The Art of Decision-Making: Navigating Complexity and Uncertainty
Schedule 3 & CARO.pptx
1. Key Challenges -
Amendments in
Schedule III And
CARO 2020
under Companies Act, 2013
R Sogani & Associates
Chartered Accountants 7th May, 2022
Bharat Sonkhiya
2. Roadmap for updates
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Before 1956:
No Formalized Concept of
presentation of Financial
Statements
2011: Revised Schedule VI of Companies Act, 1956:
Vertical format mandated for standardization
Concept of Non-Current Assets and Liabilities were
introduced
Intangible assets to be separately disclosed
(Bifurcation of Asset & Liability on Liquidity
Pattern)
2015-16: Ind AS introduction:
Part II of Schedule III was
introduced providing
different presentation for
companies on which Ind AS
was made applicable
Schedule VI of Companies Act
1956:
Formalized Concept of
presentation of Financial
Statements introduced
Companies to choose between
vertical or horizontal reporting
Schedule III of
Companies Act 2013:
No significant
changes
Depreciation concept
as per useful life was
introduced
2021: Amendment in
Schedule III :
More Transparency and
disclosure norms introduced
(Extensive Disclosure for
decision making)
3. Overview of Updates- Schedule III And CARO 2020
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Ageing schedule of Trade Payables to be disclosed.
Ageing schedule of Trade Receivables to be disclosed.
Reconciliation note of quarterly returns of current assets submitted with banks
with financial statements.
Ratio Analysis
Disclosure of utilization of Borrowings not used for same specific purpose for
which it was obtained.
Rounding off of figures reported in Financial Statements is mandatory
Details of transactions with struck off companies.
Disclosure of Benami Properties, wilful defaulters and undisclosed income under
Income Tax Act.
Title deeds of Immovable Properties not held in the name of company.
CSR Disclosure
4. Disclosure of Loans granted to promoters, directors, KMPs and the
related parties
Disclosure of utilization of borrowed funds and share premium
CWIP Ageing
Disclosure of Shareholding of Promoters
Charges summary
Change of heads: "Property, Plant and Equipment and Intangible Assets“
from “Property, Plant and Equipment”
Current maturities of Long Term Borrowings to be disclosed under short
term borrowings from other current liabilities
Security deposits re-grouped under other non current assets from long
term loans and advances
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Overview of Updates- Schedule III And CARO 2020 Contd.
5. Impact of Amendments – Schedule III And CARO
Drastic Amendments & Far- reaching Impact
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• Increased level of transparency to establish higher level of Corporate
Governance.
• Preparation of Comparative figures, i.e. related to the year ended 31
March, 2021
• Enhanced Disclosures to be given.
• Assess, review and make changes to existing internal control systems
and processes.
• Enhanced Auditor’s reporting in addition to CARO 2020 (Audit Report).
• Aligned with additional reporting like reporting with banks, CMA data,
CARO, Companies Act and other laws applicable from time to time.
• New IT infrastructure will be required to meet the new disclosure
requirements.
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• Increased involvement of management during finalization of financial
statements due to the sensitive nature of information asked for.
• Basis of ROC scrutiny & Income Tax scrutiny.
• Benefit to owners- How management is running the business.
• Increased Responsibility of Management
• Need to strengthen Accounts Department of Company for ensuring
correctness.
• Inquiry/Inspection under Companies Act, 2013 by ROC.
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Impact of Amendments- Schedule III And CARO Contd.
7. Shift in Auditor’s Responsibilities upon
Management
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1. Mandatory preparation of Financial Statements in accordance with
amended Schedule III requirements by the management.
2. Need more accuracy of data. Burden of reporting is being shifted on
management through additional disclosure requirements.
3. Information disclosed as per amendments to Schedule III will be used by
all the Government Departments through integration. Hence, increased
involvement of owners is required during finalization of financials.
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9. OVERVIEW OF CARO 2020
▸ I(A). For Safeguarding Interest of Banks on Loans taken by Companies –
Ensuring Financial Discipline
▹ Utilization of Term Loans for Stipulated Purpose and diversions, if any
▹ Utilization of Funds taken on Short Term Basis not used for Long Term
Purposes
▹ If Sanctioned Working Capital > 5 crores, reporting about quarterly returns
submitted to bank and details to be provided in case of mismatch with
Books of Account.
▹ Reporting of Default in Repayment of Interest and Principal to any lender
▹ Reporting about declared wilful defaulters by Bank or FI or other lender.
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10. OVERVIEW OF CARO 2020
▸ I(B). For Safeguarding Interest of Banks and Other Parties on Loans taken by
Companies
▹ Reporting about Companies capacity to pay its Financial Liabilities in 12
months
▹ Reporting about Cash Losses of Companies
▹ Loan taken to meet obligations of Subsidiaries, Associates and Joint Ventures
▹ Loans taken by Company on pledge of securities held in its Subsidiaries,
Joint Ventures and Associate Companies.
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11. OVERVIEW OF CARO 2020
▸ II. Effective Use of Equity Investment / Private Equity Funds Raised for Business
Purpose –
▹ Whether the moneys have been applied for the purposes they were raised.
▹ Whether the moneys have been applied for the purposes they were raised.
▹ Also, Compliance with relevant provisions of Companies Act, i.e., Section 42
and 62.
▸ III. Effective Control over Public Deposits -
▹ Any deposits other than Directors/Director Relatives in case of Private
Company and Directors in case of Public Company.
▹ In case of Private Company, Deposits from shareholders not more than Net
Worth of the Company
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12. OVERVIEW OF CARO 2020
▹ Whether Declaration has been taken from Directors and relative of Directors
– Not Out of Borrowed Funds.’
▹ Advance from Customer exceeding 365 days.
▹ Penal Consequence – Penalties up to Rs. 10 crore and Non Compoundable
Prosecution.
