1. Companies (Auditor’s Report) Order, 2016
Presented by
CA. Abhay Vasant Arolkar
Saturday, August 6, 2016,

2. CARO 2016 – Major Items Fixed Assets – Inventories –
Related Parties and parties registered u/s 189
Statutory Liabilities
Loans & Advances granted/given
Borrowings
Issue of Capital
Fraud – noticed or reported
Nidhi Companies
Deposits & Loans taken
Non-cash transactions

3. Applicability Applicability to every company including foreign company
Non-applicability:
Banking Company
Insurance Company
Company licensed to operate under Section 8
One Person Company
Small company

4. Applicability (Contd.)
f) Private Limited Company
Not being a subsidiary or a holding company
of a public company
Having paid-up Capital and Reserves &
Surplus <= 100 lacs rupees as on the balance
sheet date
Having total borrowings from any bank or
financial institution <= 100 Lacs rupees at
any point of time during the financial year
and
Having total revenue (including revenue from discontinuing operations) as disclosed in Schedule
III of Companies Act, 2013 during the financial year
<= 1,000 lacs rupees

5. A Pvt. Ltd. a new company registered with a capital of One crore, and subsequently before the year end raises the capital to Rs. Five crores, Is the Order applicable to it?
B Pvt. Ltd. has a Revaluation Reserve of Rs. 20 Lakhs, Capital Reserve of Rs. 20 Lakhs, Free Reserves of Rs. 20 Lakhs, Credit balance in profit and loss account of Rs. 21 Lakhs and paid up Capital of Rs. 20 Lakhs. What should be included while arriving at the reserves for the purpose of the Order?

6. C Pvt. Ltd. , has paid up capital of Rs
C Pvt. Ltd., has paid up capital of Rs. 50,00,000/-and Reserves & Surplus of Rs. 50,00,000/-. During the year the company issued new equity shares of Rs. 25,00,000/- (Face premium of 100% of the face value.
Is the Order applicable to it?
Is the Order applicable to it, if, thereafter, the company issues Bonus shares to its existing 1 share for every three shares held from out of its Share Premium Account?

7. D Pvt. Ltd. has a paid up share capital of Rs
D Pvt. Ltd. has a paid up share capital of Rs. 10,00,000/- against its authorized capital of Rs. 1,50,00,000/-. During the year the company received share application money amounting to Rs. 120,00,000/-. The Directors have not made the allotment till the end of the financial year. Is the Order applicable to it?

8. F Pvt. Ltd. has a loan of Rs. 68 Lakhs from a Bank at the beginning of the year & received Rs. 60 Lakhs during the year from a Financial Institution. However its paid up capital is Rs. 30 lakhs and the turnover is Rs. 150 lakhs. Since its borrowings from each of the Bank & Financial Institution is not exceeding Rs. 100 Lakhs is the Order applicable to it?
G Pvt. Ltd has received Rs 50 Lakhs on account of sale of scrap. It wants to know whether, it should be considered while arriving at Turnover for the purpose of this clause?

9. AB Co. Pvt. Ltd. is a closely held company having a paid-up capital of Rs. 50,00,000/- and the Reserves and Surplus include General Reserve of Rs. 20,00,000 and Profit & Loss Account Credit Balance of Rs. 30,00,000. The company has not taken any loans or deposits from banks or financial institutions and the turnover of the company is Rs. 11,00,00,000/-. Is the Order applicable to it?

10. AC Co. Pvt. Ltd. , has a paid up capital of Rs
AC Co. Pvt. Ltd., has a paid up capital of Rs. 120 Lakhs and the accumulated debit balance in the Profit & Loss Account as on March was Rs. 60 Lakhs. However the company had a credit balance in its Revaluation Reserve of Rs. 40 Lakhs. Is the Order applicable to the company?
H a private company, limited by shares and guarantee, having licence u/s 8 of the Companies Act, 2013 is having paid up capital of Rs. 100 Lakhs and the balance in the Income & Expenditure Account exceeds Rs. 25 Lakhs during the year. Is the Order applicable to it?

11. I Bank Ltd., a public company registered under the Companies Act, 1956, is a Scheduled Bank. Is the Order applicable to it?
J Insurance India Ltd., a public company registered under the Companies Act, 1956, has tied up with a leading international insurance major. It is registered with the IRDA and commences business in India. Is the Order applicable to it?

