Under CARO 2003 the auditor is required to report on __
|a) arrears of cumulative preference dividends|
b) Preferential allotment of shares to related party
c) disposal of fixed assets and its effect on going concern.
d) unsecured loans granted to related party
The Correct Answer Is:
a) arrears of cumulative preference dividends
Under the Companies (Auditor’s Report) Order, 2003 (CARO 2003), auditors are required to report on various aspects of a company’s financial statements and operations. Among the options provided, the correct requirement for reporting under CARO 2003 is:
a) Arrears of cumulative preference dividends.
Now, let’s delve into an explanation of why this is the correct answer:
When a company issues preference shares, it agrees to pay a fixed dividend to the shareholders before distributing profits to common shareholders. If the company is unable to pay these dividends in a particular year, they accumulate as arrears.
CARO 2003 mandates the auditor to report on any arrears of cumulative preference dividends, ensuring that shareholders, especially preference shareholders, are informed about the company’s financial performance and its ability to meet its obligations.
This is indeed a valid reporting requirement under CARO 2003. When a company issues cumulative preference shares, it commits to paying a fixed dividend rate to preference shareholders. If the company fails to make these dividend payments, the arrears accumulate.
This can be indicative of financial difficulties or mismanagement, and it’s important for shareholders to be aware of such arrears as it affects their returns. CARO 2003 mandates auditors to report on this to ensure transparency and to protect the interests of preference shareholders.
Now, let’s analyze why the other options are not correct:
b) Preferential allotment of shares to related party:
This issue, while important, is not specifically covered by CARO 2003. It may be relevant in terms of corporate governance and related party transactions, but CARO 2003 primarily focuses on the auditor’s reporting responsibilities concerning financial statements and certain specified matters.
While preferential allotment of shares to related parties is a matter of corporate governance and can raise concerns about potential conflicts of interest, it is not a specific requirement under CARO 2003.
CARO 2003 primarily deals with auditing and reporting on financial statements and certain specified financial matters. Related party transactions are typically disclosed in the notes to the financial statements, but they are not a direct reporting requirement of CARO 2003.
c) Disposal of fixed assets and its effect on going concern:
While the disposal of fixed assets and its impact on the company’s ability to continue as a going concern is indeed an important aspect of financial reporting, CARO 2003 does not explicitly require auditors to report on this matter.
The going concern assumption is generally a part of financial statement preparation and disclosure, but it is not one of the specific requirements covered by CARO 2003.
d) Unsecured loans granted to related party:
Unsecured loans granted to related parties can also raise concerns related to corporate governance and conflicts of interest. However, like the preferential allotment of shares, this is not a specific reporting requirement under CARO 2003.
CARO 2003 primarily focuses on financial statements and certain financial matters specified in the order. Unsecured loans to related parties are typically disclosed in the financial statements, but they are not a mandatory reporting item under CARO 2003.
In summary, CARO 2003 primarily focuses on specific areas of financial reporting and disclosure. The correct requirement for reporting, as per the options provided, is the arrears of cumulative preference dividends.
This ensures that shareholders are informed about the company’s ability to meet its obligations to preference shareholders. The other options, while important, do not fall within the specific reporting scope of CARO 2003.
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