Boi - Preparation

1.
WHAT IS CARO
Audit Reports in India are guided by the Companies Act, 1956 — as amended —
and the pronouncements of the Institute of Chartered Accountants of India,
which, inter-alia, include the Companies Audit Report Order (CARO), issued in
2003 and revised in 2005.
CARO is a very comprehensive document that details audit requirements on 21

areas that could be part of an entity’s financial statements ranging from fixed assets
to utilization of IPO proceeds and frauds. CARO also includes thirteen appendixes
that extract information from other Acts that need to be reported in CARO.
2. PROVISIONS REGARDING AUDITORS REPORT

The requirements of the Order are supplemental to the existing provisions of
section 227 of the Act regarding the auditor’s report. However, there are certain
points of distinction between the Order and the requirements of section 227, which
are as follows:
(i) the provisions of sub-sections (1A), (2), (3) and (4) of section 227 are
applicable to all companies while the Order exempts certain classes of companies
from its application; and
(ii) the provisions of sub-section (1A) require the auditor to make certain specific
enquiries during the course of his audit. The auditor is, however, not required to
report on any of the matters specified in the sub-section unless he has any special
comments to make on the said matters. In other words, if he is satisfied with the
results of his enquiries, he has no further duty to report that he is so satisfied. The
Order, on the other hand, requires a statement on each of the matters specified
therein even if he has no comments to make on any of the matter(s) contained in
the Order. In that respect, the provisions of the Order are similar to the provisions
of sub-sections (2), (3) and (4) of section 227.
3. CURRENT FINANCIAL ENVIRONMENT
S TIMULUS EXIT STRATEGY WILL HELP IN I NDIA ’ S GROWTH
Interestingly, India embarked on fiscal expansion much before the global financial
crisis and this has helped the economy land softly during the crisis. The plan for
large increases in public expenditures for pay revision, loan waiver and food and
fertiliser subsidies was put forth in February 2008, much before the Lehman
episode unfolded in September 2008. Besides, large election-related spending also
resulted in a stimulus.
Exiting from the stimulus to phase out large volume of deficits and debt is,
however, painful and Indian policy makers will have to evolve an exit strategy that
maintains high growth with price stability.
India’s consolidated fiscal deficit in 2010-11 is estimated at about 8 per cent

which, although lower than the 10.2 per cent recorded in the previous year, is much
larger than any other emerging market economy.
India’s debt-to-GDP ratio is also very high at about 80 per cent and though an
overwhelming proportion of this is internal, it is a cause for worry.
4. IFRS
IFRS Origin and Structure:
International Financial Reporting Standards (IFRS) are standards and

interpretations adopted by the International Accounting Standards Board (IASB).
Many of the standards forming part of IFRS are known by the older name of
International Accounting Standards (IAS). IASs were issued between 1973 and
2001 by the board of the International Accounting Standards Committee (IASC).
In April 2001 the IASB adopted all IAS and continued their development, calling
the new standards IFRS.
IFRSs are considered a “Principles bases” set of standards in that they establish
broad rules as well as dictating specific treatments. International Financial
Reporting Standards comprise:
International Financial Reporting Standards (IFRS)- Standards issued after 2001
International Accounting Standards(IAS)- Standards issued before 2001
Interpretations originated from the International Financial Reporting
Interpretations Committee (IFRIC)- issued after 2001
Standing Interpretation Committee (SIC)- Issued before 2001.
There is also a Frame work for the preparation and presentation of Financial
Statements which describes some of the principles underlying IFRS.
IFRS and India:
"The introduction of IFRS represents a fundamental change in financial

