CARO 2020: Clauses on Assets, Inventory, Loans and Investments

Understand CARO 2020: Clauses on Assets, Inventory, Loans and Investments

Key rules to remember

Clause 3(i)(a)

Proper records: PPE (full particulars, quantitative details, situation); intangibles (full particulars)

Reported separately: (A) for PPE and (B) for intangible assets.

Clause 3(i)(b)

PPE physically verified by management at reasonable intervals; material discrepancies properly dealt with in books

Physical verification of PPE is by management. The auditor reports whether it was done and how discrepancies were treated.

Clause 3(i)(c)

Title deeds of all immovable properties held in company's name; if not, give details in prescribed format

Excludes properties where the company is lessee and lease agreements are duly executed in its favour. Format covers description, gross carrying value, name held in, whether promoter/director/relative/employee, period held, reason (and whether in dispute).

Clause 3(i)(d)

Revaluation of PPE (including Right of Use assets) or intangibles: based on Registered Valuer? Specify change if 10% or more in aggregate of net carrying value of each class

The 10% test is applied class by class, on net carrying value.

Clause 3(i)(e)

Benami property proceedings initiated or pending under the Benami Transactions (Prohibition) Act, 1988; disclosure in financial statements

Report whether details are appropriately disclosed.

Clause 3(ii)(a)

Inventory verified by management at reasonable intervals; coverage and procedure appropriate in auditor's opinion; discrepancies of 10% or more in aggregate for each class of inventory properly dealt with

The 10% test is for each class of inventory.

Clause 3(ii)(b)

Working capital limits sanctioned above ₹5 crore in aggregate at any point in the year, on security of current assets: do quarterly returns or statements agree with books of account?

Applies to limits from banks or financial institutions. If they do not agree, give details.

Clause 3(iii)

Investments made, guarantees or security provided, loans or advances in the nature of loans granted to companies, firms, LLPs or other parties: report sub-clauses (a) to (f)

Sub-clauses (a) and (e) are not applicable to companies whose principal business is to give loans.

Clause 3(iii) details

(a) amounts during year and outstanding, to subsidiaries/JVs/associates and to others; (b) not prejudicial to company's interest; (c) repayment schedule stipulated and regular; (d) overdue more than ninety days and recovery steps; (e) renewals or fresh loans to settle overdues; (f) loans repayable on demand or with no terms

Under (f), give aggregate amount, percentage to total loans granted, and amount granted to Promoters and related parties as defined in section 2(76) of the Companies Act, 2013.

Clause 3(iv)

Loans, investments, guarantees and security: sections 185 and 186 complied with? If not, give details

Short clause, but a qualification here needs the details of the breach.

Clause 3(v)

Deposits accepted or deemed deposits: RBI directives and sections 73 to 76 or other relevant provisions and rules complied with? If not, state nature of contraventions; if an order has been passed by Company Law Board, NCLT, RBI, a court or tribunal, has it been complied with?

Applies where applicable.

How to solve CARO 2020: Clauses on Assets, Inventory, Loans and Investments questions

1. 1Identify the clause from the facts: assets, inventory, working capital limits, loans or investments, sections 185 and 186, or deposits.
2. 2Write the clause's question in your own words as a one-line opening.
3. 3List the sub-clauses that apply, such as 3(i)(a) to (e) or 3(iii)(a) to (f).
4. 4Test each fact against the threshold: 10% for revaluation change or inventory discrepancy, ₹5 crore for working capital limits, ninety days for overdue loans.
5. 5Decide whether the answer is clean or an exception. For an exception, state the details the clause asks for.
6. 6Check for exclusions, such as leased property in 3(i)(c) and loan companies in 3(iii)(a) and (e).
7. 7Conclude with the reporting outcome in a sentence, naming the clause number.

Quickest way: Clause, threshold, details

Common mistakes in CARO 2020: Clauses on Assets, Inventory, Loans and Investments

• Saying the auditor physically verifies PPE or inventory under clause 3(i)(b) or 3(ii)(a).

  Students mix the audit procedure of attending stock-taking with the reporting question.

  Fix: The clause asks whether verification was done by management. For inventory, the auditor also gives an opinion on whether coverage and procedure are appropriate.

• Applying the 10% inventory discrepancy test to total inventory.

  Students think one overall figure is enough.

  Fix: The text says discrepancies of 10% or more in the aggregate for each class of inventory. Test class by class.

• Treating all lease properties as needing title deed reporting.

  Students forget the exclusion in clause 3(i)(c).

  Fix: Properties where the company is lessee and lease agreements are duly executed in its favour are excluded.

• Applying the ₹5 crore working capital test to each bank separately or to any type of loan.

  The wording on aggregate limits is missed.

  Fix: The test is aggregate limits sanctioned at any point in the year from banks or financial institutions on security of current assets. Then check that quarterly returns agree with the books.

• Reporting clause 3(iii)(a) and (e) for a company whose principal business is lending.

  Students ignore the bracketed note.

  Fix: Those two sub-clauses are not applicable to companies whose principal business is to give loans.

• Confusing clause 3(iv) with 3(iii).

  Both deal with loans and investments.

  Fix: Clause 3(iii) asks for amounts and terms. Clause 3(iv) asks only whether sections 185 and 186 were complied with, and if not, the details.

Worked examples