12. Profit on sale of Fixed Assets (Sale Value Rs. 1 crore) Rs. 20 Lakhs
K Pvt. Ltd., has a turnover of sales of Rs. 9 crores. Besides the company has Other Income as follows:
Profit on sale of Fixed Assets (Sale Value Rs. 1 crore) Rs. 20 Lakhs
Interest on Deposits with Banks Rs. 20 Lakhs
Dividend from its subsidiary company (private company) Rs. 80 Lakhs
Is the Order applicable to it?

13. M Pvt. Ltd., has accepted loans/deposits from its directors, their relatives and members amounting to Rs. 100 Lakhs. However the limits as to the paid up capital and reserves as also the turnover of the company has not crossed Rs. 100 Lakhs and Rs. 10 crores respectively. The company has taken an overdraft limit from its bankers of Rs. 50 Lakhs, which is unutilised.

14. AD Pvt. Ltd. , enjoys sanctioned cash credit facility of Rs
AD Pvt. Ltd., enjoys sanctioned cash credit facility of Rs. 100 Lakhs from its bank. The credit balance as per the books of account of the company as on March 31, 2016 was Rs Lakhs. The company had issued a cheque as advance to a supplier of capital equipment, which was presented to the bank only on April 1, Thus the debit balance in the said account in the books of the bank was Rs Lakhs. The company claims that as the balance as per the bank statement has never exceeded the limit prescribed, the Order is not applicable. Advise.

15. Sales (excl. of VAT) Rs. 1,050 Lakhs Less Excise Duty Rs. 150 Lakhs
N Pvt. Ltd., has disclosed its sales in accordance with the requirement of Schedule III and the applicable accounting standards as follows:
Sales (excl. of VAT) Rs. 1,050 Lakhs
Less Excise Duty Rs Lakhs
Net Sales Rs Lakhs
Besides the company has paid Maharashtra VAT of Rs. 80 Lakhs in respect of the said sales. The sales is accounted in the books at net of taxes. Is the Order applicable to it?

16. xvi. A& Co, OPC has been formed
xvi. A& Co, OPC has been formed. Is the auditor to report under CARO, 2016?
xvii. During the year, A & Co., OPC was mandatorily converted into a private company as the paid-up capital of the company exceeded rupees fifty lacs. Is the auditor required to report under CARO, 2016?
xviii. During the year, A & Co., OPC was voluntarily converted into a private company as the turnover of the company the company exceeded rupees two crores. Is the auditor required to report under CARO, 2016?

17. xix. A& Co. Pvt. Ltd., is a subsidiary of B Ltd., a public company. B. Ltd., has prepared the standalone financial statements as well as the consolidated financial statements.
Whether report of the auditors under CARO, 2016 is required to be attached to the auditors’ report on Standalone Financial Statements of A & Co. Pvt. Ltd., if it has parameters within the limits specified under CARO, 2016 ?
Whether report of the auditors under CARO, 2016 is required to be attached to the auditors’ report on Consolidated Financial Statements?
Whether the position would change if A & Co. Pvt. Ltd. was a subsidiary of a private company and has parameters within the limits specified under CARO, 2016?
What is the applicability of the order, if A & Co. Pvt. Ltd., is an associate of B. Ltd.,

18. Clause 3(i) Fixed Assets:
whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets;
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;
whether the title deeds of immovable properties are held in the name of the company. If not provide the details, thereof.

19. 1. The company had not maintained proper records of fixed assets for most part of the financial year. However, as on the balance sheet date, the same are done up and produced before the auditors. What is the duty of the auditor in respect of reporting under this clause. 2. The title deeds of the immoveable properties are lost. The company has xerox copies available with it. What is the duty of the auditor in regard to the reporting of the title deeds.

20. 3. O Pvt. Ltd., has not maintained any statutory registers including the Fixed Assets Register as required by the Companies Act. On the directors’ request, the auditors had not qualified their report, and instead had stated in their report that the fixed asset registers are under preparation. In the subsequent year, the directors have once again requested that auditors state that the fixed assets are under preparation. What should the auditor do? Will he be liable in any manner.

21. 4. P Ltd., has genuinely made efforts to maintain the Fixed Assets Register as required by the Companies Act. However due to the complexity of the number of assets, their costs of acquisition/improvement, locations etc., the fixed asset registers could not be ready in full. The directors have stated that the fixed assets are under preparation and provided the status of the work. What should the auditor do? Will he be liable in any manner.

