Page 213 - CA Final PARAM Digital Book.

QNO Cl 9--Money Raised Miss-Applied (Loan for R&D) Old Course – (N05E, M12M, N12R, N12E ,M16R,
406.000 TITANIUM CNO—CARO.200 SM17, PM17, N17M, M18M, N18M, SM21)
Under CARO, 2020, as a statutory auditor, how would you report on the following:
A Term Loan was obtained from a bank for ` 80 lakh for acquiring R&D equipment, out of which ` 15 lakh
was used to buy a car for use of the concerned director who was overlooking the R&D activities.
OR
A term loan was obtained from a bank for ` 80 lakhs for acquiring R&D equipment, out of which ` 15 lakh
was used to buy a car for use of the concerned director who was looking at the R&D activities. As a
statutory auditor, how would you report under CARO 2020?
Answer Part I -- Relevant Standards & Laws
▪ Clause (ix) of Para 3 of CARO, 2020
Part II -- Requirements of Relevant Standards & Laws
➢ Clause (ix) of Para 3 of CARO, 2020

According to clause (ix) of Para 3 of CARO, 2020, the auditor is required to report “whether term
loans were applied for the purpose for which the loans were obtained; if not, the amount of loan
so diverted and the purpose for which it is used may be reported”

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.

Part III – Case Discussion
➢ In the instant case, term loan taken for the purpose of R&D equipment has been utilized for the
purchase of car for the use of the director who was involved in the R&D activities.
Part IV – Conclusion
➢ Car though used by R&D Director does not fall within the meaning of R&D equipment. The auditor
is required to state the fact in his report as per Paragraph 3 clause (ix) of the CARO 2020, that out
of the term loan taken for R&D equipment, ` 15 lakh was not utilised for the purpose of acquiring
R&D equipment.

QNO Cl 9--Money Raised Miss-applied (Loan for P&M) Old Course – (N18E)
406.010 TITANIUM CNO—CARO.200
During the financial year ended on 31/03/2018, LM Private Limited had borrowed from a Nationalized
Bank, a term loan of Rs 120 lakhs consisting of Rs 100 lakhs for purchase of machinery for the new plant
and Rs 20 lakhs for erection expenses. As on the date of 31st March 2018, the total of capital and free
reserves of the Company was Rs 50 lakhs and turnover for the year 2017-18 was Rs 750 lakhs. The Bank
paid Rs 100 lakhs to the vendor of the Company for the supply of machinery on 31/12/2017. The

machinery had reached the yard of the Company. On 28/02/2018, the Company had drawn the balance
of loan viz. Rs 20 lakhs to the credit of its current account maintained with the Bank and utilized the full
amount for renovating its administrative office building. The machinery had been kept as capital stock
under construction. Comment as to reporting issues, if any, that the Auditor should be concerned with
for the financial year ended on 31/03/2018, in this respect.

Answer ➢ Applicability of CARO, 2020 and Utilization of Term Loan:

• Exemptions from CARO for private companies
• CARO ,2020 specifically exempts a private limited company,
• not being a subsidiary company of a public company,
• having a paid-up capital, reserves & surplus not more than rupees one crore as on
balance sheet date and
• which does not have total borrowing exceeding rupees one crore from any bank or
financial institution at any point of time during the year and
• which does not have a total revenue as disclosed in Schedule III to the companies Act
2013 exceeding Rs 10 crore during the financial year as per financial statements.

• Case Discussion & Conclusion on Exemption

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