1. REPORTING UNDER CARO
CA. T.S.VENKATESWARAN

2. Differences between CARO 2013 vs 2015
Contents
Main Audit Report
CARO 2015
Differences between CARO 2013 vs 2015
FRRB Issues
CARO Clauses

3. Changes in Auditors’ Report
Management Responsibility ( Board of Directors) to include the following matters as stated under section 134(5) of Companies Act, 2015:
Maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding of the assets of the Company and for preventing and detecting frauds and other irregularities.
Selection and application of appropriate accounting policies; making judgments and estimates that are reasonable and prudent;
Design, implementation and maintenance of adequate internal financial controls, that were operating effectively for ensuring the accuracy and completeness of the accounting records, relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.

4. Changes in Auditors’ Report (Contd…)
Reporting on Other Legal and Regulatory Requirements as required under Section 143(3) of Companies Act, 2015:
With respect to the adequacy of the internal financial controls over financial reporting of the Company and the operating effectiveness of such controls
With respect to the other matters to be included in the Auditor's Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our information and according to the explanations given to us:
i. The Company has disclosed the impact of pending litigations on its financial position in its financial statements - Refer Note XX to the financial statements;
ii. The Company has made provision, as required under the applicable law or accounting standards, for material foreseeable losses, if any, on long-term contracts including derivative contracts - Refer Note XX to the financial statements;
iii. There has been no delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the Company

5. Effective Date of the Order:
Companies (Auditor’s Report) Order, 2015:
Effective Date of the Order:
The Companies (Auditor’s Report) Order, 2015 (CARO, 2015) was issued vide Ministry of Corporate Affairs Notification dated 10th April 2015.
This order has been issued pursuant to section 143(11) of Companies Act
The Order supersedes the Companies (Auditor’s Report) Order, (CARO, 2003) was issued vide General Notification G.S.R 480(E) dated 12th June 2003 and came into force on the 1st day of July 2003 (Companies Act, 1956).

7. CARO 2003 Vs CARO 2015 – Comparison
Description
CARO 2003
CARO 2015
Remarks
Maintenance of Records – Fixed Assets
Clause 4(i)(a)
Clause 3(i)(a)
No change
Physical verification of fixed assets
Clause 4(i)(b)
Clause 3(i)(b)
Assets disposed off during the year -
Omitted in CARO 2015
Physical verification of Inventory
Clause 4(ii)(a)
Clause 3(ii)(a)
Adequacy of procedures with respect to physical verification
Clause 4(ii)(b)
Clause 3(ii)(b)
Discrepancies noted in physical verification -Dealing in books of account
Clause 3(ii)(c)
Granting of loans
Clause 4(iii)(a)
Clause 3(iii)
The word has the Company is replaced by Whether
Rate of Interest is prejudicial to interest of the company
Clause 4(iii)(b)

8. CARO 2003 Vs CARO 2015 – Comparison
Description
CARO 2003
CARO 2015
Remarks
Whether receipt of principal or interest are regular
Clause 4(iii)(c)
Clause 3(iii)(a)
No change
If overdue is more than one lakh, necessary steps have been taken for recovery of principal of interest
Clause 4(iii)(d)
Clause 3(iii)(b)
Has company taken any loans
Clause 4(iii)(e) -
Omitted in CARO 2015
Rate of interest is prejudicial to the interest of the company
Clause 4(iii)(f)
Payment of principal and interest are regular
Adequate Internal Control System
Clause 4(iv)
Clause 3(iv)
Details of contracts entered in 301 register
Clause 4(v)(a)
Contracts have been entered at reasonable prices at prevailing market prices
Clause 4(v)(b)

