CARO clause 3(i)(e) requires the auditor to report whether any proceedings have been initiated or are pending against the company for holding any benami property under the Prohibition of Benami Property Transactions Act and the rules made thereunder, and if so, whether the company has appropriately disclosed the details in its financial statements; because such proceedings are rarely volunteered by management, the auditor corroborates the position with external and internal evidence rather than relying on a representation letter alone, and the exact clause wording should be confirmed against the current order.
Why a representation letter is not sufficient on its own
A company facing a benami property proceeding has every incentive not to disclose it voluntarily, since the finding itself implies that title to an asset on the books does not genuinely rest with the company. The auditor needs corroborating procedures that do not depend solely on management's word, built into the audit the same way fraud-risk inquiry is built in rather than bolted on at sign-off.
Testing approach
- 01Obtain a specific written representationInclude a specific representation on benami proceedings in the management representation letter, distinct from the general litigation representation, naming the Prohibition of Benami Property Transactions Act explicitly.
- 02Review legal case status and litigation summariesCheck the company's legal case tracker, correspondence with legal counsel, and board and audit committee minutes for any reference to an attachment, show-cause notice, or adjudicating authority order under the Act.
- 03Cross-check the title deeds schedule from clause 3(i)(c)Properties where title is not held in the company's name, or is held in the name of a director, promoter or employee, are a natural starting point for assessing benami risk; a property parked in someone else's name with company funds is the structure the Act targets.
- 04Confirm with the company's legal counsel directlySend a direct inquiry to external legal counsel as part of the standard legal confirmation process, asking specifically whether counsel is aware of any proceeding under the Act, rather than folding the question into a generic litigation confirmation.
- 05Check for public record of attachment ordersWhere risk indicators exist, check whether any provisional or final attachment order has been published by the Initiating Officer or Adjudicating Authority against the company's properties.
A pattern of immovable property held in the name of promoters, directors or their relatives but funded and used by the company, flagged under the title deeds clause, is the clearest internal red flag for benami risk and should be followed through rather than treated as a title-deeds-only issue.
Regulatory requirement
The exact clause wording, the governing statute and rules, and the disclosure requirements referred to are set out in the Prohibition of Benami Property Transactions Act and the Companies (Auditor's Report) Order as currently in force. Confirm all of these against current source material before drafting the report.
How we think about this
This clause is one of the few in CARO where the auditor's own corroboration matters more than the paperwork the company hands over, because the paperwork is exactly what a benami arrangement is structured to make look clean.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- CARO & Companies ActCARO 2020 reporting checklist for statutory auditorsThe topic areas CARO reporting covers, what evidence each one needs, and how the clauses fit together across the audit file.
- CARO & Companies ActCARO fixed asset and inventory clauses: what auditors testWhat the fixed asset and inventory points under CARO actually require in evidence: physical verification, title deeds, revaluation, and count discrepancies.
- Internal audit & IFCFraud risk assessment: building it into the audit planThe fraud triangle applied practically rather than as theory, why management override is a presumed risk on every engagement, and what journal entry testing is actually looking for.
- Related parties & disclosuresUndisclosed related parties: red flags to test forThe counterparties that most need scrutiny are the ones nobody flagged as related. Here is what actually surfaces them.
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