▸ Control Over Diversion of Funds –
▹ Loans and Advances given to Subsidiaries, Associates, Joint Ventures and
others – Agreement, Regularity in repayment or not, Overdue, Interest Rate,
Repayment Terms, Renewal of Loan Not Prejudicial to the Interest of the
Company
▹ Percentage of Total Loans Granted to Promoters and Related Parties without
stipulating Terms and Conditions
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13. OVERVIEW OF CARO 2020
▹ Compliance with Section 185 of Companies Act – Restriction on Loans and
Advances to Directors and Related Parties.
▹ Compliance with Section 186 of Companies Act – Restriction on Loans to
Related and Other Parties within limit and permission of Boards and
Members along with stipulated rate of interest.
▸ Control Over Assets of the Company –
▹ Property, Plant and Equipment
■ Records of PPE in the prescribed format - FAR
■ Physical verification of PPE
■ Title deeds of Immovable Properties in name of Company only
■ Revaluation of PPE in excess of 10% Proceedings initiated under
Benami Act.
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14. OVERVIEW OF CARO 2020
▹ Intangible Assets
■ Records of full particulars of Intangible Assets.
▹ Inventory
■ Physical verification of inventory and Discrepancies observed in
excess of 10% in each class of inventory;
■ To give opinion about coverage and procedure of physical
verification by management.
▸ Control over Related Party Transactions
▹ Approval or any Subsequent modification of transactions of the company
with related parties
▹ Transaction at Arm’s Length Price.
▹ Requirement of Board Resolution / Member’s Resolution Section.
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15. OVERVIEW OF CARO 2020
▸ Ensuring Other Compliances
▹ Undisputed Statutory Dues
▹ Disputed Statutory Dues
▹ Recording of Unrecorded Surrendered Income under Income Tax Settlement
▹ Maintenance of Cost Records
▹ Resignation of Auditors
▹ Unspent CSR
▹ Non Cash Transactions.
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16. FR
About CARO 2020
C o m p a n i e s ( A u d i t o r ’ s R e p o r t ) O r d e r, 2 0 2 0 S t r i n g e n t P r o
v i s i o n s I n t r o d u c e d
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o CARO 2020 has been notified by the Ministry of Corporate Affairs
as on 25th February, 2020.
o It is applicable w.e.f. 1st April 2019.
o Its applicability is as of the applicability criteria provided in CARO
2016.
o With this, MCA has provided 21 Clauses CARO Report (divided
into 51 sub-clauses) out of which
17 Clauses have been Substantially Modified as Compared to
Previous Year.
o With this Reporting Order, MCA has formulated a stringent
reporting requirement by Auditors to ensure Qualitative Audited
Financial Statements.
18. Stakeholders • Tax Authorities/ Government
• Employees
• Investors
• Public/Society
CARO 2020
Why Need of CARO-2020?
Corporate Failures &Loss to Stakeholders
• Shareholders/Members
•
•
•
•
Creditors
Banks/Other Lenders
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19. FR
Need of Introspection !!
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o Continuous Corporate Failures & Scams in which Auditors found guilty
of misreporting/no-reporting;
o Report of Committee of Experts dated 25th October 2018 in
compliance of Judgement of Supreme Court on S. Sukumar v/s ICAI
23rd February 2018;
o Audit Quality Review Report by NFRA dated 12th December 2019 –
Audit by Deloitte in IL&FS;
o Rejection of petition of Deloitte by NCLAT regarding relaxation from
penal consequences dated 4th March 2020.
20. FR
Need of Introspection !!
o FRRB Compilation of continuous Mis-reporting & No-reporting
by Auditors;
o MCA Consultation Paper dated 6th February 2020 to ensure
Independence of Auditors;
o Code of Ethics 2019 to ensure Independence of Auditors
applicable w.e.f. 1st April 2020.
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21. FR
Intentional/Gross Negligence considered No Reporting /
Misreporting by FRRB
( G e n e r a l I n s t a n c e s o f M i s r e p o r t i n g / N o R e p o r t i n g i n p r e v i o u s C A R O r e p o r t s a s
o b s e r v e d b y F R R B )
Additional Words added to Report Compliance Status, i.e., “Reasonable
Records”, “Generally Maintained”, etc. not presenting a clear view of Compliances
In factual reporting, it was mentioned “As informed to us” – Audit Procedures not followed for verification,
Professional Judgement not applied
In various Clauses Complete reporting not done – Some Contents not reported
Incorrect Reporting – Mismatch from Financial Statements
Incorrect reference of law, authority and facts
Requirements of Law not correctly understood
Prescribed Format in CARO not followed while reporting
Non-Compliance under law – Not reported as undisputed dues
Clause of Previous CARO reports reported in Current CARO Report.
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22. Directors Found Guilty for Non-Compliances
CARO 2020
Company Default
Penalty on
Directors/Promoters
Case
dealt
under
Vasta Corporation
Ltd.
Failure to distribute dividend within 30 days of declaration; Default in transferring fund to IEPF;
Mis-statement in prospectus;
Inviting deposits without issuing advertisement; Altering memorandum without SR
Multiple penalties on the director
under various sections of
Companies Act.
SFIO
ABG
Shipyard
Failure to disclose tax settlement order by Income tax department to Stock Exchange;
Publishing incorrect and mis-stated financial results;
Audit committee and board failed to perform their roles diligently.
Penalty imposed Rs 8,00,000 on
three independent directors
NCLT/SEBI
Usha India Ltd
Siphoning off borrowed funds out of group companies; Diversion of loans from financial
institution via 20 group companies;
Wrongfully using loans to buy real estate.
Multiple penalties on the director
under various sections of
companies act. SFIO/SEBI
63 Moons
Technologi es
(India) Ltd
Failure to seek prior approval for change of name from stock exchanges. Changed the name after coming
under the scanner regarding fraud of Rs 5600 crore in its subsidiary NSEL.
Rs 1,00,000 on the company
SEBI
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23. Directors Found Guilty for Non-Compliances
CARO 2020
Company Default
Penalty on
directors/promoters
Case dealt under
Satyam Computer
servicesltd
No reporting of fake invoicing and bills; Auditing standards
neglected;
Financial statements did not reflect the actual position;
Balances of accounts grossly inflated to show the company in good health
Imprisonment of 7 yrs and penalty of
Rs 5 Cr on Director SFIO
LakhaniIndia Ltd Inadequate disclosures regarding change in promoter’s shareholding Rs. 4,00,000 onthe company
SEBI
JVG Group
(4companies)
Money raised by NBFC Diverted to Sister concerns Raising of deposits exceeding the entitled limit
Financial statements did not reflect the actual position
3 Directors penalizedby a fine of Rs.
10,000 each SFIO
National Spot Exchange
Ltd.