reporting. It is not something that can be handled in a few weeks prior to
adoption. Planning for it, generating the necessary awareness, educating
stakeholders and managing the required changes will take considerable
management commitment and time to achieve a successful transition. IFRS
brings groups and collective working to achieve profits, bring about fair value in
the business. Outsourcing becoming important IFRS will give leverage to Indian
companies to understand international accounting."
5. DSCR
Debt-Service Coverage Ratio
1. In investment real estate, the ratio of annual net operating income on a piece of
investment property to its annual debt service. Banks use the DSCR to help
determine whether to make or refinance loans for investment property. A DSCR
equal to or greater than 1 indicates that the debtor is able to service the debt on the
income from the investment property. In personal finance, banks usually require a
DSCR of at least 1 to make such a loan, while they generally expect a ratio of 1.2
for commercial projects.
2. In government finance, the ratio of annual export earnings to its annual debt
service on external debt.
6. CREDIT DERIVATIVE
In finance, a credit derivative is a securitized derivative whose value is derived

from the credit risk on an underlying bond, loan or any other financial asset. In this
way, the credit risk is on an entity other than the counterparties to the transaction
itself.[1] This entity is known as the reference entity and may be a corporate, a
sovereign or any other form of legal entity which has incurred debt.[2] Credit
derivatives are bilateral contracts between a buyer and seller under which the seller
sells protection against the credit risk of the reference entity.
7. SUB-PRIME CRISIS
The US subprime mortgage crisis was one of the first indicators of the 2007–
2010 financial crisis, characterized by a rise in subprime mortgage delinquencies
and foreclosures, and the resulting decline of securities backing said
mortgages.Approximately 80% of U.S. mortgages issued to subprime borrowers
were adjustable-rate mortgages.[1] After U.S. house prices peaked in mid-2006 and
began their steep decline thereafter, refinancing became more difficult. As
adjustable-rate mortgages began to reset at higher rates, mortgage delinquencies
soared. Securities backed with mortgages, including subprime mortgages, widely
held by financial firms, lost most of their value. Global investors also drastically
reduced purchases of mortgage-backed debt and other securities as part of a
decline in the capacity and willingness of the private financial system to support
lending, tightening credit around the world and slowing economic growth in the
U.S. and Europe.
8. WHAT IS CASA
CASA stands for Current and Savings account. Different kinds of deposits -
current account, savings account and term deposits - form the major source of
funds for banks. The CASA ratio shows how much deposit a bank has in the form
of current and saving account deposits in the total deposit.
How is it important for banks?

A higher CASA ratio means higher portion of the deposits of the bank has come
from current and savings deposit, which is generally a cheaper source of fund.
Many banks don’t pay interest on the current account deposits and money lying in
the savings accounts attracts a mere 3.5% interest rate.
Hence, higher the CASA ratios better the net interest margin, which means better
operating efficiency of the bank. Net interest margin is difference between total
interest income and expenditure and is shown as a percentage of average earning
assets. Higher income from CASA will improve the net interest margin as the cost
of this fund is relatively lower.
For instance, most banks lend at over 10%, whereas, the rate of interest that they
pay on saving deposit is just 3.5%. However, actual realisation depends on other
expenditure, too.
How is CASA different from term and demand deposits?

Current and saving accounts remain operational. Depositors don’t need to give
prior notice to withdraw money, however, in case of term deposits; the money is
locked in for a specific period. If a depositor wishes to withdraw the money before
maturity, he may have to pay a fine. Usually, an overdraft facility is available with
the current account deposit. Demand deposit gives you the facility to withdraw
your money anytime.

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1.

CARO is a very comprehensive document that details audit requirements on 21

2. PROVISIONS REGARDING AUDITORS REPORT

India’s consolidated fiscal deficit in 2010-11 is estimated at about 8 per cent

International Financial Reporting Standards (IFRS) are standards and

International Financial Reporting Standards (IFRS)- Standards issued after 2001

International Accounting Standards(IAS)- Standards issued before 2001

Interpretations originated from the International Financial Reporting

Interpretations Committee (IFRIC)- issued after 2001

Standing Interpretation Committee (SIC)- Issued before 2001.

IFRS and India:

"The introduction of IFRS represents a fundamental change in financial

In finance, a credit derivative is a securitized derivative whose value is derived

How is it important for banks?

How is CASA different from term and demand deposits?

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