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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 29th, 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.
Table of Contents
of Corporate Affairs (MCA) announced the Companies Auditor’s Report Order
CARO Guidance note By MCA
note contains all the important information for the employees.
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
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.
The MCA has provided that every report made by the auditor under section 143 of the Companies Act, 2013 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:
is applicable to report on the financial statements of the companies who
commence their financial year on or after 1st April 2015.
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).
Also, Read: Roles and Responsibilities of Statutory Auditor.
The following are the reporting requirements under CARO 2016:
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.
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.
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.
Whether the following requirements have complied with the Directives issued by the reserve bank of India, if the company has accepted deposits:
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.
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.
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.
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.
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.
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.
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:
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.
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.
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.
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.
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.
Recommended Article: An Internal Auditor: Why are they important in a Company?.
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