9. CARO 2003 Vs CARO 2015 – Comparison
Description
CARO 2003
CARO 2015
Remarks
Accepting of deposits from public
Clause 4(vi)
Clause 3(v)
Reference to section of Companies Act, 2013 has been changed
Internal Audit System
Clause 4(vii) -
Omitted in CARO 2015
Maintenance of Cost Accounting records
Clause 4(viii)
Clause 3(vi)
Regularity of depositing undisputed statutory dues
Clause 4(ix)(a)
Clause 3(vii)(a)
Omission of IEPF and inclusion of Value Added Tax
Disputed statutory dues
Clause 3(vii)(b)
Inclusion of Value Added Tax
Amount required to be transferred to Investor Education and Protection Fund
Clause 3(vii)(c)
Inclusion of new sub clause with respect to IEPF
Extent of Accumulated losses
Clause 4(x)
Clause 3(viii)
No change

10. CARO 2003 Vs CARO 2015 – Comparison
Description
CARO 2003
CARO 2015
Remarks
Repayment of dues to financial institution / bank / debenture holders
Clause 4(xi)
Clause 3(ix)
No change
Documents and records for loans and advances
Clause 4(xii) -
Omitted in CARO 2015
Provisions relating to special statute
Clause 4(xiii)
Records, etc for companies dealing and trading in securities
Clause 4(xiv)
Guarantee given by the Company
Clause 4(xv)
Clause 3(x)
Application of term loans
Clause 4(xvi)
Clause 3(xi)
Tenure of usage of funds raised
Clause 4(xvii)
Preferential allotment of shares
Clause 4(xviii)
Security on debenture
Clause 4(xix)

11. CARO 2003 Vs CARO 2015 – Comparison
Description
CARO 2003
CARO 2015
Remarks
Disclosure of end use of public money raised
Clause 4(xx) -
Omitted in CARO 2015
Fraud
Clause 4(xxi)
Clause 3 (xii)
No change

12. CARO, 2015 – Applicability Applicability: The Order applies to:
All companies except certain categories of companies specifically exempted from the application of the order;
Foreign companies as defined in clause (42) of section 2 of the Companies Act, 2013;
The order DOES NOT apply to:
Banking company
Insurance company
Section 8 company
One person company

13. FRRB Observations

15. Fixed Assets Observations:
Omission to comment on the reasonableness of frequency of physical verification of fixed assets conducted by Management.
The auditor had used the words, “ The company maintained proper records…………. no material discrepancies were noticed on such verification as compared to the available records.” Wordings used are ambiguous, it has been stated that proper records have been maintained whilst reference has been made to available records.

16. Inventories

17. Inventory Observations:
It was reported in CARO, that the company did not have inventory and therefore the question of reporting under the said clause does not arise. On review of Financial Statements, it was noted that there was a schedule for Work in Progress. Comments in CARO contradicting with those in Financial Statements.
In the Notes to Accounts, it was mentioned that the there was a shortage of finished goods in few units as found by excise department during their searches. The auditor had not made any comment as to whether those material discrepancies have been properly dealt with in the books of account.

18. Internal Control System
“In our opinion and according to the information and explanations given to us, there are adequate internal control procedures commensurate with the size of the Company and the nature of its business for the purchase of fixed assets”

19. Internal Control Systems
Observations
Usage of words, ‘Internal control procedures’ instead of ‘internal control system’. The word system is much wider in scope than procedures. Hence usage of the term ‘procedures’ does not fully meet the purposes of reporting.
Commenting on only purchases and failing to comment on adequacy of internal control system with regard to sale of goods and services.
It was noted that the second aspect of this clause requiring to comment on whether there was a continuing failure to correct major weakness in such internal controls was not reported. It cannot be construed that if no major weakness was reported during the period of audit, the internal control system is adequate.

20. Loans to related parties u/s 301 (189)
Observations:
Omission to report whether receipt of principal amount and interest are regular.
It was reported that the company had not taken any loans from the entities as per register maintained under section 301 of the Act, whereas it was also stated that “the rate of interest of loans given or taken is not prejudicial …….” It was observed that these statements were contradictory and the same shall be avoided.

