODULE Applicable for NOV exams By: CA VINOD PARAKH JAIN 1 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

2 INDEX S.No. PARTICULARS Page No. 1. Audit Report Cost Audit Audit of General Insurance Companies For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

3 3 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

4 Look a New Trend Have Started.. 100% of Syllabus being Covered in lesser classes with effective Output and Questions of RTP, SA and Practice Manual being covered in the class itself When we started the Audit Classes in 2009, the General Trend in the CA Final Audit- Coaching was More Classes with less Output and No Examinations Questions being practiced in Class. We tried to reverse the trend with Effective Output, Lesser fees and Practice of Exams Questions in the class itself and at a very economical Rate. NOW OTHERS ARE FOLLOWING OUR MODEL.. We FEEL HAPPY IT s in Greater Interest of Students Fraternity Shubas Pandey Ex- President at Hatemalo Varun Mittal Sumit Singhal Arun sharma It is really hard to think OUT OF THE BOX & it is even more complex to do the same but he is doing the same. VPJ sir believes in Purity of Teaching profession and guides his students how to excel in CA Exams. VPJ sir strictly follow institute's materials along with question & answer in the class itself. Finally i came to know that why there is such low pass percentage in CA Final & further i saved my TIME & MONEY that matters me. Thank u Sir Ji... Earlier I thought ki audit ho jayegi yaar by self study but after studying with you I realise that I was very short of my observation... All the mnemonics plus practical approach of all relevant SAs and other topics (in practical sense) are really really helpful for me...:-) Thanks for such nice audit classes...really my attitude towards studies now completely changed... I have taken classes from many teachers but nobody was like u so down to earth... both in knowledge aspects and as well as in communication with them... u have taken all queries of student whether it is reasonable or not...i know my qureries were just beyond the topic discussed but u always clear them... Also, some great goal suggested from your side which i will consider for carrier...again, thanks for such a cooperation and your blessings to students Sir guided me in a right direction and told me whats the lacuna in other materials which was not updated as per study material. Now i passed with sir advice and guidance that how to present the answer in a right way. I got success in this attempt which was not availed previous attempts...thank u sir. 4 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

5 A Very big thank you for your Audting batch. A balanced approach b/w practical exposure & examinations, all those mnemonics helped a great deal in the exams. And you were dead right as i was able to revise all the standards in about 4 hours a day before exam & except 1 or 2 application questions nothing was there which was not covered by your module. Shreyans Jain VPJ sir guides exactly what ICAI wants form studentshis Teaching is totally correlated with practical business environment. One thing that i really love about him is he focuses on students to crack question first & then ask students to write down answers& finally helps students to correct silly mistakes Acharya ravesh Ex. Secretary at Hatemalo Thank you sir just because of your support i cleared my first group...after having audit class from you, I believe that audit is the most important subject that we always ignore and just took at end...but now I am sure that with your teaching techniques specially auditing standards will help me a lot in my auditing career... hatts off to you sir... Puneet Ahuja Rahul yadav CA V.P Jain sir is the first ever teacher from whom I met and who completes IDT as well as Audit in lesser days with full coverage of syllabus in deep. There are only merits and no demerits of VPJ classes: 1. Full coverage of syllabus in deep. 2. Improves concentration power for studying other subjects also 3. Industry wide sharing of knowledge 4. Saves money & time too as required for new trend. 5. Easiest and simplest way of learning with mnemonic 6. Classes full of motivation & confidence 7. And last but not least--- No bakwas only gyan with exam oriented approach A heartiest thanks to CA V.P Jain sir for teaching those who are not able to take costly & reputed classes. You are the only teacher who teaches with full of energy and without any self motive..thanks a lot Sir Ji.. Thanx a lot Sir.. its all your support n belief in me that i could prove myself.. Really I appreciate your hard work for making us success.. CA Saurab PandayFrom Nepal Only u r the best teacher who is thinking for benefits of CA student and tells them how can they utilize their tym in best way.. 5 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

6 Mahak Poddar Sir Hum to Khuskismat hai ki Aap Hume Mil Gaye Ankit PritiChouhan Thanks for your great efforts Sir! Cos of u in such a short span of time have completed one subject. Teachers like u will definitely bring a change. You value our time and money. Had a wonderful experience in your class. A BIG THANKS to u Sir :-) Thank you so much sir... I love your style of creating mnemonics & will definitely miss your TAI MAA O DPS... Sumit Chopra Akshita Jain Thnaks Sir...a wonderful Experience of audit classes. You really made it interesting. Ritika Sharma Dashrath Kumar Thank you.. Sir.. It was great learning experience from your classes. All the tricks to learn answers are amazing.. Thank You again. Vinod Parakh Jain is the most experienced teacher. He is having best industrial practical knowledge and explains the theoretical part in a good practical manner...seriously i have learnt a lot in audit classes given by Vinod Sir... Its end of our learning which we learned during the audit classes... once we clear ca- exam, we will join again classes to get more and more practical knowledge from you... We salute you from heart by saying "Thanks Audit Guru".. Really we feel happy to call u our teacher. A teacher at heart in its true sense. Tushar Sharma 6 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