22. 5. The Directors of Q Pvt. Ltd
5. The Directors of Q Pvt. Ltd., claim that they have physically verified the fixed assets during the year and have issued a management certificate to the effect. No evidence was provided in that regard. On subtle enquiry the auditor has found that there was no such stock taking carried out by the management. Should the auditor qualify? If not, what are the implications?

23. 6. The immoveable properties are held in the name of one of its directors of the company from whom the property was purchased but changes have not been effected. What is the duty of the auditor to report?
7. The management of R Ltd., has physically verified the fixed assets during the year and minor discrepancies were found. These discrepancies have not been given any effect in the accounts. Should the auditor report?

24. 8. S Ltd., is in the business of manufacturing and trading in an industrial spare part used in the pharma companies. The company had carried out a costing exercise and concluded that the manufacturing activity should be discontinued and outsourced. Thus the company sold its manufacturing unit, the assets of which constituted a major portion of the fixed assets in the books. How should the auditor report?

25. 9.A firm had purchased an immoveable property being a office premises in a co-operative society. Subsequently the firm was converted into a company. The changes of the constitution are made in the records of the society. However the purchase deed remains in the name of the firm? What is the reporting duty of the auditor under CARO 2016?

26. 10. U Pvt. Ltd., has maintained its fixed asset register in an excel file, with all the relevant columns. However the number of items being large, the company requests the auditor to ask for only certain extracts of the said register so as to satisfy that proper record have been maintained. As an auditor do you agree?

27. 11. The Company holds transferable development rights(TDRs) which are in the name of one of the directors of the company. Should the auditor report under CARO, 2016? 12. The company is owning certain property the title of which is under dispute. What is the auditor’s duty of reporting?

28. Clause 3(ii) Inventory :
whether physical verification of inventory has been conducted at reasonable intervals by the management 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;
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;
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;

29. a. V Pvt. Ltd., is engaged in the business of civil construction as a contractor. The company has valued the inventory in accordance with the Accounting Standard 7. There are no qualifications in the auditors’ report under CARO, Discuss.

30. b. W Pvt. Ltd. , is engaged in the business of manufacturing machinery
b. W Pvt. Ltd., is engaged in the business of manufacturing machinery. Its inventory includes the work-in-progress which is valued by the management on the basis of estimation. How should the auditors’ report thereon?

31. c. X Ltd., normally takes physical stock of inventory once a year at the end of the financial year. The auditors are informed that due to demand pressure, the company has not been able to physically verify the stock and requests the auditor to not qualify the report that physical verification was not carried out. Advise the auditors.

32. d. In principle, a company carries out 100% physical verification once in three years. The company has no programme for such verification. The company had conducted physical verification one year back and the company claims that it will conduct the physical verification in the next year. What are the reporting requirements by the auditor.
e. The company has stock of machinery spares. However the same is not included in the inventory of the company. Comment.

33. Clause 3(iii) Loans Granted
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 Act, and if so,
whether the terms and conditions of the grant of such loans are not prejudicial to the company’s interest whether receipt of the principal amount and interest are also regular; and
whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular;
if the amount is overdue, state the total amount overdue for more than ninety days, and overdue amount is more than rupees one lakh, whether reasonable steps have been taken by the company for recovery/payment of the principal and interest;

34. I. Y Pvt. Ltd., has advanced as well as taken loans to various parties, covered in the register required to be maintained u/s 189 of the Companies Act, 2013, which have operated the account as a current account. No interest is paid or received in respect thereof. Advise the auditor as to how he should report in respect of the same.

35. II. The auditor has not obtained the list of parties entered in the register u/s 189 of the Companies Act, The company has not even maintained the requisite register. During the year there was inspection by the concerned Registrar of Companies, wherein it was found that the company had not maintained the register and consequently the reportable transactions with such parties were in fact not reported. Is the auditor liable for negligence?

36. III. AA Pvt. Ltd., has a policy of giving loans to the employees at a concessional rate of interest. The auditor has not reported under clause of the Order a case where such loan was given to an employee of the company who is also a relative of a director of the company. Advise?

37. IV. Reporting requirements of auditor where:
Loans were given to or taken from parties at such time when the particulars of parties were required to be entered in the register maintained under section 189 of the Act, but thereafter ceased to be covered;
loans given to or taken at such time when the particulars of parties were not required to be entered in the register maintained under section 301 of the Act, i.e., parties, at the relevant point of time when the loans were given, were not covered by the conditions imposed under section 187 and section 188 of the Act, but during the year came within the ambit of those sections;
Loans were given or taken to parties after they ceased to be covered under sections 184 or 188 of the Act.