21. Loans to related parties u/s 301
Observations (Contd.)
Although commented on loans wherein interest has been stipulated, omission to comment on other terms and conditions of loans which even include the items wherein no stipulation exist with regard to repayment of principal and interest.
Omission to comment on the regularity of payment of interest on loan taken by the company.
It was reported that the repayment of loan and interest were as stipulated. Further, it was reported that “in case of overdue amounts exceeding ` 1 lakh reasonable steps have been taken by the company for recovery……… It was viewed that, if the parties were repaying the principal and interest as stipulated there was no question of overdue amount. Such contradictory statement should be avoided.

22. Public Deposits Observations:
It was suggested that the auditor should have also reported on whether the directives issued by Reserve Bank of India or any other relevant provisions have been complied with or not.

23. Statutory Remittances
Observations
In one of the cases the Company, was not regular in depositing statutory dues, the auditor should have commented on the same as per Paragraph ix(a) regarding the arrears of outstanding dues as at last day of the financial year concerned for a period of more than 6 months from the date they became payable. However it mentioned in the report that, “late deposit if any has been reported in the Form 3CD attached”. As Form 3CD forms part of Tax Audit Report and not Auditor’s Report under Companies Act, accordingly it can be concluded that the reporting is not complete.
It was noted that the auditor had not commented regarding the arrears of outstanding statutory dues as at last day of the financial year concerned for a period of more than 6 months from the date they became payable.
Even if there are no statutory dues outstanding for more than six months or any disputed dues, a positive confirmation to that effect should be made.

24. Statutory Remittances
Observations
It was noted that the auditor had omitted to report on whether the company is regular in depositing the service tax dues or not.
In some cases, it was noted that the auditor had not mentioned the forum where the dispute is pending or the period to which the amounts relates to.

25. Accumulated Losses (Contd.)
Observations:
It was noted that though the company’s accumulated losses exceeded 50% of its net worth, the auditor has not stated this fact in the Audit Report.
The auditors had stated that the company incurred cash losses during the current financial year, they have omitted to state whether the company has incurred cash losses in the immediately preceding financial year.

26. Cost Records Observations:
As per the Cost Accounting Record Rules, the requirement to maintain cost records is not applicable to SSI with turnover of less than ` 10 crores.
It was reported that the Central Government has not prescribed maintenance of cost records by Small Scale Industry Units.
It was noted that the above comment was made though the Company did not fall within the definition of SSI. Hence the auditor had not complied with the reporting requirements under CARO.

27. Guarantees Observations:
It was noted that the auditor had provided comments only to the extent that the company had given guarantee for loan taken by its subsidiaries and associates, but has not given any comment on the guarantees which may have been given by the company for loan taken by parties other than subsidiaries and associates. Accordingly, the reporting made by the auditor is not complete.

28. Utilisation of short term funds
Observations:
It was noted that the certain temporary short term funds have been used for long term investment but the nature and amount of short term funds that were deployed were not disclosed.

29. Fraud
Observations:
It was noted that the wordings used were, ‘during the course of our audit’, which indicates that the scope of the auditor was restricted only to the frauds noticed or reported during the course of his audit only whereas the auditor is required to report on all the frauds noticed during the year.
The auditor had provided a conditional statement that fraud on or by the company has been noticed or reported during the year that causes the financial statements to be misstated. The same is not in strict compliance with the requirements of the clause

30. CARO

31. CARO, 2015 – Applicability (Contd..)
Private Limited company which fulfills all the following conditions throughout the reporting period covered by the audit report: (i) its Paid up capital and reserves are fifty lakh rupees or less; (ii) its Outstanding loan from any bank or financial institution are
rupees twenty five lakh or less; and (iii) its Turnover does not exceed rupees five crores
Definitions :
‘Private Limited Company’ : The term “private limited company”, as used in the Order, should be construed to mean a company registered as a “private company” {as defined in sub-section (68) of section 2 of the Companies Act, 2013} and which has a limited liability. In other words, the Order would be applicable to private unlimited companies irrespective of the size of their paid-up capital and reserves, turnover, borrowings from banks/financial institutions.