7 1: Audit Report Reporting under Companies (Auditor s Report) Order, 2015 [CARO, 2015]: The Central Government, after consultation with the Institute of Chartered Accountants of India, has issued the Companies (Auditor s Report) Order, 2015, (CARO, 2015) under section 143(11) of the Companies Act, 2013, dated 10th April, The requirements of the Order are supplemental to the existing provisions of section 143 of the Act regarding the auditor s report. The Order is not intended to limit the duties and responsibilities of auditors but only requires a statement to be included in the audit report in respect of the matters specified therein. For example, examination of the system of internal control is one of the basic audit procedures employed by the auditor. The fact that the Order requires a statement regarding the internal control system applicable to purchases of inventory and fixed assets, and sale of goods and services only is no justification for the auditor to conclude that an examination of internal control regarding the other areas of a company s business is not important or not required. 1.Applicability 2. Auditor's report to contain matters specified in paragraphs 3 and 4 3. Matters to be included in the auditor's report The CARO, 2015 is an additional reporting requirement Order The Order is applicable to all companies including a foreign company as defined in section 2(42) of the Companies Act, 2O13 except: - I. A Banking Company as defined in Section 5 (c) of the Banking Regulation Act,1949 II. An Insurance Company as defined in (21) of the section 2(21) of the Act III. A company licensed to operate under section 8 of the Companies Act; IV. One Person Company as defined under Section 2(62) of the Companies Act V. A small company defined under section 2(85) of the Companies Act. VI. A Private Limited Company which satisfies the following conditions: a) Its paid-up capital and reserves does not exceed Rs. 50 lacs rupees; b) It doesn t have loan outstanding Rs.25 lacs rupees or more than from any bank or financial institution; c) It doesn t have a turnover exceeding Rs. 5 crore rupees at any point of time during the financial year. If any of the above conditions are not satisfied, the above order will apply to the private limited company. Every report made by the auditor under section 143 of the Companies Act, on the accounts of every company examined by him to which this Order applies for the financial year commencing on or after 1st April, 2014, shall contain the matters specified in paragraphs 3 and 4. The auditor's report on the account of a company to which this Order applies shall include a statement on the following matters, namely: (i) (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; (ii) (a) whether physical verification of inventory has been conducted at reasonable intervals 7 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

8 by the management; (b) are the procedures of physical verification of inventory followed by the management reasonable and adequate in relation to the size of the company and the nature of its business. If not, the inadequacies in such procedures should be reported; (c) whether the company is maintaining proper records of inventory and whether any material discrepancies were noticed on physical verification and if so, whether the same have been properly dealt with in the books of account; (iii) whether the company has granted any loans, secured or unsecured to companies, firms or other parties covered in the register maintained under section 189 of the Companies Act. If so, (a) whether receipt of the principal amount and interest are also regular; and (b) if overdue amount is more than rupees one lakh, whether reasonable steps have been taken by the company for recovery of the principal and interest; (iv) is there an adequate internal control system commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods and services. Whether there is a continuing failure to correct major weaknesses in internal control system. (i) 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 and the rules framed there under, where applicable, have been complied with? If not, the nature of contraventions should 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) where maintenance of cost records has been specified by the Central Government under section 148(1) of the Companies Act, whether such accounts and records have been made and maintained; (vii) (a) is the company regular in depositing undisputed statutory dues including provident fund, employees' state insurance, income tax, sales-tax, wealth tax, service tax, duty of customs, duty of excise, value added tax, cess and any other statutory dues with the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they became payable, shall be indicated by the auditor. (b) in case dues of income tax or sales Lax or wealth tax or service tax or duty of customs or duty of excise or value added tax or cess 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 constitute a dispute). (c) whether the amount required to be transferred to investor education and protection fund in accordance with the relevant provisions of the Companies Act, 1956 and rules made thereunder has been transferred to such fund within time. (viii) whether in case of a company which has been registered for a period not less than five years, its accumulated losses at the end of the financial year are not less than fifty per cenl of its net worth and whether it has incurred cash losses in such financial year and in the immediately preceding financial year; (ix) whether the company has defaulted in repayment of dues to a financial institution or bank or debenture holders? If yes, the period and amount of default to be reported; (x) whether the company has given any guarantee for loans taken by others from bank or financial institutions, the terms and conditions whereof are prejudicial to the interest of 8 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