38. V. What are the reporting requirements where loans are repayable on demand (given or taken) by the company in respect of which no demand has been made by/on the company? VI. A company has, during the financial year, granted a loan of Rs. 5,00,000/- to a firm in which one of the directors of the company is interested for more than six months.

39. VII. The company has renewed the loan which was given by it three years ago, on the same terms and conditions. The company claims that as the company has not granted during the year, the reporting by the auditor under CARO 2016, of the said loan is not required. Do you agree? VIII. What are the factors which need to be considered by the auditor to comment whether the terms and conditions are prejudicial to the interest of the company or not?

40. (iv)Compliance of Section 185 and 186 :
In respect of loans, investments, guarantees and security, whether provisions of Sections 185 and 186 of the Companies Act, 2013 have been complied with. If not, provide the details thereof.

41. A. One of the parties, who is the daughter of the Managing Director of the company and has been studying, is advanced a sum of Rs. 2 Lakhs for a period of two years, which has expired, but there is no repayment. No interest is charged thereon. The company says that the Managing Director is the unstated guarantor of the amount and hence there is no question of taking any steps to recover the amount. How does the auditor report on this matter?

42. B. Company A borrows from company B and immediately lends the same to company C. Whether loan given by Company B would be covered to be reported by the auditor? C. A government company, other than a listed company, has obtained approval from the ministry or department of the central government which is administratively in charge of the company, before making any loan or giving any guarantee or providing any security or making any investment under the section. Is reporting required under this clause by the auditor?

43. Clause 3(v) Deposits from Public :
in case the company has accepted deposits from the public, whether the directives issued by the Reserve Bank of India and the provisions of sections 73 to 76 or any 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?

44. a) E Pvt. Ltd has received security deposit from its clients, whether the same will considered as a Public Deposit?
b). Whether deemed deposits, being loans from shareholders, relatives or other parties should also be examined and reported under this clause?

45. c) During the year, K. Mahindra Ltd, a non-banking financial company, has been converted into a private bank after receiving the necessary approvals from RBI and other regulatory authorities. The company is listed on a recognized stock exchange. As on the balance sheet date, it is a banking company. Is the reporting under CARO, 2016 applicable.

46. d) During the year, AC Ltd
d) During the year, AC Ltd., a public company was converted into a private limited company. From the date of converting, the private limited company satisfies all the conditions for exemption from the Order. Is the reporting under CARO, 2016 applicable.

47. Clause 3(vi) Cost Records
where maintenance of cost records has been prescribed by the Central Government under sub-section (1) of section 148 of the Companies Act, whether such accounts and records have been made and maintained;

48. (i) AF Pvt. Ltd. , maintains cost records
(i) AF Pvt. Ltd., maintains cost records. However it does not carry out the cost audit as the same is not required by law. How should the auditor report? (ii) AG Pvt. Ltd., is engaged in an industry where normally cost audit is conducted. However the company does not maintain cost records as the same is not required by law. How should the auditor report?

49. Clause 3(vii) Statutory Dues
is the company regular in depositing undisputed statutory dues including Provident Fund, Employees’ State Insurance, Income-tax, Sales-tax, Wealth Tax, Service Tax, Custom Duty, Excise Duty, 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.
in case dues of income tax or /sales tax or /wealth tax/ or service tax/ customs duty/ excise duty/cess 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 Department shall not constitute be treated as a the dispute).
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.

50. (1) AH Pvt. Ltd. , has not deducted tax at source as required by law
(1) AH Pvt. Ltd., has not deducted tax at source as required by law. Accordingly the same are subjected to disallowances while filing the return of income. Whether for the purposes of reporting under this clause income tax includes taxes deduced at source?

51. (2). What are the reporting responsibilities of the auditor under this clause in case the company had five years back imported material and had placed them under a bond and even till the current financial year, has not removed the goods there from? Further, interest and rent liability thereon is being provided by the company each year. However, after issuance of Accounting Standard 2, the fact that the company is not loading customs duty appears as a qualification in the auditor’s report ?

52. (3) What are the reporting responsibilities of the auditor in case the company has not paid the service tax to a transporter for the transportation services availed from him or in respect of advocates’ fees under the reverse mechanism basis?
(4) What are the reporting responsibilities of the auditor under this clause in case a company was statutorily required to get itself registered under the Provident Fund Act, but has not got itself so registered? Further, what would be manner of qualification and the quantification thereof ?