32. CARO, 2015 – Applicability (Contd..)
Paid-up Capital : Sub-section (64) of section 2 of the Act defines the term “paid-up capital” or “share capital paid-up” means such aggregate amount of money credited as paid-up as is equivalent to the amount received as paidup in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called.
Reserves : The Guidance Note on Terms Used in Financial Statements defines the term “reserve” as, “The portion of earnings, receipts or other surplus of an enterprise (whether capital or revenue) appropriated by management for a general or specific purpose other than provision for depreciation or diminution in the value of assets or for a known liability.
Turnover : Turnover means the aggregate value of the realization of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during the financial year

33. Clause 3 (i) –Fixed Assets - Whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets. [Paragraph 3(i)(a)] 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; [Paragraph 3(i)(b)]

34. Clause 3 (i) –Fixed Assets Reporting Requirements:
Maintenance of proper records with full particulars including quantity and location
Fixed assets register shall be maintained showing classification of assets
The above mentioned particulars shall be mentioned both in respect of tangible and intangible assets.
Physical verification of fixed assets at reasonable intervals by the management
Management representation to be obtained in respect of physical verification in accordance with the policy of the company
What constitutes “reasonable intervals” depends on circumstances of each case
Dealing with material discrepancies, if any, in the books of accounts.

35. Clause 3 (i) –Fixed Assets (Contd..)
Special Considerations :
The auditor should examine whether the method of verification was reasonable in the circumstances relating to each asset. For example, in the case of certain process industries, verification by direct physical check may not be possible in the case of assets which are in continuous use or which are concealed within larger units. It would not be realistic to expect the management to suspend manufacturing operations merely to conduct a physical verification of the fixed assets, unless there are compelling reasons which would justify such an extreme procedure. In such cases, indirect evidence of the existence of the assets may suffice.

36. Clause 3 (i) –Fixed Assets (Contd..)
References:
Section 293 of Companies Act, deals with the sale, lease or otherwise disposal of the whole or substantially the whole, of the undertaking of the company.
AS 10 – Accounting for Fixed Assets – Whether abandoned or held for sale fixed assets are shown separately as per paragraph 24 of AS 10.

37. Clause 3 (ii) : Inventories Whether physical verification of inventory has been conducted at reasonable intervals by the management [Paragraph 3(ii)(a)] - 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. [Paragraph 3(ii)(b)] - 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. Paragraph 3(ii)(c)]

38. Clause 3 (ii) : Inventories (Contd…)
Reporting Requirements:
Physical verification of inventory has to be conducted at reasonable intervals by the management
Physical verification of inventory – Responsibility of the management of the company which should verify all materials at least once in a year and more often in appropriate cases.
Procedure for physical verification of inventory followed by the company shall be reasonable and adequate in relation to the size of the company and the nature of its business.

39. Clause 3 (ii) : Inventories (Contd..)
Special Considerations :
Any deficiencies shall be reported.
What constitutes “proper records” has not been defined. However, in general, records relating to inventories should contain, inter alia, the following:
(i) particulars of the item like nomenclature, nature, etc.
(ii) identification code of the item;
(iii) details regarding quantity of the receipts, issues, balances and dates of transactions in a chronological manner;
(iv) relevant document number and department identification, if any;
(v) location.
Maintenance of proper records of inventory and any material discrepancies noticed on physical verification, if any, shall be properly dealt with in the books of accounts of the company

40. Clause 3 (ii) : Inventories (Contd..)
Inventories include goods purchased and held for resale but does not include machinery spares covered by AS 10, “Accounting for Fixed Assets”.
References:
AS 2 “Valuation of Inventories”: The term“inventory” should be construed to have the same meaning as assigned to it in Accounting Standard (AS) 2.
SA 501 (“Audit Evidence – Additional Considerations for Specific Items”) :The duties and responsibilities of the auditor while attending a stock taking by the management are governed by the principles laid down in the Standard on Auditing (SA) 501

41. Clause 3 (iii) – Loans Granted - Has the company granted any loans, secured or unsecured to companies, firms or other parties covered in the register maintained under section 189 of the Act Whether receipt of the principal amount and interest are also regular; and [Paragraph 3 (iii)(a)] - 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. [Paragraph 3(iii)(b)]

42. Clause 3 (iii) : Loans granted (Contd..)
Reporting Requirements:
Details regarding the loans, secured or unsecured, given or taken by the company, to or from the companies or firms or other parties that are covered in the register maintained under section 189 of the companies act.

