Any Reporting requirement for an Auditor is either mandated in :-
1) The Companies Act, 1956
2) CARO, 2003
3) The Standards on Auditing
Checking all the cases one-by-one.
1) The Companies Act, 1956 : - The Matters of inquiry as given u/s 227(1A) does not require an Auditor to report in case he finds Working Capital to be Negative.
2) CARO, 2003 :- CARO reporting is mandatory for all Public Limited Companies. Auditors have to report on each paragraph of CARO even if the finding is positive.bUT, None of the paras of CARO deal with the case of Negative Working Capital, To put it differently, under None of the paras, an auditor is required to report, if the firm is having Negative Working Capital.
3) Standards on Auditing :- The Case of Negative Working Capital is not common, therefore the Auditor must extend his audit procedures to ensure, if the reason for such Negative Wroking capital, requires reporting or communicating with Those Charged With Governance and Management. (SA 265)
Further if there are signs of Fraud, he will need to extend his procedures to confirm or dispel the doubt. (SA 240)
Further, If it renders the Gong Concern Assumption to be inappropriate, the auditor will need to report it specifically as per SA 570
In any case, if he finds any information/finding of his audit working to be as important to be brought to the notice of Shareholders, he may include it in the Report as "Emphasis of Matter". Remember Emphasis of Matter does not mean the report is Negative or Qualified. It only means that the Matter was found by auditor to be important to be brought to Shareholder's notice.
Conclusion :- Mere instance of Negative working capital is not reportable, But, the reasons for and Implicaitons of, such Negative Working Capital may render the case be Reportable under various Standards on Auditing. The objective of Auditing as derived from reading all the SA's is, to report on all the issues that may be important to the 'users of Account' / Shareholders, to gain understanding of the Firm's Financial Status and performance. Therefore, if the Negative Working Capital, in the view of Auditor is found to be important so as to require reporiting, he may report it as Emphasis of Matter.