53. (5) Are the following payments covered by this clause of the Order:
Bonus payable under the payment of Bonus Act, 1965
Turnover Fees payable to SEBI by brokers
APMC charges
Service Tax
Penalty/interest on service tax
Gratuity liability under the payment of Gratuity Act not funded by the company
cess payable by a company under section 441A of the Companies Act, 1956

54. (6) What are the auditor’s reporting responsibilities under this clause in case there are dues outstanding for a little less than six month as at the balance sheet date as well as in case of previous dues, which though late, were deposited just before the close of the financial year?
(7) What are the auditor’s reporting responsibilities under this clause in case the company has not provided for the statutory dues payable, as the company is accounting taxes on cash basis ?

55. (8). Does “regular” means within due date
(8). Does “regular” means within due date? If a company is making payments of TDS, PF etc., but with a delay of one or two days,can the company be said to be regular in depositing statutory dues ?
(9) AI Pvt. Ltd., received show-cause notice as to why penalty should not be levied u/s 271(1)(c ) of the income tax act, the company is in the replying the same. Should the auditor report about the same.
(10) What if the penalty is levied or demand for tax on additions made by the AO has been made, which is under the dispute. The company is in the process of filling an appeal but the time limit for filling the appeal has lapsed?

56. (11) AI Pvt. Ltd., has received a show-cause notice as to why penalty should not be levied u/s 271(1) (c) of the Income Tax Act, The company is in the process of replying the same. Should the auditor report about the same.
(12) What if the penalty is levied or demand for tax on additions made by the AO has been made, which is under the dispute. The company is in the process of filing an appeal but the time limit for filing the appeal has lapsed?

57. (13) Should the amounts, which has been disputed at a forum, but which have already been provided for in the books, be reported under this clause?
(14) Should such statutory dues, the demands of which have been set aside/referred for reassessment or stayed be disclosed or will a statement clarifying that the disclosure excludes the disputes which have been stayed/remanded, along with the aggregate amount, suffice?
(15) Whether the disclosure requirements of the disputed statutory dues, require that each dispute be reported separately or can various disputes of the same nature (and also pertaining to the same authority) be aggregated?

58. 3(viii) Dues to Banks, etc.:
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 (in case of defaults to banks, financial institutions and Government, lender wise details to be provided)

59. a. the company has submitted an application for re-schedulement/restructuring proposals to the lenders, which is under process. The Directors are confident that their application would be considered favourably and have requested the auditors to not report on the default as the same would be waived once the application is favourably accepted by the lenders. Advise the auditors

60. b. What procedures and reporting should be adopted by the auditor in case of term loans from banks, raised against title deeds, long term FDRs, NSCs etc., where the bank is not concerned with the purpose for which it is being obtained?

61. c. Would the Company be construed as having defaulted in repayment of dues in case it has defaulted in repayment of debentures or institutional dues?
Note: If yes, then the concept of going concern itself it would be at stake as the lenders have recourse to the assets under the Securitization Act.

62. Particulars
Amount of default as at the balance sheet date
Period of default
Remarks, if any
Name of the Lenders
In case of:
Bank
Financial Institution &
Government
(ii) Debentures

63. 3(ix) Public Offer:
Whether moneys raised by way of initial public offer or further public offer (including debt instruments) and terms loans were applied for the purposes for which they were raised. If not, the details together with delays or default and subsequent rectification, if any, as may be applicable, be reported.

64. 1. Comment on the auditor’s duty to report under CARO 2016 in the following cases:
The Company has made Further Public Offer in the financial year ended March 31, However the utilisation was made in the immediately following financial year.
The company had made Public Offer in the financial year ended March 31, Utilisation of the funds was done in the current financial year.
The company has raised moneys from foreign capital markets by issuing GDR/ADR during the financial year.

65. 3(x) Reporting on Fraud :
whether any fraud on or by the company or on the company by its officers or employees has been noticed or reported during the year. If yes, the nature and amount involved is to be indicated ;

66. (a) Whether a transaction where the company gets a fake purchases bill from the supplier and a letter of credit is issued against such purchases, and the latter gets the LC discounted and gives the money back to the company, would need to be reported under this clause?
Should the auditor consider materiality of the amount involved for reporting under this clause?
Should a fraud risk committed in one quarter but rectified in the other quarter (2nd Quarter) of the year be reported under this clause?
Should teeming and lading frauds be reported under this clause?

