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CARO 2016- Applicability & Reporting Requirements

An audit is an independent and systematic process for examination of accounts, books and statutory records of a company or an organization for ascertaining the financial statements and non-financial disclosures to present a true and fair view of the concern. It also ensures that the books are properly maintained by the provisions of law.

The Central Government introduced the Companies Auditor’s Report Order (CARO) on March 29^th, 2016 under Subsection (11) of Section 143 of the Companies Act, 2013(also known as “the Act”). It was issued as a replacement for the 2015 Companies Auditor’s Report Order – CARO.

An auditor is usually a person or a firm appointed by a company to conduct its audit, internal as well as external.

According to the provisions of Section 139, every company shall at its first AGM appoint an individual or a firm as an auditor who shall hold office for a tenure of 5 years.

The Companies Act also provides that, the financial statements approved by the board for the financial year should be accompanied by the Auditor’s Report.

Ministry Of Corporate Affairs- MCA

The Ministry of Corporate Affairs (MCA) announced the Companies Auditor’s Report Order (CARO).

CARO Guidance note By MCA

A guidance note contains all the important information for the employees.

The purpose behind the CARO guidance note is to mention all the specific details regarding the reporting necessities and the clauses and to make easier for the members to understand.

Exclusions under CARO

CARO 2016 is applicable to all the companies excluding Banking Company as defined under Section 5 (c) of the Banking Regulation Act, 1949. Insurance Company as defined under the Insurance Act 1938.

CARO 2016

The MCA has provided that every report made by the auditor under section 143 of the Companies Act, 2013^[1] on or after 1st April 2015 are required to abide by CARO 2016. CARI is applicable to a few classes of companies based on activity, constitution, and a class of companies. CARO 2016 is applicable to the foreign company as well. However, CARO, 2016 is not applicable to the auditor’s report on consolidated financial statements.

The auditors of Companies exempted from complying with CARO 2016 requirements are as follows:

• Banking Company as defined under section 5(c) of the Banking Regulation Act, 1949
• Insurance Company as defined under the Insurance Act, 1938
• Companies Incorporated under section 8 of the Companies Act, 2013
• One Person company formed under section 2(62) of the Companies Act, 2013
• Small Company as defined under 2(85) of the Companies Act, 2013
• A private company, which is not a holding or a subsidiary company of any public company:
• Having a paid-up capital and reserves and surplus, not more than Rs. 1 crore

• Where the total borrowings from any bank or any financial institution at any point in time during the FY does not exceed Rs. 1crore
• Where the total revenue does not Rs. 10 crores during the financial year.

CARO Applicability

CARO, 2016 is applicable to report on the financial statements of the companies who commence their financial year on or after 1^st April 2015.

CARO Applicability For Private Limited

CARO 2016 made applicability a little easy for private companies by increasing thresholds. It is also not applicable to the consolidated financial statements (statements that include the financial data of the parent and subsidiary companies).

Matters Required to be Included in CARO 2016

The following are the reporting requirements under CARO 2016:

Fixed Asset

Whether proper records showing full particulars of the quantitative details and situation of the fixed asset have been maintained by the company.

Whether the fixed asset has been physically verified by the management at regular intervals.

Whether any discrepancies of material nature were observed during such verification and whether they have been properly addressed if any.

Inventory

The Auditor under CARO guidelines has to ensure that Whether the management of the company has conducted physical verification of inventory at reasonable intervals. Whether the proper record of inwards and outwards of inventory has been maintained.  Whether any discrepancies of material nature were observed during such verification and whether they have been properly addressed if any.

Loans and Investments

Whether the provisions of Section 185 and 186 of the Companies Act, 2013 Act have compiled concerning loans, investments, and guarantees. If not, whether details have been provided thereof.

Deposits

Whether the following requirements have complied with the Directives issued by the reserve bank of India, if the company has accepted deposits:

1. The provisions of section 73 to 76 or any other relevant provisions of Companies Act, 2013 and the rules framed thereunder.
2. Any order has been passed by NCLT or RBI or any other court or tribunal.
3. If there is any non-compliance, the nature of contraventions is required to be stated.

Cost Records

Where the maintenance of cost records under sec 148 (1) of Companies Act, 2013 has been specified by the Central Government and whether such accounts and records have been maintained.

Repayment of Loan

Where any default in repayment of loans/borrowings towards any bank or financial institution or government or to debenture holders, has been committed by the Company, then the amount of default is required to be reported.

Utilization of IPO and further public offer

If any money is raised by way of an initial public offer or further public offer, whether they were applied to which those are raised. If not, the details and the reason for delays and defaults and rectification, if any, as may be applicable, are required to be reported.

Reporting of Fraud

Whether the company or any of the company’s officers/employees have noticed, reported or were involved in any fraud during the year under review. If it has been committed or reported, the nature of fraud and the amount involved has to be mentioned.

Managerial Remuneration

Whether the Company has complied with and taken the requisite approvals mandated by the provisions of section 197 (read with schedule) of the Companies Act, 2013, before the managerial remuneration has been paid/provided by.

Related Party Transaction

Whether the company has complied with the provisions of Section 177 and 188 of the Companies Act, 2013 concerning all the related party transactions and the details have been disclosed in the financial statement, as prescribed by the accounting standards.

The loan is given by Company

If the company has granted any secured or unsecured loans to any firm, LLP, company or any other parties covered Section 189 of the Companies Act, 2013, the auditor should ensure that:

• The terms and conditions of such loans do not hamper the company’s interest.
• Whether the repayment of principal and payment of interest schedule has been stipulated and whether the repayments and receipts are being made on a regular basis.
• If any amount is overdue, the total amount overdue is required to be stated, along with the total amount which is overdue for more than 90 days and the steps taken by the company for recovery of such amounts.

Nidhi Company

If the Company is a Nidhi company, the auditor should ensure that the company has complied with the net owned funds to deposit ratio of 1:20 to meet out the liability and whether the company has maintained a 10% unencumbered term deposits as provided in the Nidhi rules 2014.

Private Placement of Preferential Issues

Where the company has issued shares by way of preferential allotment or private placement of debentures during the year under review, the Auditor in his report should mention that to whether the provisions of Section 42 of Companies Act, 2013 have complied and that the amount raised has been used for the purpose for which the funds were raised. If the requirements have not complied, the details& the amount involved and the nature of noncompliance has to be mentioned.

Non-Cash Transaction

Whether any non-cash transaction has been undertaken by the company with its director or any other person concerned, it has to be observed that the provisions of Section 192 of Companies Act, 2013 has been complied with.

Register under RBI Act 1934

Where the company is required to obtain registration under Section 45 IA of Reserve Bank of India Act, 1934 and whether the registration has been obtained.

Summary

To summarize, CARO has been announced to get important information from the auditors that was a necessity for the MCA. Thus, it is mandatory for the auditors to report on the clauses mentioned in the report.

The Auditor’s Report Order is also available in the PDF Form.

Auditors-Report-Order-CARO-2016