## CARO 2020 – Clause (xi): Fraud
Three aspects to cover:
| Aspect | Reporting |
|---|
| Fraud on or by the company | Whether any fraud has been reported during the year (by officers or employees). If yes: report nature and amount |
| Section 143(12) compliance | Whether the auditor complied with the duty to report fraud to the Central Government |
| Whistle-blower complaints | Whether the auditor has considered whistle-blower complaints, if any, received by the company during the year |
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## CARO 2020 – Clause (xii): Nidhi Company
Applicable only to Nidhi Companies.
| Sub-clause | Requirement |
|---|
| (a) Net Owned Funds to Deposits Ratio | Must maintain 1:20 ratio (net owned funds : deposits). For every ₹1 of net owned funds, deposits must not exceed ₹20 |
| (b) Unencumbered Term Deposit | Must maintain 10% of outstanding deposits as unencumbered liquid term deposits |
| (c) Default in Payment | Whether there has been default in payment of interest on deposits or repayment of principal. If yes: report details |
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## CARO 2020 – Clause (xiii): Related Party Transactions
Whether all related party transactions comply with:
| Provision | Requirement |
|---|
| Section 177 | Audit Committee approval (including omnibus approval on annual basis for related party transactions) |
| Section 188 | Prior approval of Board of Directors for entering into contracts/arrangements with related parties |
| AS-18 | Proper disclosure of related party transactions in the financial statements |
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## CARO 2020 – Clause (xiv): Internal Audit System
| Sub-clause | Reporting |
|---|
| (a) | Whether the company has an internal audit system commensurate with its size and nature of business |
| (b) | Whether the reports of the internal auditor were considered by the statutory auditor |
### Section 138 – Mandatory Internal Audit Thresholds
| Category | Threshold for Mandatory IA |
|---|
| Listed Company | Always mandatory |
| Unlisted Public Company | Paid-up Share Capital ≥ ₹50 crore, OR Turnover ≥ ₹200 crore, OR Outstanding Borrowings ≥ ₹100 crore |
| Private Company | Turnover ≥ ₹200 crore, OR Outstanding Borrowings ≥ ₹100 crore |
### Example 1
Example 1 – Fraud reporting and Section 143(12)
During the audit of Omega Ltd, the auditor discovers that the purchase manager committed a fraud of ₹40 lakh by creating fictitious vendor invoices. The auditor reported this to the Board but did not file a report with the Central Government.
What must the CARO report state under Clause (xi)?
Answer: (1) A fraud by an officer (purchase manager) of ₹40 lakh was committed during the year — nature (fictitious invoices) and amount must be stated. (2) The auditor did not comply with Section 143(12) — reporting to the Board alone is insufficient; the Central Government must also be notified. The CARO report must flag this non-compliance by the auditor.
### Example 2
Example 2 – Nidhi Company ratios
Sunrise Nidhi Ltd has net owned funds of ₹2 crore and total deposits from members of ₹50 crore. Its unencumbered term deposit is ₹3.5 crore.
Is Sunrise Nidhi compliant?
Answer:
- Ratio test: Net owned funds ₹2 crore × 20 = ₹40 crore maximum permissible deposits. Actual deposits = ₹50 crore. Ratio violated (actual is 1:25, limit is 1:20).
- Liquid deposit test: Required = 10% of ₹50 crore = ₹5 crore. Actual = ₹3.5 crore. Below the required 10%.
The auditor must report non-compliance under both sub-clauses (a) and (b) of Clause (xii).
### Example 3
Example 3 – Related party and Section 177/188
Crystal Ltd entered into a contract with a director's firm for ₹5 crore of services. The transaction was approved by the Board under Section 188 but was not placed before the Audit Committee, nor disclosed in AS-18 disclosures.
What must the auditor report under Clause (xiii)?
Answer: Non-compliance with Section 177 — the Audit Committee did not approve the transaction. Non-compliance with AS-18 — disclosure was not made in the financial statements. Section 188 Board approval was obtained, so that is compliant. The auditor must report both areas of non-compliance.
### Example 4
Example 4 – Internal audit applicability
Blue Star Pvt Ltd has turnover of ₹250 crore and borrowings of ₹80 crore. Does it need internal audit under Section 138?
Answer: Yes. For private companies, Section 138 mandates internal audit if turnover ≥ ₹200 crore or borrowings ≥ ₹100 crore. Here, turnover is ₹250 crore (≥ ₹200 crore) — the first condition alone is sufficient. The auditor must report under Clause (xiv)(a) whether an internal audit system exists commensurate with the company's size.