9 4. Reasons to be stated for unfavourable or qualified answers.- the company; (xi) whether term loans were applied for the purpose for which the loans were obtained; (xii) 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. (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 reasons for such unfavourable or qualified answer, as the case may be. (2) Where the auditor is unable to express any opinion in answer to a particular question, his report shall indicate such fact together with the reasons why it is not possible for him to give an answer to such question. Note: a) Paid up capital include both equity and preference share capital. While calculating the paid-up capital, amount of calls unpaid should be deducted from and the amount originally paid-up on forfeited shares should be added to the figure of paid-up capital. Share application money received should not be considered as part of the paid-up capital. b) Both Revenue and Capital reserve should be considered while calculating limit of Rs. 50 lacs for paid up capital and reserve. c) Debit balance of Profit and Loss Account (if any) should be reduced from the figure of revenue reserves only. If the Company does not have Revenue Reserves, Debit Balance of P&L A/c cannot be reduced from the figures of Paid Up Capital, Capital Reserves and Revaluation Reserves.(Note: Disclosure Requirements under Schedule III, i.e. netting off Dr. Balance of P&L under the heading Reserves and Surplus, should be distinguished from the applicability of CARO, where the Dr. Balance of P&L can be reduced only from Revenue Reserves.) d) Loan from financial institutions or banks are normally in the form of term loans, demand loans, export credit, working capital limits, cash credit, overdraft facilities, bills purchased or discounted. e) Outstanding of such loans (in aggregate) should be considered as loan outstanding for the purpose of computing the limit of Rs. 25 lacs. f) Outstanding Dues in respect of Credit Cards would also be considered while calculating the limit of Rs. 25 Lakhs in respect of Loan Outstanding from a Bank or Financial Institution. g) The term Financial Institution used in CARO includes a scheduled bank and any other Financial Institution, defined or notified by RBI. However, NBFCs is not a Financial Institution. h) Part II of Schedule III to the Act, defines the term turnover as the aggregate amount for which sales are affected by the company. Sale effected include sale of goods as well as services rendered by the company. While calculating ascertaining limit of Rs. 5 Crore following to be considered: sales tax collected or excise duties collected should not be taken into account if they are credited separately to sales tax account or excise duty account; trade discounts should be deducted from the figure of turnover; commission allowed to third parties should not be deducted from the figure of turnover; and sales returns should be deducted from the figure of turnover even if the returns are from the sales made in the earlier years i) Date of Determining of Limits - The Order does not clarify the point of time at which various limits laid down by the Order are to be tested for determining its applicability to a private limited company. It is clarified that the Order would become applicable to a private limited company. If, at any point of time, during the financial year covered by the audit report: its paid-up capital and reserves exceed the limit of rupees fifty lakhs; or its Outstanding Loans exceed rupees twenty five lakhs ; or its turnover exceeds rupees five crore. 9 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

10 Format of the Auditor s Report of a Company: The Auditing and Assurance Standards Board has issued illustrative formats of the auditor s report on financial statements of a company under the Companies Act, While reporting on the requirements of CARO, 2015, a reference thereto also needs be added in the main audit report under the Report on Legal and Other Regulatory Matters paragraph as follows: Report on Other Legal and Regulatory Requirements As required by the Companies (Auditor s Report) Order, 2015 ( the Order ), issued by the Central Government of India in terms of sub-section (11) of section 143 of the Companies Act, 2013, we give in the Annexure a statement on the matters specified in paragraphs 3 and 4 of the Order, to the extent applicable. As required by Section 143(3) of the Act, we report that:.... Mind Teasers (1) A Pvt. Ltd. is incorporated on 1st July, During the year ended 31st March, 2005, it had issued shares (fully paid up) of Rs. 40 lakhs, had borrowed Rs. 7.5 lakhs each from 2 financial institutions and its turnover (Net of excise Rs. 50 lakhs which is credited to a separate account) is Rs.475 lakhs. Will Companies Auditors Report Order, 2015 be applicable to A Pvt. Ltd.? (4 marks, May -2005) (2) T Pvt. Ltd. s paid up Capital & Reserves are less than Rs. 50 lakhs and it has no outstanding loan exceeding Rs. 25 lakhs from any bank or financial institution. Its sales are Rs. 6 crores before deducting Trade discount Rs. 10 lakhs and Sales returns Rs.95 lakhs. The services rendered by the company amounted to Rs. 10 lakhs. The company contends that reporting under Companies Auditor s Reports Order (CARO) is not applicable. Discuss. (3) As the statutory auditor of B Ltd. to whom CARO, is applicable, how would you report in the following situations? Physical verification of only 50% (in value) of items of inventory has been conducted by the company. The balance 50% will be conducted in next year due to lack of time and resources{4m, May 2007} (4) Big and Small Ltd. received a show cause notice from central excise department intending to levy a demand of Rs. 25 lakhs in December The company replied to the above notice in January 2011 contending that it is not liable for the levy. No further action was initiated by the central excise department upto the finalization of the audit for the year ended on 31st March, As the auditor of the company, what is your role in this? (4 Marks) (5) As a Statutory Auditor, how would you deal with the following cases? During the course of audit of ABC Ltd. it is noticed that out of Rs. 12 lakhs of provident fund contribution accounted in the books, only Rs. 2 lakhs has been remitted to the authorities during the year. On enquiry the Chief Accountant informed that due to financial problems they have not remitted but will remit the same as and when the position improves.(4 Marks) (6) As the statutory auditor of B Ltd. to whom CARO, 2015 is applicable, how would you report in the following situations? Accumulated losses of the company are 50.9% of its net worth and it is incurring continuous cash losses 10 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