43. Clause 3 (iii) : Loans granted/ Taken (Contd..)
The transactions squared up during the year shall be considered and reported under the clause.
The “Other terms” would primarily include security, terms and period of the repayment and restrictive covenants, if any.
The payment or receipt of principal and interest shall be regular
Special Considerations :
Where no stipulation has been made auditor will not be able to make any specific comments, in such a case, the fact that the terms of repayment have not been stipulated shall be reported.
Reasonable steps shall be taken for payment or recovery of principal and interest if the amount over due is more than rupees one lakh.

44. Clause 3 (iii) : Loans granted (Contd..)
References :
Sections 185 and 188 of Companies Act, 2013: Maintenance of registers which contain the particulars of all contracts or arrangements to which section 188 of the Act applies.

45. Clause 3 (iv) – Internal Controls - 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. [Paragraph 3(iv)]
Reporting Requirements :
Adequate internal control procedures commensurate with the size of the company and nature of its business shall be in place in respect of:
(i) Purchase of inventory
(ii) Purchase of fixed assets
(iii) Sale of goods
Continuous failure to correct major weaknesses in internal control shall be reported.

46. Clause 3 (iv) – Internal Controls (Contd..)
Special Considerations :
Review of reports of internal auditor, if any in order to know the cases of weaknesses pointed out by the internal auditors in the design of internal controls and non-observance of the laid down controls.
Review of minutes of the meetings of the Board of Directors and Review of auditor’s previous years’ working papers with a view to determine the cases of weaknesses in internal controls, if any.
The follow-up action taken in response to weaknesses communicated to the management shall also be examined.
References :
(SA) 400, “Risk Assessments and Internal Control”: Paragraph 50 requires that the auditor should make management aware, as soon as practical and at an appropriate level of responsibility, of material weaknesses in the design or operation of the accounting and internal control systems, which have come to the auditor's attention during the course of the audit.

47. Paragraph 3 (v) – Deposits - 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 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? [Paragraph 3 (v)]
Reporting Requirements:
Where the company has accepted deposits from public, the following shall be complied with, where applicable:
1. Directives issued by the Reserve Bank of India
2. Provisions of sections 73 to 76
3. Any other relevant provisions of the Act and the rules framed there under .
Nature of contraventions, if any, shall be stated.

48. Paragraph 3 (v) – Deposits (Contd..)
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, the same shall be complied with.
References:
Section 73 to 76 of Companies Act, 2013: The auditor shall enquire of the management about the possible instances of non compliance with sections 73 to 76 and the relevant rules.

49. Paragraph 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. [Paragraph 3(vi)]
Reporting Requirements:
The clause applies to the companies which are prescribed by the central government under section 148 (1) of the Act to maintain cost records.
Such companies shall make and maintain cost accounts and cost records.
The Cost Accounting Records Rules issued for various industries contain requirements relating to two matters:
1. maintenance of proper books of account relating to materials, labour and other items of cost; and
2. Preparation of cost statements at the end of the financial year in accordance with the rules specific to the industry concerned.

50. Paragraph 3(vi) – Cost Records (Contd..)
Special Considerations :
The auditor shall obtain a written representation from the management stating:
1. whether cost records are required to be maintained for any products of the company under section 148(1); and
2. whether cost accounts and records are being made and maintained regularly.

