Follow Us:


PART 1 – CLAUSES 3(i) to 3(iii)

{As empowered to the Central Govt. under Section 143(11) of Companies Act, 2013 with the consultation “National Financial Reporting Authority” (NFAR)}

When I started my career as ‘Practicing Chartered Accountant’ then reporting under Companies (Auditor’s Report) Order, 1988 was applicable then I saw many changes and versions like CARO 2003, CARO 2015, CARO 2016 and now currently “Companies (Auditor’s Report) Order, 2020” which was supposed to implement for the financials started with effect from 1-4-2019 but thereafter dates were defer for it’s implementation now it is to be reported along with Financials started from 1st April, 2021 i.e. F.Y. 2021-21 as per the MCA  Notification No. S.O. 4588(E) – Dated: 17/12/2020.

What exactly encouraged me to write this article, in my whole carrier of 27 years of practice the way of reporting clause by clause of the order by “Reporting Authorities” is somewhere loosen it’s real essence of including this Order as a very essential part of “Auditors Report”. It is very much to be excepted by us as CA fraternity that whenever some thing is co-relate with the Size of Company then it has some message from Government to the reporting authorities to emphasis on certain matters that may be financial or related to the health of company which ultimately affects the Investors, Creditors, Bankers etc. who are the real users of Audited Accounts.

There are many articles, books, literature available on technicalities of clauses of Order but I want to UNFOLD those hidden aspects and I want to bring your attention towards the practical aspects of ORDER.


You can read from Order itself by reading para 2 of the said order, only what attracts in NON APPLICABILITY to the certain classes of companies, which is as under:

1. Banking Companies only those as defined u/s 5 (c) of the Banking Regulation Act, 1949

2. Insurance Company

3. A company licensed to operate under section 8 of the Companies Act

4. One Person Company – u/s 2(62) & Small Company – u/s 2(85)

5. A Private Company on which this Order shall be applicable if,

a. It is a subsidiary or Holding company of any Public company

b. It has Paid Up Capital + Reserves is exceeding 1 crore on balance sheet date

c. Total borrowings from any Financial Institution or Bank at any point of time is exceeded Rs. 1 crore

d. Total Turnover is more than Rs. 10 crores as Disclosed in Schedule III to the Act (including discounted perations).


** It is worthwhile to note here if as per your accounting practice you are showing GST included in Revenue and then putting it as expense at left hand side then as per Schedule III it will be count as Turnover for Order or some time there is revenue share model and whole revenue is shown at Income Side and sharing of revenue shown at expense side then again Revenue will be count as shown in Schedule III, as a crux whatever you show revenue in Schedule III that will be responsible for counting as applicability of Order.



Here I want to Unfold those aspects of checking, confirmation, documentation etc which are very much required before giving qualified or un-qualified report under CARO, my point by point methods are as under:

(First two clauses of Order are explaining to it’s applicability & where to put this report paragraphically)

Clause 3(i)(a)(A)

Is company maintaining PROPER records of “Property, Plant & Equipment” (Tangible/Fixed Assets) – remember Schedule III format has been changed for Balance Sheet where “Fixed Assets” word has been replaced by – “Property, Plant & Equipment”.


It includes the following details related to Tangible Assets as under:

a. Date of Purchase of Assets

b. Name & Address/Details of Supplier (including VAT/GST Number)

c. Name of item purchased

d. Make & Model of Item (if applicable)

e. Quantity

f. Rate

g. Value

h. Additional cost of installation, freight, packaging, fixing cost etc if any

i. Gross Cost of Asset

j. Date of put to use

k. Year wise Depreciation and w.d.v as per the rates of Companies Act applicable from time to time

l. Serial Number of Asset

m. Location of Asset – Full address along with floor wise room wise etc by which mean assets can be easily traced by any person.

n. Year wise comment on condition of asset – whether using/useful/damaged etc so that Impairment Clause can be applied.


AUTHOR COMMENT: All above details need to be verified by the Auditor before saying in general that Company is maintaining Proper Fixed Assets records. If not satisfied and not getting these details since inception of the company then it should be properly disclosed in his report.

Clause 3(i)(a)(B)

Similar details are required for INTANGIBLE ASSETS also.