67. (b) What are the reporting responsibilities of the auditor under this clause where frauds have been committed by the directors of the company but are not reported by the company and come to the knowledge of the auditor from private sources?
(c) Whether, for the purpose of reporting under this clause, a total amount of all the frauds noticed on reported to be disclosed, explaining the nature of the fraud committed?

68. (d) Whether the total amount of frauds and the major frauds can be clubbed and disclosed? Or whether individual amount involved in each fraud is to be separately listed out with the corresponding nature of fraud?
(e) Is it enough if the auditor expresses his opinion on the frauds noticed and reported by a detective appointed to approach his work with suspicion?

69. 3(xi) Managerial Remuneration :
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, 2013? If not state the amount involved and steps taken by the company for securing the refund of the same.

70. Section 197 applies only to public companies
Remuneration, not to include:
Sitting fees paid to directors [sub-sections 2 & 5 of Section 197]
Remuneration payable to directors for services rendered by him of a professional nature [sub-section4 of Section 197]
Default to be reported incorporating the following:
Payment made
Amount paid/provided in excess if the prescribed limits.
Amount due for recovery as at Balance Sheet date.
Steps taken to secure the recovery
Remarks, if any.

71. 3(xii) Nidhi Company :
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.

72. Nidhi Company means a company which has been incorporated with the object of cultivating the habit of thrift and savings amongst its members, receiving deposits from, and lending to its members only, for their mutual benefit and which complies with suc rules as are prescribed by the Central Government for regulation of such class of companies.
Nidhi Rules 2014

73. 3(xiii) Related Party Transactions:
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.

74. Related party transactions
Following transactions entered in to with related parties are called related party transactions require approval by ordinary resolution of members;
sale / purchase / supply of goods / materials - > 10% of Annual Turnover or Rs crores, whichever is less.
Selling / buying of property > 10% of NW or Rs. 100 Crores, whichever is less.
Leasing of property >10% of NW or 10% of Turnover or Rs. 100 crores, whichever is less.
Availing / rendering of services > 10% of Turnover or Rs. 100 crores, whichever is less.
Appointment of agent for purchase / sale of goods / materials / services / property
Related party’s appointment to office / place of profit in company / subsidiary / associate company Remuneration > Rs 2.50 lacs pm
Underwriting subscription of securities / derivatives of company Remuneration > 1 % of NW

75. Arm’s Length Price
Transaction between two related parties that is conducted as if they were unrelated so that there is no conflict of interest. [Expln (b) Section 188(1)]
A transaction conducted on such terms & conditions as between a willing buyer and a willing seller who are unrelated and acting independently of each other and pursuing their own best interest. [SA 550]
Arm’s length price under the Transfer Pricing mechanism under Income Tax Act, 1961

76. Transactions outside the entity’s normal course of business [SA 550]
Complex equity transactions, such as corporate restructurings or acquisitions
Transactions with offshore entities in jurisdictions with weak corporate laws
The leasing of premises or the rendering of management services by the entity to another party if no consideration is exchanged
Sales transactions with unusually large discounts or returns
Transactions with circular arrangements, for example, sales with a commitment to repurchase
Transactions under contracts whose terms are changed before expiry.

77. Illustrative checklist to determine – ‘ordinary course of business
Whether the transaction is covered in the objects of the company as envisaged in the Memorandum of Association;
Whether a transaction is usual or unusual, both from the company and its line of business perspective;
Frequency: If a transaction is happening quite frequently over a period of time, it is more likely to be treated as an ordinary course of business. However, the inverse does not necessarily hold true;
Whether transaction is taking place at arm’s length;
Business purpose of the transaction;
Whether transaction is done on similar basis with other third parties; and
Size and volume of transaction.

78. Circumstances in which it may be appropriate to obtain written representations from those charged with governance include:
(i) When they have approved specific related party transactions that
a) materially affect the financial statements, or
b) involve management.
(ii) When they have made specific oral representations to the auditor on details of certain related party transactions.
(iii) When they have financial or other interests in the related parties or the related party transactions.
(iv) Management’s assertion of responsibility that related party transactions were conducted on terms equivalent to those prevailing in an arm’s length transaction.

79. 3(xiv) Preferential Allotment/Private Placement:
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 purpose for which the funds were raised. If not, provide the details in respect of the amount involved and nature of non-compliance.