Inadequate internal control system and no reporting by the auditors;
No verification of physical movement of stock at the
designated warehouses leading to overvaluation of commodities in the exchange.
Attachment of properties worth Rs
7063 crores, Penalty Rs 1.66 Cr
under PMLA SFIO/FIU
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24. Auditors Found Guilty for Non-Compliances
Company
Relevant clause of
CARO 2020
Case
dealt
under Auditor’s default
National Spot
Exchange Ltd.
(ii), (xiv) SFIO
Inadequate internal control system and no reporting by the auditors;
No verification of physical movement of stock at
the
designated warehouses leading to overvaluation
of commodities in the exchange.
JVG Group
(v), (iv), (ix) SFIO
Money raised by NBFC Diverted to Sister concerns; Raising of deposits exceeding the entitled
limit; Financial statements did not reflect the actual position
ABG Shipyard (viii) SFIO/
SEBI
Failure to disclose tax settlement order by Income tax department in the financial statements and to stock
exchange; Publishing incorrect and mis-stated financial results.
CARO 2020
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25. Auditors Found Guilty for Non-Compliances
Company
Relevant clause
of CARO 2020
Case
dealt
under
Auditor’s default
Usha India Ltd (iv)(ix)
SFIO/
SEBI
Siphoning off borrowed funds out of group companies Fudging accounts;
Diversion of loans from financial institution via 20 group companies.
Satyam Computer
Services Ltd (xix), (xvii) SFIO
No reporting of fake invoicing and bills; Auditing standards
neglected;
Financial statements did not reflect the actual position;
Balances of accounts grossly inflated to show the Company in good health.
Infrastructure leasing
and financial services
(xi) SFIO
Possibility of frauds needed to be reported u/s 143(12) not reported by auditors.
CARO 2020
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26. Need to Take Additional Precautions while conducting
this year CARO 2020 Audit –
CARO 2020
Capacity Building of Firm
Prepare CARO Compliance team in
your office having good
understanding of each and every
clause under CARO
More and more interaction/meeting/
communication directly with Top
Management
Meeting with Top Management by Key
Personnel
Effective Documentation of –
- Communication with Client
- Reply by Client
- Basis of Reporting
- Basis in detail along with acknowledgement by client in case of qualified opinion
- In case of disclaimer of Opinion, specific communication and acknowledgement by client.
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27. Mere Compliances v/s Need of Sustainable Business Model
in Present Scenario –
CARO 2020
Whether need to restructure Existing way of doing Business?
Whether need to Enhance the Level of Corporate Governance with Greater Transparency?
Whether need to review need of borrowed funds requirement and its end use – Financial Discipline ?
Whether need to be 100% Law Compliant?
Whether there is need of safeguarding business assets?
Whether there is need of effective Internal Control System- Blue Book, Standard Operating Procedures, Risk and Control Matrix, IFC
Testing?
Whether there is need of creating Social Impact of our business?
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28. FR
Applicability of CARO-2020
Banking
Company
Insurance
Company
Section 8
Companies
(NPO)
One Person
Company /
Small
Company
Small
Company
Private Companies having -
- Paid up Share Capital and Reserve and Surplus not more than 1 Cr at year end and
- Borrowings from Banks and FIs not more than 1 Cr at any point of time during the year and
- Revenue not exceeding Rs. 10 Cr during the year
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( S i m i l a r a s C A R O 2 0 1 6 )
Exempte d Clas ses of Com pa nies
29. Effective Internal Control Mechanism -
Consideration of Whistle Blower Complaints
received by Company
Consideration of the reports of Internal
Auditors
Reporting of frauds identified by Auditors u/s
143(12)
Compliance with Standards on Auditing and
Other Regulatory Requirements
Effective Internal Audit System (Blue
Book, SOPs, RCM and IFC Testing)
CARO 2020
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30. Clause (xiv)
Regarding Effective Internal Audit System:
CARO 2020
Sub Clause
No. Status Description
(a)
Whether the company has an internal audit
system commensurate with the size and nature of its business;
(b)
Whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor.
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31. Clause (xi)
Regarding Effective Fraud Reporting including Preventive
Measures:
CARO 2020
Sub Clause
No. Status Description
(a)
Whether any Fraud by the Company or any Fraud on
the Company has been noticed during the year;
(b)
Reporting of Frauds identified by Auditors under
section 143(12);
(c)
Comments by Auditors on Whistle Blower Complaints
received by the Company during the year.
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32. Comparative Data
Additional Burden: Previous Year Data needs to be prepared by the company
&
verified by Auditors
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Rounded off figures to be disclosed for previous year as well in the
balance sheet, statement of profit and loss and detailed notes thereof.
Ratio Analysis
Details of transactions with struck off companies.
Loans granted to promoters, directors, KMPs and the related parties.
Trade Payables Ageing
Trade receivables Ageing
CWIP Ageing
Promoter’s Holding
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33. 33
Proactive Role of MCA-
Increased probability of MCA Inspection/ Scrutiny
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Current Affairs:
Recent Headlines:
• MCA seeks information from L&T on alleged Governance Issue between 2003 & 2008.
• MCA begins probe against MVA Leaders- Suspecting fraud by 6 companies under the
Companies Act (Money Laundering Case)
Other Recent News:
• MCA moves NCLT to recover Rs. 2,320 cr siphoned off by Amtek Auto promoters
• MCA issues notices to 272 companies for Non- Compliances with CSR Norms.
• Govt. sanctioned prosecution in 366 cases related to CSR norms violation.
• Public notice by MCA for striking off the companies who have not filed the Form
relating to commencement of business.
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34. Role of Auditor
1. To ensure finalization of Qualitative Audited Financial Statements of the
Company
2. To ensure correctness of information submitted to ensure true and fair
view.
