Page 220 - CA Final PARAM Digital Book.

However, they later decided to postpone their resignation to the following year. At the conclusion of the
audit, there was a difference of opinion between two articled assistants (Jack & Jill), who were assigned
to the engagement, concerning disclosing the points mentioned above in the Companies (Auditor's
Report) Order 2020. Jack was of the opinion that the proceeding initiated under Benami Property Act
need not be disclosed since the expert legal team had informed them that the case would not withstand
the law. However, he insisted that the cash loss shall be disclosed along with the amount. Jill was of the
opinion that CARO is not at all applicable to the company, hence nothing needs to be reported. They
both approached the firm's partners (Mr. Y & Mr. S) to resolve their argument. Mr Y supported Jack's
viewpoint & Mr S supported Jill's viewpoint. Now, both partners approached their Senior Partner to get
clarification on the same. As a Senior Partner, kindly clarify the correct disclosure requirement

Answer As per para 1 of Companies (Auditor's Report) Order 2020, CARO 2020 is applicable to every company,
including a foreign company, as defined in clause (42) of section 2 of the Companies Act 2013, except,

(i) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of
1949);
(ii) an insurance company as defined under the Insurance Act,1938 (4 of 1938);
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company as defined under clause (62) of section 2 of the Companies Act and a small
company as defined under clause (85) of section 2 of the Companies Act; and
(v) a private limited company, not being a subsidiary or holding company of a public company, having
a paid up capital and reserves and surplus not more than rupees one crore as on the balance sheet
date and which does not have total borrowings exceeding rupees one crore from any bank or
financial institution at any point of time during the financial year and which does not have a total
revenue as disclosed in Scheduled III to the Companies Act, 2013 (including revenue from
discontinuing operations) exceeding rupees ten crore during the financial year as per the financial
statements

In the given case, though LIU is a private company, and its paid-up capital is less than 1 crore as on the
balance sheet date, it is to be noted that for the period 15th December to 17th December, the total
borrowings of the company had exceeded 1 crore (75 lakh + 30 lakh). The borrowings are less than 1
crore as of the balance sheet date and the authorised capital is 200 lakh, are irrelevant to the current
scenario. Also, the turnover of the company was greater than 40 crore. Hence, CARO 2020 is applicable to
LIU Private Limited.

(i) As per clause (i) (e) of para 3 of CARO 2020, the auditor shall include a statement on: whether any
proceedings have been initiated or pending against the company for holding any benami property
under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and rules made thereunder, if
so, whether the company has appropriately disclosed the details in its financial statements.

In the given situation, a new proceeding was initiated against the company for holding a benami
property worth ` 2.5 crores during the financial year. However, the company's legal team had
advised that the case would not withstand the law and would be dismissed during the hearing,
which would be held in April of the next financial year.

Therefore, the above observation of a new proceeding initiated against the company for holding a
benami property worth ` 2.5 crores need to be disclosed as per clause (i) (e) of para 3 of CARO
2020.

(ii) As per clause (xvii) of para 3 of CARO 2020, the auditor shall include a statement on whether the
company has incurred cash losses in the financial year and in the immediately preceding financial
year, if so, state the amount of cash losses.

In the given situation, the company incurred a cash loss of ` 39 lakh during the financial year.
Hence, a cash loss of ` 39 lakh during the financial year need to be reported as per clause (xvii) of
para 3 of CARO 2020

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