11 since last 2 years.(may 2005, 4 Marks) (7) As the statutory auditor of B Ltd. to whom CARO, 2015 is applicable, how would you report in the following situations? The company has stood guarantee to its sister concern, whose financial condition was not healthy for a sum of Rs. 20 lakhs borrowed from a bank. (8) Under CARO, 2015 how, as a statutory auditor would you comment on the following: A Term Loan was obtained from a bank for Rs.75 lakhs for acquiring R&D equipment, out of which Rs.12 lakhs was used to buy a car for use of the concerned director, who was overlooking the R&D activities. (9) As a Statutory Auditor, how would you deal with the following :LM Ltd. had obtained a Term Loan of Rs. 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. (May 2008, 4 Marks) (10) OK Ltd. has taken a term loan from a nationalized bank in 2006 for Rs. 200 lakhs repayable in five equal instalments of Rs. 40 lakhs from 31st March, 2007 onwards. It had repaid the loans due in 2007 & 2008, but defaulted in 2009, 2010 & As the auditor of OK Ltd. what is your responsibility assuming that company has sought re-schedulement of loan? (4 Marks) (11) During the audit for the year ended on 31st March, 2009 of XYZ Ltd. you come across certain personal expenses of employees having been debited to Profit and Loss account. (4 Marks) [M09] (12) A Private Limited reports the following position as on 31st March, 2010 : Paid up capital 30 Lacs Revaluation reserve 10 Lacs Capital reserve 11 Lacs P&T A/c [Dr. Balance] 2 Lacs The Management of the Company contends that CARO 2015 is not applicable to it. (5 marks) [M10] (13) XYZ Pvt. Ltd. has submitted the financial statements for the year ended for audit. The audit assistant observes and brings to your notice that the company's records show following dues:income Tax relating to Assessment Year Rs.125 lacs - Appeal is pending before Hon'ble ITAT since Customs duty Rs.85 lakhs - Demand notice received on but no action has been taken to pay or appeal. As an auditor, how would you bring this fact to the members? (5 Marks)[N11] (14) ABC Private Ltd. has granted loan of Rs.20 crores to XYZ Ltd. a sister concern and it remains outstanding at the year end. How would you report the fact? (4 Marks)[N11] (15) Under CARO, 2015, how, as a statutory auditor would you comment on the following: A term loan was obtained from a bank for Rs. 50 lakhs for the purpose of purchase of assets for Research & Development (R & D). Out of these funds, a vehicle was purchased for the use of the concerned director who was in charge of the R & D activities. (8 Marks) [N12] (16) X Ltd closed its manufacturing operations For fixed assets, the company carried out a physical verification as at the end of 31st March, 2013 and found a material discrepancy to the tune of ` 1 lac, which was written off and is disclosed separately in the profit and loss account. Kindly incorporate the above in your audit report. (4 Marks) [N 13] (17) As a statutory auditor, how would you report on the following under CARO: ABC Pvt. Ltd. is an 11 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

