Page 214 - CA Final PARAM Digital Book.

In the case of LM Pvt. Ltd, it has paid up capital of rupees 50 lacs which is below the
specified limit of rupees 1 crore and turnover is rupees 7.5 crore which is also less than
specified rupees 10 crore. However, there is total borrowing of rupees 1.20 crore which is
more than rupees 1 crore and exceeding the specified limits of rupees 1 crore. Hence CARO,
2020 will be applicable to LM Pvt. Ltd.
➢ CARO Clause (ix) & Audit Procedures
• Clause
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”

• Audit Procedures
The auditor should examine the terms and conditions subject to which the company has
obtained the term loans. The auditor may also examine the proposal for grant of loan made
to the lender. Normally the end use of the funds raised by term loans is mentioned in the
sanction letter or documents containing the terms and conditions of the loan. The auditor
should ascertain the purpose for which term loans were sanctioned. The auditor should also
compare the purpose for which term loans were sanctioned with the actual utilization of
the loans. The auditor should obtain sufficient appropriate audit evidence regarding the
utilization of the amounts raised. If the auditor finds that the funds have not been utilized
for the purpose for which they were obtained, the auditor’s report should state the fact.

Case Discussion on Utilization
➢ In the present case, the term loan obtained by LM Private Ltd. amounting rupees 20 lakh have not
been utilized for erection expenses instead its utilized for renovating its administrative office
building. Further, assuming that erection work has not been done and machinery is not being
installed, disclosure of the same as Capital Stock under construction is in order.

Conclusion on Utilization
➢ Here, the auditor should report the fact in his report that pending utilization of the term loan for
erection expenses, the funds were temporarily used for the purpose other than the purpose for
which the loan was sanctioned as per clause (ix) of Para 3 of CARO, 2020.

QNO Cl 9--Money Raised Temporary Investment Old Course – (M08E , PM17, SM17)
407.000 TITANIUM CNO—CARO.200
LM Ltd. had obtained a Term Loan of ` 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.
Answer Part I -- Relevant Standards & Laws
▪ Clause (ix) of Para 3 of CARO, 2020
Part II -- Requirements of Relevant Standards & Laws
➢ Term Loan Invested in Short Term Deposits:
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”
Part III – Case Discussion
➢ 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.

Part IV – Conclusion
➢ 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 clause (ix) of Para 3 of CARO, 2020.

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