51. Reporting Requirements:
Paragraph 3 (vii) (a)– Statutory Liabilities - 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, 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.[Paragraph 3(vii)(a)]
Reporting Requirements:
The company shall be regular in depositing undisputed statutory dues including :
Provident Fund,
Employees’ State Insurance,
Income-tax,
Sales tax

52. Paragraph 3 (vii) (a) – Statutory Liabilities (Contd..)
Wealth tax,
Service Tax,
Custom Duty, Excise Duty, Cess and
Any other statutory dues with the appropriate authorities.
The emphasis is on the regularity, hence the scope of auditor’s inquiry is restricted to only those statutory dues which the company is required to deposit regularly.
The auditor is not required to specify in detail each instance of delay or the extent of delay, it shall be sufficient if he indicates whether generally the deposits have been regular or otherwise.
Special Considerations :
It may be noted that the use of the words “any other statutory dues” indicates that the clause covers all type of dues under various statues which may be applicable to a company having regard to its nature of business.

53. Paragraph 3 (vii)(a) – Statutory Liabilities (Contd..)
The auditor has to report on the regularity of deposit of statutory dues irrespective of the fact whether or not there are any arrears on the balance sheet date. Penalty and/or interest levied under the respective laws would be covered within the term “amounts payable”.
In case of non-payment or late payment of dues, the auditor shall report 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 6 months from the date they become payable in the format given below :
Name of
the Statute
Nature of the
Dues
Amount
(Rs.)
Period to which the
amount relates
Due
Date
Date of
Payment

54. Reporting Requirements :
Paragraph 3 (vii)(b) – Disputed Statutory Liabilities - In case dues of Income Tax/ Sales Tax/ Service Tax/ Customs Duty/ Wealth Tax/ Excise Duty/ Cess have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending shall be mentioned. [Paragraph 3 (vii)(b)]
Reporting Requirements :
The amounts to be reported under clause 3(vii)(b) of the Order are those which have not been deposited on account of any dispute, irrespective of the treatment of such disputed amounts in accounts.
Special Considerations :
A mere representation to the Department shall not constitute the dispute.
The information required by the clause may be reported in the following format:
Statement of Disputed Dues
Nature of Dues
Amount (Rs.)
Period to which the
amount relates
Forum where
dispute is pending

55. Paragraph 3 (vii)(b) – Disputed Statutory Liabilities (Contd..)
Further, in case where the amount under the dispute is pending for an appeal to be filed and the time limit for filing the appeal has lapsed, the disputed amount would become a statutory due and the reporting responsibilities of the auditor as are applicable to any other undisputed statutory due under clause 3(vii)(a) of the Order would become applicable.
The auditor should also obtain a management representation about the disputed dues, the amounts involved and the forum where the dispute is pending.

56. Reporting Requirements :
Paragraph 3 (vii)(c) – Amounts required to be transferred to Investor Education and Protection Fund: - Whether the amount required to be transferred to Investor Education and Protection Fund in accordance with the relevant provisions of the Companies Act, 1956 (1 of 1956) and rules made thereunder has been transferred to such fund with in the time [Paragraph 3 (vii)(c)]
Reporting Requirements :
The amounts to be reported under clause 3(vii)(c) of the Order are those which are required to be transferred to Investor Education and Protection Fund under provision of Companies Act 1956, but not deposited within the time lines stated there under
Nature of amount to be transferred
Amount (Rs.)
Period to which the amount relates
Due date for transfer
Date of transfer

57. Clause 3(viii) – Accumulated Losses - 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 cent of its net worth and whether it has incurred cash losses in such financial year and in the immediately preceding financial year. [Paragraph 3(viii)]
Reporting Requirements :
whether the accumulated losses at the end of the financial year are not less than 50% of its net worth; and
whether the company has incurred cash losses during the period covered by the report and in the immediately preceding financial year covered by the report.
Special Considerations :
The auditor while reporting on this clause should indicate that his opinion on the matters specified in the clause has been arrived at after considering the effect of the qualifications on the figures of accumulated losses, net worth and cash losses. Where any of the qualifications in the audit report cannot be quantified, it has to be stated that the effect of such unquantified qualification(s) has not been taken.