12 manufacturer of jewellery. A senior employee of the Company informed you that the Company does not properly disclose the purity of gold used on the jewellery Answer to Mind Teaser Audit Report (CARO) 1. The Companies (Auditor s Report) Order (CARO), 2015, exempts private limited companies from its application which fulfils all the following conditions: (i) the paid up capital and reserves is Rs.50 lakhs or less; (ii) it has no outstanding loan of Rs.25 lakhs or more from any bank or financial institution; and (iii) its turnover does not exceed Rs.5 crores. In the case of M/s A Pvt. Ltd., its paid-up capital is less than Rs.50 lakhs, turnover is less than Rs. 5 crores since excise duty is not taken into account if it is credited separately to excise duty account; and, it has no Outstanding Loan exceeding Rs 25 Lakh. Since the M/s A Pvt. Ltd satisfies all the conditions accordingly CARO, 2015 will Not be applicable to it 2. Since paid up capital and reserves of T Pvt. Ltd. is less than Rs. 50 lakhs and has no loan outstanding exceeding rupees 25 lakhs from any bank or financial institution, the only other condition is whether turnover exceeds rupees five crores. Turnover is not defined in the CARO. Part II of Schedule VI defines the term "turnover" as the aggregate amount for which sales are affected by the company. "Sales affected" would include sale of goods as well as services rendered by the company. For ascertaining turnover though trade discount and sales returns should be deducted, the inclusion of services rendered would result in a turnover of Rs crores (i.e crore) Hence CARO will apply to T. Pvt. Ltd. 3. Para 3(ii)(a) of CARO, 2015 requires the auditor to state in his report whether physical verification of inventory has been conducted at reasonable interval by the management. Physical verification of inventory is the responsibility of the management which should verify all material items at least once in a year and more often in appropriate cases. The auditor in order to satisfy himself about verification at reasonable intervals should examine the adequacy of evidence and record of verification. In the given case, the above requirement of CARO, 2015 has not been fulfilled as such and the auditor should point out the specific areas where he believes the procedure of inventory verification is not reasonable. He may consider the impact on financial statement and report accordingly. 4. The auditor s report under section 143 the Companies Act, 2013 has to specifically include certain matters specified in Para 3 of CARO One of such matter is payment of dues to Government. As per Para 3 (vii) of CARO, 2015, In case dues of Income Tax/ Sales Tax/ Service Tax/ Customs Duty/ Wealth Tax/ Excise Duty/value added tax/cess have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending shall be mentioned. As per clause 3 (vii)(b), A mere representation to the Department shall not constitute the dispute. In the present case issuance of show cause notice by Excise Department does not tantamount to demand payable by the Company. In as much as the Company has replied to the notice and no further correspondence was received from the Department, it has to be construed that there is no demand. The auditor needs not to report on this. 5. Depositing Provident Fund Dues: The Companies Audit Report s Order, 2015 required the auditor to state whether the dues of provident fund have been regularly deposited with the appropriate 12 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

13 authorities and, if not, the extent of arrears shall have to be indicated by the auditor. A company is required to deposit provident fund dues to appropriate authorities with in the period prescribed under the Rules governing it. In the case of fund constituted by the company, the company is required to follow provisions of the Act. In this case there is a default in not depositing the provident fund contribution to the extent of Rs. 10 lakhs which is a lapse on the part of the company. The reason put forward by the Chief Accountant that the amount has not been deposited due to financial problems faced by the Company is no excuse for not remitting the provident fund. In fact, the company has not at all been regular in depositing the amount. Thus, the auditor shall include this in his report indicating the extent of arrears. (Note: The Companies (Auditor s Report) Order, 2015 requires the auditor to comment upon the regularity aspects as also the extent of arrears in case the same has been outstanding for a period of more than six months. In the given case, it may be noted that M/s ABC Ltd. has failed to deposit the provident funds regularly and the major part of it has been outstanding for more than six months.) 6. Para 3 (viii)of CARO, 2015 requires the auditor to state in his report in respect of a company which is in existence for more than 5 years from the date of registration: a) whether the accumulated losses at the end of the year are more than 50% of its net worth; and b) whether it has incurred cash losses during the current year and the immediately preceding financial year. In the instant case, since the company is covered by the above requirements, there are symptoms of potential sickness and, thus, auditor should report the same. It is, however, assumed that the company is in existence for more than 5 years. 7. Para 3 (x) of CARO, 2015 requires the auditor to state in his report whether the company has given any guarantee for loans taken by others from bank or financial institutions, the terms and condition whereof are prejudicial to the interests of the company. The auditor should examine the Memorandum of Association to determine whether the company has the power to give guarantee. The auditor should also examine the minute book and register of guarantee to ascertain whether guarantee has been issued under the sanction of competent authority. The auditor should also verify compliance with requirements of sections 185 and 186 of the Companies Act, It should also be ensured that the guarantee given is shown as contingent liability. In determining whether the guarantee is prejudicial to the interest of the company, the auditor should consider financial standing of the party, nature of security offered, etc. In this case, since financial condition of the company on behalf of whom guarantee is given is not so good, the auditor may consider expressing an opinion that the terms and conditions on which the company has given guarantees for loans taken by the sister concern, i.e., M/s B Ltd., is prejudicial to the interests of the company. 8. Utilisation of Term Loans: Under CARO, 2015, an auditor is required to comment whether term loans were applied for the purpose for which the loans were obtained. The auditor should examine the terms and conditions of the term loan with the actual utilisation of the loans. If the auditor finds that the fund has not been utilized for the purpose for which they were obtained, the report should state the fact. In the instant case, since term loan taken for the purpose of R&D equipment has been utilized for purchase of car which has no relation with R&D equipment. Therefore, car though used for R&D Director cannot be considered as R&D equipment. The auditor should state the fact in his report that the out of term loan of R&D lack, Rs.12 lakhs was not utilised for the purpose of acquiring the R & D equipment. 13 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