Clause 3(i)(b): This clause wants to know about Physical Verification (PV) of Fixed Assets

a. Have been Physically Verified

b. At reasonable Intervals

c. Any material discrepancy was noticed

d. If discrepancy found and have been dealt accordingly


First question is PV done – Auditor has to check evidences of PV done at year end and during the year- Proper list supported with adequate signatures or passwords if soft copy maintained and matched with accounts records. Is items conditions checked is everything is at equal value of w.d.v. as mentioned in PV chart.

Then what is Reasonable Interval -this is very important to understand what is reasonable interval – it depends on nature of Company, location, nature of work, natural place, movement of assets (from office to office, if any) Auditor has to comment on frequency is in his opinion OK or it needs improvement as per the responsible factors of business.

Material Discrepancy – If damages or theft or lost asset is material it may be even in value or it’s uses i.e. there may be a important part of machinery theft or damaged by which whole machinery or plant becomes not usable by which production suffered then it is material so Auditor has to report on it. Wherever carelessness of management appears it should be reported with proper language for which Auditor has to go in depth.

Clause 3(i)(c): Title Deeds in name of Company of all Immovable Assets

This is very important and difficult clause of Order, here a table given which actually wants to know is property held in promoters or directors name or not, you can check the table.

AUTHOR COMMENT: Title deeds of all Immovable Properties in the name of Company or not is looking a very difficult to ascertain apparently by going through with the records provided by the client.

As you all know there is a chain of registrations of property from one person to other and even several past owners are possible of a single property. Therefore, in my opinion Auditor should obtain certificate through some experts of this field who can certify after verifying records from relevant Registrars, Khasra Khatauni, Patwari records as the land may be situated in rural areas or even at mountain areas specially Power Producer Plants. Auditors should report only on it’s own assessment, if he is satisfied that the produced records are proper and adequate and if any doubt arises then take help of Experts on the cost of company as well as a proper “Management Representation” as well “Certificate” should be obtained well before commenting on this clause otherwise he should issue a Disclaimer with Valid Reasons and put his non-competence to comment on this clause with valid reasons or along with some riders of making non favourable opinion.

Clause 3(i)(d):- Whether the property is re-valued:

Here three things to report:

a. Whether the Company has revalued it’s Property, Plant & Equipment (Including Right To Use, now it’s taxation has been merged with GST).

b. If, Re-valued then is it by “Certified Valuer”

c. If answer of (a) above is affirmative then is variation in value of valuation increased or decreased by 10% of it’s carrying cost as at Balance Sheet date (that is opening + additions) of each class of Property, Plant & Equipment or intangible assets then specify the amount of change, if any- no change no report. (For each class you may refer Depreciation Schedule of Companies Act)


(a) For above clause “a” – Naturally management will inform for the same and also data will support their information but most important – “Right To Use” suppose owners’ himself right on property has lost in some dispute and company is using that asset then consequently right of company to use that asset will also lost – therefore in case of Assets using under right to use clause that has to be get certified by the “Supplier of Rights” otherwise disclaim the clause reporting.

(b) For above clause “b” Whether the Valuer is certified- ask to management to produce before you Certificate number and the Certifying Body details so that you can verify online or by any other means the “Valuer” is genuine and his certificate is effective on the date of valuation as well he has certified only those Property etc for which he is authorised to certify as per his certificate.

(c) Here have to specify if variation is more than 10% of its carrying cost – here only one thing important to note – ii is not necessary that it is related to old Property only it is also possible in case of new Property purchased in current year – If due to any reason management got valuation of property that has to report if 10% clause is satisfied.

Clause 3(i)(e):- Any proceedings have been initiated or are pending against the company for holding any benami property; The company has appropriately disclosed the details in its financial statements.


After reading the language of clause it is imposing duty on you whether any proceedings have been initiated or pending against the company the Property shown in books is “Benami” or not because if it has not been disclosed by company in it’s financials then you have to report in CARO.

Here it is to note that 1988 Benami Transaction referred in CARO which is now – “Benami Transaction (Prohibition) Amendment Act, 2016”. As an Auditor you have to rely on Management Representation whether any proceeding is initiated or not or pending etc.