58. Clause 3(viii) – Accumulated Losses (Contd..)
The auditor is also required to report whether the company has incurred cash losses during the period covered by the report and in the financial year immediately preceding the period covered by the report.
Definitions :
Net Worth : Section 2(57) of the Companies Act, defines the term “net worth” as the aggregate value of the paid up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write back of depreciation and amalgamation.
Cash Losses : The figure of profit/loss shown by the profit and loss account is adjusted for the effects of transactions of a non-cash nature such as depreciation, amortization, deferred tax expenses, etc.(The figure of cash loss of the company for the financial year and the immediately preceding financial year should also be adjusted for the effect of qualifications to the extent they can be quantified.)

59. Clause 3(ix) : Repayment of Dues - 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 [Paragraph 3 (ix)]
Reporting Requirement :
whether the company has defaulted in repayment of dues to a financial institution or bank or to debenture holders; and
the period and amount of all defaults existing at the balance sheet date irrespective of when those defaults have occurred.
Special Considerations :
Submission of application for rescheduling / restructuring does not imply that no default has occurred. However, if the application for rescheduling of loan has been approved by the concerned financial institution or bank, the auditor shall state the fact of rescheduling of loan.
Following is an example of negative reporting under the clause:
“The company has defaulted in repayment of dues to debenture holders. Debentures amounting to Rs.50,00,000/- became due for redemption on 30th May 20X3 which were redeemed by the company on 15th March 20X4.”

60. Clause 3(x) : Guarantees Given - 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 the company. [Paragraph 3 (x)]
Reporting Requirement :
The clause requires the auditor to determine whether the company has given any guarantee for loans taken by others from bank or financial institutions and if yes, whether the terms and conditions of the guarantee are prejudicial to the interest of the company.
Special Considerations :
The scope of the auditor’s inquiry under this clause does not extend to the guarantees given by the auditee company for loans taken by “others” from sources “other than bank or financial institutions”.
The auditor should examine the register of guarantees, if any, maintained by the company.
The auditor should examine the Memorandum of Association of the company with a view to determine whether the company can give a guarantee.

61. Clause 3(xi) : Term Loans - Whether the term loans were applied for the purpose for which the loans were obtained. [Paragraph 3 (xi)]
Reporting Requirement :
This clause requires the auditor to examine whether term loans were applied for the purpose for which these loans were obtained.
Special Considerations :
A strict interpretation of the clause would mean that the term loan obtained from entities/persons other than banks/financial institutions would also have to be examined by the auditor for the purpose of reporting under the clause.
It may happen that the company might have acquired improved version/model of assets as against the assets for which the loan had been sanctioned. For example, if out of a loan sanctioned for purchase of machinery to be used for manufacture of shoe upper is instead used to purchase a machine, which apart from manufacturing shoe uppers has certain additional manufacturing facilities. In such cases, it should not be construed that the loan has not been applied for the purpose for which it was raised.

62. Reporting Requirement :
Clause 3 (xii): Fraud - 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. [Paragraph 3(xii)]
Reporting Requirement :
This clause requires the auditor to report whether any fraud has been noticed or reported either on the company or by the company during the year. If yes, the auditor is required to state the amount involved and the nature of fraud. The clause does not require the auditor to discover the frauds on the company and by the company.
Special Considerations :
The following is an example of reporting under the clause: “We have been informed that the accountant of the company had misappropriated funds amounting to rupees ten lakhs during the preceding year and the year under audit. Investigations are in progress and the accountant has been dismissed and arrested. The company has withheld his terminal benefits and it is estimated that the amount misappropriated may not exceed the terminal benefits due to the accountant. The company is also adequately covered by fidelity insurance cover.

63. Clause 3 (xii) : Fraud (Contd..)
The auditor should examine the reports of the internal auditor with a view to ascertain whether any fraud has been reported or noticed by the management. The auditor should examine the minutes of the audit committee, if available, to ascertain whether any instance of fraud pertaining to the company has been reported and actions taken thereon.
References :
Standards on Auditing 240 (“The Auditor’s Responsibility to Consider Fraud and Error in an Audit of Financial Statements”): Irrespective of the auditor’s comments under this clause, the auditor is also required to comply with the requirements of Standard on Auditing (SA) 240,
Fraud: The term "fraud" refers to an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.

64. Model Audit Report

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