14 9. As per paragraph 3 (xi) of CARO, 2015, an auditor need to comment whether the term loans applied for the purpose for which the loan were obtained. In the present case, the term loan obtained by LM Ltd. have not been put to use for construction activities and temporarily invested the same 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 paragraph 3 (xi) of CARO, As per Para 3 (ix) of CARO, 2015 the auditors of a company has to state in his report that whether the Company has defaulted in repayment of its dues to financial institutions or bank or debentures holders and if yes the period and amount of default to be reported. In this case OK Ltd has defaulted in repayment of dues for three years. Application for rescheduling will not change the default position. Hence the auditor has to report in his audit report that the Company has defaulted in its repayment of dues to the bank to the extent of Rs. 120 lakhs. 11. Personal expenses of employees (debited to profit and loss account) Explanation The practice of meeting certain types of personal expenses of employees by the company is considered normal and is being recognised by the statutory authorities also. The charging of such personal expenses of the employees by the company to its profit and loss account is justifiable or not depends upon the terms and conditions of appointment of the employees. If the terms and conditions of employment include payment of expenses of personal nature, then such expenses can be incurred by the company. Where, however the contract of employment does not contain any provision for payment of expenses of a personal nature, then there is no warrant for incurring or reimbursement of such expenses by the company. Illustration of such expenses are medical re-imbursement, conveyance for personal use, expenses on leave travel, maternity benefits, provisions of rent free quarters, canteen facilities etc. Conclusion Thus, charging of such personal expenses to profit and loss account either on the basis of company s contractual obligations or in accordance with the accepted business practice is perfectly normal and legitimate and does not call for any comments by the auditor. However, where personal expenses not covered by contractual obligations or by accepted business practice, is charged to profit and loss account, it would be the duty of the auditor to report thereon in terms of Section 143 of the Companies Act, For determining the applicability of the CARO, 2015 to a private limited company, both capital as well as the revenue reserves shall be taken into consideration while computing the limit of rupees fifty lacs prescribed for paid up capital and reserves. Revaluation reserve, if any, should also be taken into consideration while determining the figure of reserves for the limited purpose of determining the applicability of the Order. The credit balance in the profit and loss account should also be considered as a part of reserve since the balance in the profit and loss account is available for general purposes like declaration of dividend. The debit balance in the profit and loss account, if any, should be reduced from the figure of revenue reserves only. If the company does not have revenue reserves, debit balance of profit and loss account cannot be reduced from the figures of paid up capital, capital reserve and revaluation reserve. Accordingly the profit and loss account (Dr Balance) of Rs. 2 lacs cannot be deducted and hence CARO, 2015 is applicable to the Company. 14 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

15 13. Reporting under Paragraph 4 (ix) of CARO, 2003 (I) As per Paragraph 3 (vii) (b) CARO, 2003 In case dues of Income Tax/Sales Tax/Service Tax/ Customs Duty/ Wealth Tax/ Excise Duty/ Cess/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. However, a mere representation to the Department shall not constitute the dispute. The auditor should also obtain a management representation about the disputed dues, the amounts involved and the forum where the dispute is pending. The auditor should carry out necessary audit procedures to verify the information provided by the management. The information may be reported in the Statement of Disputed Dues as nature of the dues, amounts, period which the amount relates and forum where dispute is pending. In the present case, there is Income Tax demand of Rs.125 Lacs and the company has gone for an appeal, it needs considerations as to whether the entire demand is disputed, because it is difficult to presume that the demand by Income Tax authority is without any basis. Therefore, As per AS 29 partly to the extent the company considered that the demand is based on some logical basis, that amount may be provided for and the remaining may be disclosed as the contingent liability. Further, it should be brought to notice of members by reporting under Paragraph3 (vii) (b) of CARO, 2015 as per the requirement mentioned therein; (II) As per Paragraph 3 (vii) (a), the auditor has to report upon the regularity of the company in depositing undisputed statutory dues including provident fund, investor education and protection fund, employees state insurance, income-tax, sales-tax, wealth-tax, service tax, custom duty, excise duty, cess and any other statutory dues to appropriate authorities. If the company is not regular in depositing the above mentioned undisputed statutory dues, the auditor is required to state the extent of arrears of statutory dues which have remained outstanding as at the last day of the financial year concerned for a period of more than six months from the date they became payable. With reference to the regularity, in case of custom duty on import of goods or demands arising on account of assessment orders etc., which a company is required to pay as and when an event giving rise to the liability of the company occurs. Such dues should be construed to have been paid regularly if the company deposits them as and when they become due. However, the auditor would be required to comment upon the regularity of the company in depositing the installments, if any, granted by an authority in respect of a demand against the company. In the instant case, the demand notice has been received for Custom Duty of Rs.85 Lacs on and is outstanding for more than 6 months, for which no action has been taken by the management, leads to the irregularity which should be brought to notice of members by reporting under Paragraph 3 (vii) (a) of CARO, Reporting of loan under CARO, 2015: As per Paragraph 3(iii) of CARO, 2015 the auditor has to report whether the company has granted any loans, secured or unsecured to companies, firms or other parties covered in the register maintained u/s 189 of the Companies Act, Whether the particulars of contracts or arrangements referred to in section 189 of the Companies Act, 2013, have been entered in the register required to be maintained under that section Hence, in the instant case ABC Private Ltd. has granted loan of Rs.20 crores to XYZ Ltd., a sister concern needs to be reported as per Paragraph 3 (iii) 15. Utilisation of Term Loans: Under CARO, 2015, an auditor is required to comment whether term loans were applied for the purpose for which the loans were obtained. The auditor should examine the terms and conditions of the term loan with the actual utilisation of the loans. If the auditor finds that the fund has not been utilized for the purpose for which they were obtained, the report should state the fact. In the instant case, since term loan taken for the purpose of purchase of assets for Research & Development (R&D) has been utilized for purchase of vehicle for the use of Director which has no relation with assets for Research & Development (R & D). Therefore, vehicle though used for Director 15 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