3. To discuss key issues involved with management in compliance with
Standard of Auditing with TCWG.
4. To ensure true and fair view reporting.
5. To evaluate mechanism through which information have been derived
and submitted by the Company.
6. Need management representation at number of places to ensure
correctness of failure
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35. Role of Auditor Contd.
7. Other challenges
a. Extent of verification/checking of information provided by
management.
8. Is there any need of qualification if schedule III not complied with ?
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36. Audit Trail (Postponed: Applicable w.e.f. 01-04-2023)
Need to be enabled in Accounting Software
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An Audit trail (also called audit log) is defined as a step-by-step sequential
record of the documented evidence of financial transactions that allows
tracing of every step of the transaction.
An auditor can trace the financial data of a particular transaction right from
the general ledger to its source document with the help of the audit trail.
Every company which uses accounting software for maintaining its books of
account, shall use only such accounting software which has a feature of:
• Recording audit trail of each and every transaction
• Creating an edit log of each change made in books of account along
with the date when such change were made and,
• Ensuring that the audit trail cannot be disabled.
38. Trade Payables – Disputed v/s Undisputed
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#similar information shall be given where no due date of payment is specified in that case
disclosure shall be from the date of the transaction.
• Unbilled dues shall be disclosed separately
As per the amendment, following ageing schedule shall be given for Trade payables due
for payment:
Particulars
Outstanding for following periods from
due date of payment#
Less
than
1 Year
1-2
years
2-3
years
More
than
3 years
Total
(i) MSME
(ii) Others
(iii) Disputed dues –
MSME
(iv) Disputed dues –
Others
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39. Impact Analysis
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1. Long outstanding payables , for a period exceeding 2 year (depending
upon the industry standards), will be analysed on the following basis:
• Deviation from Industry Norms
• Abnormal Trends
• Divergent Comparitive Trends
It may lead to the following consequences:
• Bogus transactions
• Liquidity of the company
2. The data filled here shall be aligned with MSME-1 form filed by the
company with MCA.
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40. 40
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3. Presentation in Balance Sheet:
• On face of Balance Sheet & Form MSME-1: Dues of Micro & Small
Enterprises
• Ageing schedule: Dues of Micro, Small & Medium Enterprises
4. Ageing will be done in the same format for the Current & Non- Current
Trade Payables, separately.
5. Earlier Ageing was not subject to audit, now detailed ageing will be
disclosed and audited.
6. Disputed Trade Payables will be part of liability or not?
41. 41
MSMED Criteria
• If the payment of Undisputed Dues is not made within 45 days, then
interest can be charged by the MSME vendors under the MSMED Act (@ 3
times the rate prescribed under the RBI Rules) which are not allowable
expenses under the Income Tax Act.
• No agreement with MSME vendors is valid if Payment Period is exceeding
45 days.
Category
Investment in Plant
& Machinery
(Upto)
Turnover
(Upto)
Micro Enterprises 1 crore 5 crores
Small Enterprises 10 crores 50 crores
Medium Enterprises 50 crores 250 crores
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42. Challenges
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1. Can the ageing be derived from the Accounting Software?
2. How to analyze which payment is outstanding- FIFO basis or invoice
basis?
3. Whether disagreement conveyed through E-mail be categorised as a
‘Dispute’?
A.1: The accounting software shall be upgraded to provide ageing reports of
outstanding trade payables, in the required format.
A.2: Practically, ageing is calculated on invoice to payment basis. The
upgraded software can solve this issue easily.
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43. 43
A.3: Schedule III requires spilt of trade payables between disputed and
undisputed. These terms have not been defined in Schedule III. A dispute is a
matter of facts & circumstances of the case; however, dispute means a
disagreement between the two parties demonstrated by some positive
evidence which supports or corroborates the fact of disagreement.
(It also refers to the word ‘Dispute’ as defined under the Insolvency &
Bankruptcy Code, 2016 which is:
‘Dispute’ includes a suit or arbitration proceeding relating to the existence of
the amount of debt, the quality of goods or service or the breach of a
representation or warranty.)
Thus, in the above mentioned case, it will be categorized as a Dispute, as the
E-mail is an evidence of the fact of disagreement.
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Dispute
44. Illustrations
44
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For instance, let’s take a case of Trade Payables where date of transaction is 15th
December 2021
No due date on
invoice
3 months credit
term
Not due
(4 months credit period)
Ageing
bracket
Ageing to be
considered from
15th December
2021 i.e. date of
transaction
Ageing to be
considered from
15th March 2022
This case will be covered in Not
Due if the credit term for the
same is, say 4 months. Hence, it
will become due on 15th April,
2022 and will be considered as
not due as on 31st March 2022.
1. Point of Ageing
45. 45
2. Case indicating Abnormal Trend:
(Figures in Lakhs)
Particulars
Outstanding for following periods from
Total
due date of payment (as on 31.03.22)
Less than 1
year
1-2 years 2-3 years
More than 3
years
(i) MSME 5 15 10 70 100
(ii) Others 100 150 150 1000 1400
1500
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The particular case indicates:
• Abnormal Trend
• Divergent Comparative Trend
• Industry Norms- Deviation
Figures as a % of Total dues
Particulars
Less than 1
year
1-2 years 2-3 years
More than
3 years
Total
P.Y.
(as on 31.03.21)
(i) MSME 0.33 1.00 0.67 4.67 6.67 -
(ii) Others 6.67 10.00 10.00 66.67 93.33 25% of C.Y. total
100.00
47. Trade Receivables – Disputed v/s Undisputed
47
Particulars
Outstanding for following periods from due date of
Payment#
Less than
6 months
6 months -
1 year
1-2
Years
2-3
years
More than
3 years
Total
(i) Undisputed Trade
receivables –
considered good
(ii) Undisputed Trade
Receivables –
considered doubtful
(iii) Disputed Trade
Receivables –
considered good
(iv) Disputed Trade
Receivables –
considered doubtful
# 1. Similar information shall be given where no due date of payment is specified, in
that case disclosure shall be from the date of the transaction
2. Due Date can be agreed upon in writing or verbally.
Unbilled dues shall be disclosed separately
As per the amendment, following ageing schedule shall be given:
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48. Impact Analysis
48
1. Long outstanding receivables , for a period exceeding 2 year (depending
upon the industry standards), will be analysed on the following basis:
• Deviation from Industry Norms
• Abnormal Trends
• Divergent Comparitive Trends
It may lead to the following consequences:
• Bogus transactions
• Recoverability status
2. Ageing will be done in the same format for the Current & Non- Current
Trade Receivables, separately.