For better understanding we can refer para 45(i) of ICAI Guidance Note on the same – which says – For the purpose of ascertaining whether any proceedings are initiated or are pending, the auditor should make necessary inquiries from the management including obtaining a management representation letter. The auditor may also review the legal expenses account to ascertain whether any expenses have been incurred by the company in respect of a proceeding under the aforesaid Act. The auditor should also review the minutes of meetings of the Board of Directors, Audit Committee, Risk Management Committee and other secretarial records to verify whether any reference to proceedings against the company under the aforesaid Act has been made.

There is no fixed formula that can uniformly be applied across the country to determine or identify a transaction as a Benami Property. Although there are certain guidelines to identify a transaction as a Benami property. Following are the ways to identify a transaction as a Benami Property:

  • Identify the source of money, which is used for the purchase of the property
  • The nature and possession of the property after the purchase
  • The custody of the property title deeds after the sale
  • The person owned many properties, but does not have any source of income
  • The position of the parties and relationship if any between the claimant and the alleged benamidar
  •  The conduct of the parties concerned with property dealing after the sale
  •  The motive of the property buyer
  • But again for an Auditors in limited time when no such a definite portal is available where by property address you can know the Property is Benami or not so enquiry for actions taken by department is difficult.

Clause 3(ii)(a) & (b):

(a) PV of Inventory

(b) Is company got Working Capital loan during the current year

This clause is self-explanatory and nothing to unfold in this para except Clauses (a) & (b) are corelated because if you find any variation of 10% in value of Inventory as compared to Book & PV then whether the same has been dealt with QIS with Banker who has sanction the limits, because a considerable part of limits is based on Inventory. You as an Auditor has to compare books (after giving effect of variation) with the information given to bank and if bankers have not informed properly then report needs to be qualified.

Clause 3(iii)- Related to Investment, provided guarantee, granted loan or advance secured or unsecured to company, firm, LLP or any other parties by Company:

Clause 3(iii)(a)A & B is informative and simply figures to be given in two parts to Subsidiaries , joint ventures and associates and to others.

Clause 3(iii)(b) – the terms and conditions of the grant of all loans and advances or guarantee are not prejudicial to the company’s interest


Here it is pertinent to note that in isolation you can not read the Terms & Conditions of Loans etc and compare with market trend. Important to compare with Financial Conditions of the Company for example during Covid 19 many companies’ financial condition was deteriorated and may loan provider in good condition but borrower may not be or he may not be able to adhere with the conditions of loans etc then it is better to comment by Auditor on actual facts and he has to also consider the financial condition of borrower too.

Clause 3(iii)(c) & (d) – are only required information of figures so being Auditor simply give figures as required.

Clause 3(iii)(e) – It is required to inform any overdue of existing loans settled or repaid by giving fresh loan to the same party, it can be find out by books of accounts and nothing to be reported special in this clause.

Clause 3(iii)(f) –

This is very important clause where it has to be ascertain is any loan given eighter repayable on demand or without specifying any terms or period of loan if so specify the aggregate amount and percentage etc.

It is pertinent to note that loan repayable on demand can only be given by Banking Companies so it is violation of settled law and principle, therefore read carefully all documents and papers rather depending on the Management Representation etc.

Contd…. In next part of the Article


Author Bio


My Published Posts

Balance Sheet Signing Date & Board Meeting – An Ethical Review! Year End Closing FY 2023-24: Action Points for GST, Companies Act & Labor Laws Important Action Points for Year Ending Closing 2023-2024 Budget 2024: Decoding GST changes – Input Service Distribution ISD Salary Structure & Income Tax – A Useful Article for HR & IT Professionals View More Published Posts

Join Taxguru’s Network for Latest updates on Income Tax, GST, Company Law, Corporate Laws and other related subjects.

One Comment

  1. LS RATHOD says:

    This is to inform you that the Ministry of Corporate Affairs vide Order dated 17.12.2020 has extended the applicability date of Companies (Auditor’s Report) Order, 2020 for one more year, i.e. for the financial years commencing on or after the 1st April, 2021.

    Accordingly, CARO, 2020 will be applicable from FY 2021-22 and onwards.

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Post by Date
July 2024