16 who was incharge of the R&D activities, cannot be considered as purchase of assets for Research & Development (R & D). The auditor should state the fact in his report that the out of term loan of R & D, a certain sum was not utilised for the purpose of acquiring the R & D assets. 16. Paragraph 3(i)(b) Requires whether the 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. Para in the Audit Report- We have made our viewpoint from the facts of the case and on the basis of guidance drawn from AS 1. We report as under-as per Accounting Standard (AS) 1, Disclosure of Accounting Policies, the enterprise is normally viewed as a going concern, that is as continuing its operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations. Although the company has disposed off its manufacturing fixed assets during the financial year ending on , it is still a going concern in the form of a trading company. We also report that on physical verification of other fixed assets, a material discrepancy to the tune of 1 Lac was noticed and that the same has been properly dealt with in the books of account. 17. In the case of ABC Pvt. Ltd. If purity of gold is not properly disclosed on the jewellery it amounts to defrauding the customers. That means the management is deceiving customers to obtain an illegal advantage. However, the auditor is concerned with fraudulent acts that cause a material misstatement in financial statements. As long as books of account are not falsified arising out of difference in the purity of gold, i.e., actual cost of the gold and the sale price of gold, it has no implication for the auditor. Further, under CARO, 2015, the auditor may examine this from the view point of maintaining proper records of inventory. But even the requirement of maintaining proper records does not necessitate that purity as such should be mentioned on the gold itself. However, the purity of gold would have implication on the valuation of inventory. But this aspect is not required to be reported under CARO, Thus, from the view point of reporting on frauds under CARO, 2015, there is no implication for misstatement in the financial statements. Hence, no reporting is necessary for non-proper disclosure of purity of gold on the jewelry. 16 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

17 CARO IN CRUX CARO is not Applicable to: 1. Banking Company; 2. Insurance Company; 3. Company u/s 8; 4. Private Limited Company 5. One person company 6. Small company At any time during the year whose 1. Paid up capital plus Reserve less than equal to 50 lakhs; 2. Loan o/s less than equal to 25 lakhs; and 3. Turnover less than equal to 5 crores rupees. Notes: Reserve Loan Turnover (sale + service) (Capital Reserve Trade discount - Deducted + Revaluation Reserve) Banks Sales Tax/ Excise Duty-Deducted + + Sales return- Deducted (Revenue Reserve -Dr. Bal of P/L A/C) Financial Institution Commission - Not Deducted Clause 3(i) Fixed Assets a) Proper Records:- maintaining proper records showing ----full particulars ---- quantitative details and ----situation of fixed assets; b) Physical Verification ---at reasonable intervals ----Material discrepancies Properly dealt Clause 3(ii) Inventories Clause 3(iii) Loans Granted a) Physical Verification: Conducted at reasonable intervals b) Adequacy of Procedure: ----In relation to the size of the company ----Nature of its business. c) Adequacy of Records: ----maintaining proper records -----material discrepancies Properly Dealt in Books a) Regular Recovery: Whether receipt of principal amount and interest are regular. b) Steps for Recovery- Reasonable steps-to recover The overdue amt (more than Rs. One lacs.) Clause3 (iv) Internal Adequate Internal Control System: Commensurate-with the size Of the co. 17 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