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49. Challenges
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1. It will be a time consuming activity and error prone area.
2. How to analyze which payment is outstanding- FIFO basis or invoice
basis?
3. How to classify trade receivables as Disputed?
4. Difference between Dispute & Doubtful for the disclosure purposes.
5. From which date should the ‘Due Date’ be taken, in case no terms are
agreed upon between the parties.
A.1: The accounting software shall be upgraded to provide ageing reports of
outstanding parties.
A.2: Practically, ageing is calculated on invoice to payment basis. The
upgraded software can solve this issue easily.
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50. 50
In some cases, customers specify the invoice against which they are making
payments. In such cases, no other basis should be considered.
A.3: Schedule III requires spilt of trade receivables between disputed and
undisputed. These terms have not been defined in Schedule III.A dispute is a
matter of facts & circumstances of the case; however, dispute means a
disagreement between the two parties demonstrated by some positive
evidence which supports or corroborates the fact of disagreement.
A.4: ‘Dispute’ & ‘Doubtful’, are both considered as independent terminologies
for the disclosure purpose.
A.5: When no terms are agreed upon between the parties, either in written or
verbally, the ‘due date’ shall be calculated from:
• the transaction date, or
• after the normal credit period.
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51. Illustration
51
R Sogani & Associates
Chartered Accountants
For instance, let’s take a case of Trade Receivables where date of transaction is 15th
December 2021
No due date
3 months credit
term
Not due
(4 months credit period)
Ageing
bracket
Ageing to be
considered from
15th December 2021
i.e. date of
transaction
Ageing to be
considered from
15th March 2022
This case will be covered in
Not Due if the credit term for
the same is, say 4 months.
Hence, it will become due on
15th April, 2022 and will be
considered as not due as on
31st March 2022.
1. Point of Ageing
52. 52
2. Case indicating Abnormal Trend:
(Figures in Lakhs)
Particulars
Outstanding for following periods from due date of
Payment (as on 31.03.22)
Total
Less than 6
months
6 months
- 1 year
1- 2 years 2- 3 years
More than
3 years
Trade Receivables 30 50 90 150 670 1000
% of total receivables 3% 5% 9% 15% 67% 100%
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The particular case indicates:
• Abnormal Trend
• Divergent Comparative Trend
• Industry Norms- Deviation
54. Schedule III Reporting
If a company has borrowings from Bank or Financial Institution on security of
current assets then disclose:
a) Whether quarterly returns or statements of current assets filed by the
company with banks or financial institutions are in agreement with the books
of account.
b) If not, summary of reconciliation and reasons of material discrepancies, if
any, to be adequately disclosed.
CARO (Audit Report) Reporting :
▸ Whether during any point of time of the year, the company has been
sanctioned working capital limits in excess of Rs. 5 crores, in aggregate,
from banks or financial institutions on the basis of security of current
assets;
▸ Whether the quarterly returns or statements filed by the company with
such banks or financial institutions are in agreement with the books of
account of the company. If not, give details.
54
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55. 55
Quarterly Returns submitted to Bank
▸ Stock Statements
▸ Trade Receivables Statement
▸ Ageing Analysis of Trade Receivables
▸ Trade Payables Statement
▸ Ageing Analysis of Trade Payables
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56. 56
Reporting on Disagreement of
Returns/Statements
Case 1. If no disagreement found of returns/statements mentioned above
with the books of account
-Then no reporting requirement comes into existence.
Case 2. If returns/statements found in disagreement with the books of
account then following disclosure to be given for the discrepancies found-
Quarter
Name
of
Bank
Particulars
of
securities
Provided
Amount
as per
books of
account
Amount as
reported in
the
quarterly
return
/statement
Amount
of
Difference
Reasons for
material
discrepanci
es.
June
20XX
Bank
X
Finished
Goods
XX XX XX
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57. Challenges
57
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No Stock records maintained.
Stock records not integrated with books.
Submission of Statements/Data to banks on estimated basis.
Stock get drastically changed due to changes in year end audit because of the
following reasons-
a. Deviation found in quantity
b. Old material purchase price has been considered
c. Change in Method of Stock Valuation.
58. Impact Analysis
58
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1. Need for Finalization of quarterly books of account to freeze details of
current assets is required. We suggest Reconciliation of data on monthly
basis.
2. Deviation between records submitted to the Bank and as maintained by the
Company may result into following consequences-
Reduction in Bank Limit(Availment of Lower CC limit).
Income tax Department can consider higher stock any conclude sales
as out of books. Therefore generating additional tax liability.
Other Departments(such as GST) can also consider this deviation.
Physical verification Mechanism can be questioned.
Internal Financial control System will be challenged which is the
responsibility of Director u/s 134.
59. Illustration
59
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Chartered Accountants
Case Scenario 1: XYZ Pvt. Ltd. properly maintains stock records
Quarter
Ending
Statement
Submissi
on Date
Stock
submi
tted to
bank
(A)
Stock as
per
Stock
Records
(B)
Stock
considered
in Audited
FS (C)
Deviation
between
(A) and
(B)
Deviation
between
(A) and
(C)
30.06.2021 20.07.2021 10cr 7cr 3cr
30.09.2021 20.10.2021 11cr 9cr 2cr
31.12.2021 20.01.2022 13cr 10cr 3cr
31.03.2022 20.04.2022 9cr 10cr 7cr 1cr 2cr
60. Illustration
60
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Case Scenario 2: PQR Pvt. Ltd. does not maintain stock records
Quarter
Ending
Statement
Date
Stock
submitted to
bank
Stock as per
Audited Financial
Statements
Deviation
31.03.2022 20.04.2022 9cr 7cr 2cr
In the above two cases,
stock as per statement submitted to bank > stock considered for profit
computation.
This is done in order to:
• Increase Credit Limit
• Reducing profitability, thereby reducing income tax liability
62. ‘Analytical Reporting’
a) Current Ratio,
b) Net Profit ratio,
c) Return on Capital employed,
d) Return on Investment,
e) Return on Equity Ratio,
f) Debt-Equity Ratio,
g) Debt Service Coverage Ratio,
h) Inventory turnover ratio,
i) Trade Receivables turnover ratio,
j) Trade Payables turnover ratio,
k) Net capital turnover ratio,
62
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Liquidity Ratio
Profitability Ratio
Solvency Ratio
Turnover Ratio/
Efficiency Ratio
Following ratios to be disclosed:
63. Required Disclosure
63
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1. Ratios to be calculated twice for the period of applicability (i.e. for F.Y.
2021-22, it is required to be calculated for F.Y. 2020-21 also) in the following
format-
2. Deviation to be identified between C.Y. and P.Y. , if found in excess of
25% reason for the same has to be explained.
3. The company shall explain the items included in numerator and
denominator for computing the above ratios. Any change in numerator
and denominator from previous year need to be explained with reasons.
Ratio Numerator Denominator
Current
Period
Previous
Period
%
Variance
Reason
for
variance
64. 64
Corresponding reporting to CARO 2020
(Audit Report)
On the basis of the financial ratios, ageing and expected dates of realization
of financial assets and payment of financial liabilities, other information
accompanying the financial statements, the auditor’s knowledge of the
Board of Directors and management plans, whether the auditor is of the
opinion that no material uncertainity exits as on the date of the audit report
that company is capable of meeting its liabilities existing at the date of
balance sheet as and when they fall due within a period of one year from the
balance sheet date.
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65. 65
Ratio Numerator Denominator
Current Ratio Current Assets Current Liabilities
Debt-Equity Ratio Total Debts Shareholder’s Equity
Debt service coverage ratio Earning available for debt
service
Debt service
Return on equity ratio Net profit after tax -Pref.
dividend
Average shareholder’s equity
Inventory turnover ratio Cost of goods sold or Sales Average Inventory
Trade receivables turnover
ratio
Net Credit Sales Average Trade Receivable
Trade payables turnover
ratio
Net Credit Purchases Average Trade Payables
Net capital turnover ratio Net Sales Average Working Capital
Net profit ratio Net Profit after tax Net Sales
Return on capital employed Earning before interest and taxes Capital Employed
Return on investment Market value on year end –
Market value on beginning
Market value on beginning
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Basis of Ratio Calculation:
# For detailed calculation of Numerator/ Denominator- Refer ICAI Guidance Note
66. 66
Impact Analysis
1. The unusual variations in the computation of defferent ratios will be
analysed on the following basis:
• Deviation from Industry Norms
• Abnormal Trends
• Divergent Comparitive Trends
It may lead to the following consequences:
• Evaluation of Financial Health of the comapny
• Bogus transactions, if any
• Liquidity of the company
• Material uncertainty relating to Going Concern assumption.
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67. Illustration
67
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Abnormal Trend- Not in line with Industry Norms of Textile Company
Let’s compare the Inventory Turnover Ratios of a company for two years:
(Amount in lakhs)
In this case, there is an abnormal and unusual deviation in the Inventory Holding
Period when compared to industry trends. The same increased from 65 days to 445 days.
This can raise suspicions about:
- Out of Books Sale
- Overvalued Inventory to show good profit to industry
- Overvalued Inventory to get more working capital Term Loan.
Particulars F.Y. 2020-21 F.Y. 2021-22
Sales 225 150
Average Inventory 40 400
Inventory Turnover Ratio 5.62 times 0.38 times
Inventory Holding Period 65 days 973 days
68. Illustration
68
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Abnormal Trend- Low liquidity Position
Let’s compare the current ratios of 2 companies belonging to the same industry.
Particulars F.Y. 2020-21 F.Y. 2021-22
Current Assets 4000 3000
Current Liabilities 1000 4000
Current Ratio 4 0.75
1. In case of F.Y. 2021-22, the current ratio is abnormally low. This implies that
working capital management in the F.Y. 2021-22 is not upto the mark which
indicates weak financial liquidity of the company.
2. In F.Y. 2020-21, working capital situation is considered abnormal and this
may done in order to-
• To attract Investment
• To get Bank Loan
• Creation of artificial assets/liabilities through bogus transactions
69. 5.
Borrowings to
be used for the
specific
purpose for
which it was
obtained
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70. Schedule III : New disclosures
70
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Where the company has not used the borrowings from banks and financial
institutions for the specific purpose for which it was taken at the balance
sheet date, the company shall disclose the details of where they have been
used.
Loan Type Purpose of sanction
Purpose for which
amount utilized.
Cash Credit Working Capital
Requirement
For car purchase/
land purchase
Construction Loan Building
construction.
For meeting working
capital requirement.
71. 71
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Corresponding reporting to CARO 2020
(Audit 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. Guidance note on CARO 2020 (Audit
Report) provides following suggested reporting format:
Nature
of the
fund
raised
Name
of the
lender
Amount
diverted
(INR)
Purpose for
which
amount was
sanctioned
Purpose for
which
amount was
utilized
Remarks
Whether funds raised on short term basis have been utilized for long
term purposes, if yes, the nature and amount to be indicated.
72. Challenges
▸ Providing details for every application of said funds can be cumbersome
for the company.
▸ Any default in this disclosure can be considered in the Wilful Defaulter
Category and attract strict penal consequences.
▸ This can also have an adverse implication in the company’s dealing with
banks.
72
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73. Impact Analysis
73
1. Reporting is also applicable for short term loan facilities and CC limits
sanctioned by banks and financial institutions. That is, if loans/CC limit is
sanctioned for working capital requirements, it shall not be utilized for
capital expenditures.
2. As per guidance note issued by ICAI, “It is not necessary to establish a
one-to-one relationship with the amount of borrowings and its utilization.
Accordingly, this needs to be determined based on overall position of
balance sheet at the reporting period.”
3. Sanction letters to be properly documented and studied to find out
whether the loans are used for the purpose they were obtained.
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74. 74
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Illustration
A granite manufacturing company want to purchase land of Rs.4 crore.
Company have following source of funds:
If 4 Crore utilized from company’s profit then, no disclosure required.
In above case, if amount of land purchased is Rs.17 crore, it means that
remaining 2 crores are utilized from cash credit. In this case, disclosure will
be required.
Cash Credit Rs.10 crore
Company’s Profit Rs.15 crore
76. Changes summary
Depending upon the Total Income* of the Company, the figures appearing
in the Financial Statements be rounded off as given below:
76
TOTAL INCOME ROUNDING OFF
(a) less than one hundred crore
rupees
To the nearest hundreds, thousands,
lakhs or millions, or decimals
thereof.
(b) one hundred crore rupees or
more
To the nearest lakhs, millions or
crores, or decimals thereof
• Total income is the sum of revenue from operations and other income.
• We suggest preparing balance sheet in lakhs.
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77. Illustration
77
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• ABC Ltd. has revenue from operations of Rs.98 Cr. and other income of
Rs.5 Cr.
• The total income to be considered in this case would be Rs. 103 Cr.
• In this case, rounding off is to be done to the nearest lakhs and cannot be
done to the nearest thousands or hundreds.
Particulars Amount as per Books
Amount to be presented in
Financials (Rounded off in
lakhs)#
Property Plant
and Equipment
10,48,63,210 1,048.63
Trade Payables 2,98,25,817 298.26
Total Assets 98,54,12,600 9,854.13
Total Liabilities 98,54,12,600 9,854.13
#Restricted to 2 decimal places
78. Challenges
78
1. Rounding off of figures stated in Financial Statements is mandatory for all
the Companies. Absolute figures are not permissible now onwards in the
final set of Financial Statements.
2. Manual rounding off is prone to errors. Formula in MS Excel to be used to
prevent occurrence of such errors. We strongly recommend to prepare
Financial Statements through software.
3. Two sets of financial statements should be signed by directors:
A. Rounded off- for Statutory Audit purposes
B. Absolute figures- For filling data in Company Law Forms, GST
Annual Returns and ITRs
4. The figures stated in Financial Statements will not exactly match with data
present in accounting software due to rounding off.
5. Comparative data also needs to be modified as the changes are applicable for
last year also.
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80. Changes summary
Where the company has any transactions with companies struck off under
section 248 of the Companies Act, 2013 or section 560 of Companies Act,
1956, the Company shall disclose the following details:
80
Name of struck off
Company
Nature of transactions with
struck-off Company
Balance outstanding Relationship with
the Struck off company, if
any,
to be disclosed
Investments in securities
Receivables
Payables
Shares held by stuck off
company
Other outstanding balances
(to be specified)
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81. Challenges
81
1. How to determine companies struck off during the year?
2. Will the companies under liquidation or liquidated or amalgamated be
covered?
3. Implications of shares held by struck off companies
4. Will company struck off but subsequently revived pursuant to NCLT order
be covered?
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82. 82
IMPACT & INSTANCES
1. It will have impact on the recoverability of assets
For instance, if sales has been made to the struck off company during the
financial year and it’s subsequent striking off will have impact on the
recoverability of amount from the struck off company.
2. In case of Bogus transactions, it can be triggered easily
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84. Changes Summary
Where the company is covered under section 135 of the companies act, the
following shall be disclosed with regard to CSR activities:-
(a) amount required to be spent by the company during the year,
(b) amount of expenditure incurred,
(c) shortfall at the end of the year,
(d) total of previous years shortfall,
(e) reason for shortfall,
(f) nature of CSR activities,
(g) details of related party transactions, e.g., contribution to a trust controlled by
the company in relation to CSR expenditure as per relevant Accounting
Standard,
(h) where a provision is made with respect to a liability incurred by entering into a
contractual obligation, the movements in the provision during the year should
be shown separately.
84
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85. Changes Summary
CARO (Audit Report) Reporting :
▸ Whether, in respect of other than ongoing projects, the company has transferred
unspent amount to a Fund specified in Schedule VII to the Companies Act
within a period of six months of the expiry of the financial year in compliance
with second proviso to sub-section (5) of section 135 of the said Act;
▸ Whether any amount remaining unspent under sub-section (5) of section 135 of
the Companies Act, pursuant to any ongoing project, has been transferred to
special account in compliance with the provision of sub-section (6) of section 135
of the said Act;
85
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87. Changes comparison
Wilful Defaulter:
▸ Where a company is a declared wilful defaulter by any bank or financial institution
or other lender, following details shall be given:
(a) Date of declaration as wilful defaulter,
(b) Details of defaults (amount and nature of defaults)
CARO (Audit Report) Reporting :
▸ Whether the company is a declared wilful defaulter by any bank or financial
institution or other lender
87
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88. Changes comparison
Benami Property:
▸ Where 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 the rules made thereunder, the company shall provide
adequate disclosure
CARO (Audit Report) Reporting :
▸ Whether any proceedings have been initiated or are 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
88
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89. Changes comparison
Undisclosed Income:
▸ The Company shall give details of any transaction not recorded in the books of
accounts that has been surrendered or disclosed as income during the year in the
tax assessments under the Income Tax Act, 1961.
CARO (Audit Report) Reporting :
▸ Whether any transactions not recorded in the books of account have been
surrendered or disclosed as income during the year in the tax assessments under
the Income Tax Act, 1961 (43 of 1961), if so, whether the previously unrecorded
income has been properly recorded in the books of account during the year
89
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91. Changes Summary
▸ Disclose title deeds of immovable property not held (excluding leased
properties) in the name of the Company in the prescribed format which,
inter alia, would include details of title deed held in the name of, held
since date, reasons for not being held in the name of the company, etc.
▸ Disclose company’s share – if jointly held
CARO (Audit Report) Reporting :
▸ Whether the title deeds of all the immovable properties (other than properties
where the company is a lessee and the lease agreements are duly executed in
favour of the lessee) disclosed in the financial statements are held in the name of
the company. If not, provide prescribed details [Clause 3(i)(c)]
91
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93. Changes Summary
Disclosure regarding revaluation of PPE/Intangible Assets :
Amount of change due to revaluation (if change is 10% or more in the
aggregate of the net carrying value of each class of PPE/ intangible
assets)
Fair Value of investment property or revaluation of PPE/ intangible
assets (if any) is based on the valuation by a registered valuer defined
under the Companies Act, 2013
CARO (Audit Report) Reporting :
▸ Whether the company has revalued its PPE (including right of use assets) or
intangible assets or both during the year.
▸ If so, whether the revaluation is based on the valuation by a registered valuer;
specify the amount of change, if change is 10% or more in the aggregate of the
net carrying value of each class of PPE or intangible assets [Clause 3(i)(d)]
93
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95. Changes Summary
Disclosure to be provided in prescribed format where loans/ advances in
the nature oa loans are granted to promoters, directors, key managerial
personnel and related parties, either severally or jointly with any other
person, that are :
Repayable on demand or
Without specifying any terms or repayment period
CARO (Audit Report) Reporting :
▸ Whether the company has granted any loans or advances in the nature of loans
either repayable on demand or without specifying any terms or period of
repayment, if so, specify the aggregate amount, percentage thereof to the total
loans granted, aggregate amount of loans granted to Promoters, related parties
as defined in section 2(76) of the Companies Act, 2013 [Clause 3(iii)(f)]
95
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96. Analysis/Review of Financial Statements
of Listed Companies
Following are the disclosures as presented in the financial statements of
listed companies:
1. Trade Payables/Receivables:
Billed Dues
Unbilled Dues
Ageing
2. Shareholding of Promoters
3. Capital work-in-progress Ageing
4. Corporate Social Responsibilty Expenditure
5. Ratios analysis and its elements
6. Relationship with struck off companies
96
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97. Penal Consequences- Cost of Compliances v/s Cost
of Non- Compliances
97
PENALTY
UNDER
SECTION
NATURE OF NON
COMPLIANCE
PENAL CONSEQUENCE
Sec 129-
Financial
statements
Contravention with the
provisions of section 129
(Financial Statements)
(a) Imprisonment up to 1year
(b) Fine which shall not be less than Rs.
50,000 but which may extend to Rs.
5,00,000
(c) With both
Sec 447-
Punishment
for fraud
1. any act,
2. any omission,
3. concealment of any fact,
or,
4. abuse of position
committed by a person
or any other person
with the connivance in
any manner – ,
(a) Imprisonment not less than 6 months but
may extend to 10 years
(b) Fine which shall not be less than the
amount involved in the fraud, but which may
extend to 3 times the amount involved in the
fraud
(c) If fraud in question involves public
interest, the term of imprisonment shall not
be less than three years.
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98. 98
a. with intent to deceive,
b. to gain undue advantage from, or
(i) to injure the interests of;
(ii)the company, or,
(iii)its shareholders , or,
(iv)its creditors, or,
(v)any other person,
whether or not there is any:
• any wrongful gain, or
• any wrong loss.
448-
Punishment
for false
Statement
If in any return, report, certificate,
financial statement, prospectus, statement
or other document required by, or for, the
purposes of any of the provisions of this
Act or the rules made thereunder, any
person makes a statement,
(a) which is false in any material
particulars, knowing it to be false; or
(b) which omits any material fact,
knowing it to be material, he shall be
liable under section 447.
(a) Imprisonment for a
term which shall not
be less than 3 years
but which may
extend to 7 years and
(b) With fine which may
extend to Rs.
10,00,000
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99. 99
“Fraud” in relation to affairs of a company or anybody corporate, includes any
act, omission, concealment of any fact or abuse of position committed by any
person or any other person with the connivance in any manner, with intent to
deceive, to gain undue advantage from, or to injure the interests of, the
company or its shareholders or its creditors or any other person, whether or
not there is any wrongful gain or wrongful loss;
“wrongful gain” means the gain by unlawful means of property to which the
person gaining is not legally entitled;
“wrongful loss” means the loss by unlawful means of property to which the
person losing is legally entitled.
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Meaning of Fraud
100. 100
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Strengthen your Accounts Department
• Add competent professional team members to your Accounts Team
• Ensuring Entries on day- to- day basis
• Finalization of Books on Monthly basis
• Use of technically upgraded (ERP) Accounting Software
• Discussion with the Board of Directors/ Audit committee on Quarterly
basis
101. 101
Non Compliance with Schedule III
Omission
No reconciliation of Stock Statement submitted to Bank
with Books, even if huge difference in both.
Utilization of Cash Credit done for purchase of capital
assets, but no disclosure given in Financial Statements.
False Statement
Grouping of ratios changed to improve;
Incorrect ageing of Trade Receivable/ Trade Payable
disclosures.
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102. 102
Amendments Implementation
1. Ministry of Corporate Affairs (MCA) notification dated 24th March, 2021
for the Financial Year 2021-22.
2. Our updates on Amendments to Schedule- III (Dated 15th March, 2022);
3. Requirement Letter- Roadmap to finalize Financial Statements (Dated 17th
March, 2022) ;
4. Detailed Presentation;
5. Template of Draft Financials;
6. ICAI Guidance Note on changes in Schedule- III.
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Reference Materials
103. 103
Help Desk
For consultation and implementation of Schedule III, please contact:
1. Bharat Sonkhiya- bharat@soganiprofessionals.com
2. Nitin Sharma- Chartered Accountant- nitin@soganiprofessionals.com
3. Harleen Kaur- Company Secretary-
4. Neha Dangayach- Company Secretary-
5. Piyush Agrawal-
6. Pahal Jain-
7. Sparsh Garg-
8. Anshita Mittal-
Contact Details:
1. Bharat Sonkhiya- +91 9828443301
2. CS Harleen Kaur- +91 8306662129
cs@soganiprofessionals.com