80. 1. Comment on the auditor’s duty to report under CARO 2016 in the following cases:
The company has raised moneys by making Preferential Allotment or Private Placement Offer during the financial year.
The Company has made Private Placement Offer in the financial year ended March 31, However the utilisation was made in the immediately following financial year.
The company had made Private Placement Offer in the financial year ended March 31, Utilisation of the funds was done in the current financial year.
The company had made Private Placement Offer in the financial year ended March 31, 2015 and no specific purpose was stated for the issue.

81. Preferential Allotement
Section 62(1)(c ) states: where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered-
(C ) to any persons, if it is authorized by a special resolution, whether or not those persons include the person referred to in clause (a) or clause (b), either for cash or for consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer subject to such condition as may be prescribed.0

82. 3(xv) Non-cash transactions :
whether the company has entered into any non-cash transactions with directors or persons connected with him and if so, the provisions of section 192 of the Companies Act, 2013 have been complied with.

83. Section 192
192. Restriction on non-cash transactions involving directors
(1) No company shall enter into an arrangement by which—
(a) a director of the company or its holding, subsidiary or associate company or a person connected with him acquires or is to acquire assets for consideration other than cash, from the company; or
(b) the company acquires or is to acquire assets for consideration other than cash, from such director or person so connected,
unless prior approval for such arrangement is accorded by a resolution of the company in general meeting and if the director or connected person is a director of its holding company, approval under this sub-section shall also be required to be obtained by passing a resolution in general meeting of the holding company.
(2) The notice for approval of the resolution by the company or holding company in general meeting under sub-section (1) shall include the particulars of the arrangement along with the value of the assets involved in such arrangement duly calculated by a registered valuer.
(3) Any arrangement entered into by a company or its holding company in contravention of the provisions of this section shall be voidable at the instance of the company unless—
(a) the restitution of any money or other consideration which is the subject matter of the arrangement is no longer possible and the company has been indemnified by any other person for any loss or damage caused to it; or
(b) any rights are acquired bona fide for value and without notice of the contravention of the provisions of this section by any other person.

84. Acquisition of the asset takes place in one year and the corresponding liability is created in the financial statements, the corresponding settlement in the following year. Will the said transaction be considered as non-cash transaction?
Note: Mergers under Court schemes would be entered into subject to requisite approvals of Court etc., would not be considered non-cash transactions.

85. Person connected with the Director
The term “person connected with the director” has not been defined in the Act, or the Rules thereunder. Instead, the term “to any other person in whom the director is interested” is defined in the Explanation to sub section (1) of section 185 of the Act, which is reproduced as under and may be used as the reference point for reporting under this clause. “ (a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director; (b) any firm in which any such director or relative is a partner; (c) any private company of which any such director is a director or member; (d) anybody corporate at a general meeting of which not less than twenty five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or (e) Any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.”

86. 3(xvi) NBFC registration
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.

87. A company carrying on trading business has huge reserves funds which are invested in fixed deposits. The company has reduced its trading activity and the income from interest/income from financial assets constitutes more than 50% of its total income. Whether the auditor should report?

88. Reporting requirements
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.
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.

89. 1. What are the reporting responsibilities of the auditor of a branch of a private limited company under the Order in case such a branch fulfills the conditions for exemption from the applicability of the Order?
2. What is the manner of reporting or disclosure in case of liaison offices, project offices and branch offices of foreign companies for the purposes of the Order?

90. 3. Whether the auditor has to comment separately on each of the clauses such that the total number of clauses reported upon is 16? Should we maintain the sequence of the clauses as contained in the said Order?
4. What should be the manner of reporting in the main auditor’s report in case any of the reply to any of the clauses under the Order is in adverse, especially with respect to statutory dues and disposal of fixed assets.

91. Revised Standards of Auditing [w.e.f. 1-4-2017]
SA 700 – Forming an opinion and reporting on FS
SA 701 – Communicating key audit matters in Independent auditors’ report
SA 705 – Modification to the opinion
SA 706 – Emphasis of Matter and Other Matter paragraph
SA 260 – Communication with those charged with governance
SA 570 – Going concern

92. Companies (Auditor’s Report) Order, 2016
By CA Abhay Vasant Arolkar BCom (Hons.), LLB, ACS, FCA M/s. A.V.Arolkar & Co.,
Chartered Accountants, Mobile – –