18 Control System (for the purchase of inventory and fixed assets and for the sale of goods and services) Clause 3(v) Public Deposit Clause 3(vi) Cost Records Clause 3(vii) Undisputed Statutory Dues and nature of its business-identify major weakness Correction of Weaknesses: Continuing failure-to correct major weakness a) Compliance with RBI Directives Examination of system b) Order by CLB/RBI/NCLT/court/or any other tribunal complied Proper Cost records as specified by the CG under section 148(1) a) Regularity in Depositing Undisputed Statutory Dues ---if Not Extent of arrears on the Last day of FY Concerned for more than 6 Months from the date they became payable b) Dispute of Tax and Duty ---amounts involved and ---Forum where dispute is pending c) Transfer of Funds to IEPF Clause 3 (viii) Sick Company Clause 3 (ix) Default in repayment of dues Clause 3 (x) Guarantees for loans taken by others Clause 3 (xi)-usage of Terms loans Clause 3 (xii)- Reporting of Fraud Reasons to be stated for Unfavorable or Qualified Answers Registration- Not Less Than 5 Years Accumulated Losses: Computation of accumulated losses more than or equal to 50% of net worth Cash Losses- in this/immediately preceding FY ---Whether the company has defaulted in repayment of dues to financial institution or bank or debenture holders? ---If yes, the period and amount of default to be reported; -----All guarantees are properly recorded Terms and conditions are not prejudicial to interest of company Whether term loans were applied for the purpose for which the loans were obtained. Fraud-Noticed or reported during the year; if, yes, the nature, and the amount involved is to be indicated 1)Unfavourable or Qualified Answer:- state the reasons for the same 2) Unable to Express Opinion: Indicate such fact together with the reasons why it is not possible 18 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

19 2: Cost Audit COMPANIES (COST RECORDS AND AUDIT) RULES, AS AMENDED Application of Cost records - Rule 3 Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 provides the classes of companies, engaged in the production of goods or providing services, required to include cost records in their books of account These companies include Foreign Companies defined in Section 2(42) of the Act, but exclude a company classified as a Micro enterprise or a Small enterprise including as per the turnover criteria provided under Micro, Small and Medium Enterprises Development Act, The said rule has divided the list of companies into regulated sectors and non-regulated sectors. Regulated Sector Industries (i) Telecommunication services made available to users by means of any transmission or reception of signs, signals, images etc. (other than broadcasting services) and regulated by the Telecom Regulatory Authority of India. (ii) Generation, transmission, distribution and supply of electricity regulated by the relevant regulatory body or authority under the Electricity Act, 2003, other than for captive generation. (iii) Petroleum products regulated by the Petroleum and Natural Gas Regulatory Board. (iv) Drugs and Pharmaceutical. (v) Sugar and industrial alcohol. Non-Regulated Sectors (i) Machinery and mechanical appliances used in defence, space and atomic energy sectors excluding any ancillary item or items. (ii) Turbo jets and turbo propellers. (iii) Tyres and Tubes. (iv) Steel; Cement. (v) Production, import and supply or trading of following medical devices, such as heart valves; orthopaedic implants; pacemaker (temporary and permanent), etc. The rule excludes the foreign companies having only liaison offices. Applicability for Cost Audit - Rule 4 Regulated Sector Cost records are required to be audited if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is Rs. 50 Cr. or more AND The aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained Non-Regulated Sectors Cost records are required to be audited if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is Rs. 100 Cr. or more AND The aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained under rule 3 is Rs. 35 Cr. or more. 19 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website:

20 under rule 3 is Rs. 25 Cr. or more. Exemption- The requirement for cost audit under these rules shall not apply to a company which is covered in rule 3; and (i) whose revenue from exports, in foreign exchange, exceeds seventy five per cent of its total revenue; or (ii) which is operating from a special economic zone Maintenance Records - Rule 5 of Every company under these rules including all units and branches thereof, shall, in respect of each of its financial year commencing on or after the 1st day of April, 2014, is required to maintain cost records in form CRA-1. The cost records shall be maintained on regular basis in such manner as to facilitate calculation of per unit cost of production or cost of operations, cost of sales and margin for each of its products and activities for every financial year on monthly or quarterly or half-yearly or annual basis. Additionally, as per clause (vi) to Paragraph 3 of the CARO, 2015, where maintenance of cost records has been specified by the Government under section 148(1) of the Companies Act, 2013, the auditor has to report whether such accounts and records have been made and maintained. Cost Audit - Rule 6 Appointment of Cost Auditor Intimation to Cost auditor and CG Tenure of Cost Auditor Filling of Casual Vacancy Companies required to get the cost records audited, shall within 180 Days of the commencement of every financial year, appoint a cost auditor. Company shall inform the cost auditor of his or its appointment as such and file a notice of such appointment with the Central Government within a period of 30 days of the Board meeting in which such appointment is made or within a period of 180 days of the commencement of the financial year, whichever is earlier, through electronic mode, in form CRA-2, along with the specified fee. Every cost auditor appointed as such shall continue in such capacity till the expiry of 180 days from the closure of the financial year or till he submits the cost audit report, for the financial year for which he has been appointed. Any casual vacancy in the office of a cost auditor, whether due to resignation, death or removal, shall be filled by the BOD within 30 days of occurrence of such vacancy and The company shall inform the Central Government in Form CRA-2 within thirty days of such appointment of cost auditor. 20 For VPJ Classes CA Vinod Parakh Jain, Ph/whatsapp: , website: