TEA Ltd., a public company is exclusively dealing in blending, processing, packing and selling of various brands of Tea. During the year 2023-24, it…

CA Final · Advanced Auditing, Assurance and Professional Ethics · PYQS · November 2024
TEA Ltd., a public company is exclusively dealing in blending, processing, packing and selling of various brands of Tea. During the year 2023-24, it had availed credit facilities from Kuber Bank Ltd. The bank had sanctioned a working capital cash credit facility on 21st April, 2023, for a limit of 4.50 crore and Letter of Credit facility for a limit of 2.50 crores aggregating to 7 crore on the basis of the hypothecation of stocks and book debts of the company against which utilisation of the limits by TEA Ltd. during the year in the case of cash credit facility was - 3.90 crore and of Letter of credit was - 1.05 crore aggregating to 4.95 crore. During the year under review, the company had faced sluggish market conditions for its various brands of teas due to its inability to cater to the requirements of its customers' expectations. It faced severe cash crunch and found it difficult to manage working capital stress. In order that the bank does not reduce its drawing power of working capital limit, the management decided to peg up the values of the stock statements it submitted to bank by a hike of 15% during the quarters ended June 2023, September 2023 and December 2023. When an engagement partner leading the audit team happened to review the stock statements submitted to the bank, it was noticed that the stock figures declared were not in agreement with book figures and had been hiked as above. The matter was taken up with CFO of the company who contended that auditors need not examine and compare the quarterly statements with the books of accounts as the utilisation of working capital limits is less than the specified sanctioned limit as on 31st March 2024 and hence this case is beyond the scope of reporting under CARO, 2020. Is the contention of CFO correct? Analyse the issue and discuss the reporting responsibilities of the auditor.

Suggested Answer and Working Notes:

Reporting Responsibility of the auditor as per para 3 (ii) (b) of CARO, 2020: As per para 3 (ii) (b) of CARO, 2020, the auditor is required to report whether during any point of time of the year, the company has been sanctioned working capital limits in excess of five crore rupees, 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. The above clause requires the auditor to comment on whether during any point of time of the year, the company has been sanctioned working capital limits in excess of 5crores in aggregate. Tea Ltd. has been sanctioned a working capital cash credit facilities for a limit of 4.50 crore and for Letter of Credit facility for a limit of 2.50 crores aggregating working capital facilities/limit of 7crores which is apparently in excess of 5crores. based on the security of current assets i.e. Hypothecation of stocks and book debts of the company. In addition, the auditor is required to ensure that whether the quarterly returns filed by the Tea Ltd. company with Kuber Bank Ltd. are in agreement with the book of accounts of the company. In the instant situation, management of Tea Ltd. submitted its Stock Statement by a hike of 15% during the quarter ended June 2023, September 2023 and December 2023, to peg up the values of the stock due to fear of reduction in the drawing power of working capital limit. The auditor noticed that the stock figures declared by Tea Ltd. were not in agreement with the book figures and had been hiked as above. Thus, the contention of CFO is not correct regarding applicability of CARO, 2020 as the working capital is more than specified sanctioned limit as on 31st March, 2024. Hence the auditor is required to report the same in accordance with Clause (ii) (b) of Paragraph 3 of CARO, 2020.

Topics: CARO 2020

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