Companies (Auditor’s Report)
Order, 2016
Background
Companies Act 1956
• Section 227 (4A) of the Companies Act 1956, required that the auditor’s
report of certain class of companies should include a statement on
certain prescribed matters. These reporting requirements were
prescribed under the Companies (Auditor’s Report) order 2003 by the
Ministry of Corporate Affairs.
Companies Act 2013
• Section 227(4A) ceased to be effective from 01st April 2014 after
notification of section 143(11) under Companies Act 2013. MCA issued
Companies (Auditor’s Report) Order, 2015 (CARO 2015) prescribing
certain reporting requirement for auditors of certain class of companies.
CURRENT STATUS
On 30th March 2016, MCA has issued CARO 2016 and is effective for FY
2015-2016 and it is applicable ONLY for standalone financial statements
and not for Consolidated financial statements.
2
Non Applicability of CARO 2016 to select companies
• Following companies are exempt from CARO 2016
–
a banking company
–
an insurance company
–
a company licensed to operate under Section 8 of Companies Act
–
a one person company as defined under clause (62) of Section 2 of Companies Act
and a small company as defined under clause (85) of Section 2 of the Companies
Act.
–
a private company
a.
not being subsidiary or holding company of a public company
b.
not having networth of more than Rs.1 crore as on balance sheet date
c.
not having borrowings exceeding Rs.1 crore from bank or financial institution at any
point during the financial year
d.
not having total revenue as disclosed in Schedule III exceeding Rs.10 crores during
the financial year as per the financial statement.
3
Reporting Areas- Comparison
S.N
o.
CARO 2016
CARO 2015
CARO 2003
1
Fixed assets
Fixed assets
Fixed assets
2
Inventories
Inventories
Inventories
3
Loans to related parties
Loans to related parties
Loans to related parties
4
Compliance with Section 185/186
of Companies Act 2013
Not included
Not included
5
Compliance with Deposit Rules
Compliance with Deposit
Rules
Compliance with Deposit
Rules
6
Maintenance of cost records
Maintenance of cost records
Maintenance of cost
records
7
Statutory dues
Statutory dues
Statutory dues
8
Default in repayment of dues to
FI/bank/Debenture
Default in repayment of dues
to FI/bank/Debenture
Default in repayment of
dues to FI/bank/Debenture
9
Utilization of IPO proceeds/
Application of term loans
Utilization of IPO proceeds
not included
Utilization of IPO proceeds/
Application of term loans
10
Reporting on Fraud
Reporting on Fraud
Reporting on Fraud
4
Reporting Areas
S.No
.
CARO 2016
CARO 2015
CARO 2003
11
Compliance with 197 for
managerial remuneration
Not included
Not included
12
Compliance with Nidhi Rules
Not included
Compliance with Nidhi Rules
13
Compliance with Sec 177/188 on
related party transactions
Not included
Particulars of Contracts or
arrangements referred in
Section 301
14
Preferential allotment –Section
42 compliance
Not included
Preferential allotment
15
Non-cash transactions with
directors
Not included
Not included
16
Whether company registered
under RBI Act
Not included
Not included
17
Removed
Internal control system
Internal control system
18
Removed
Accumulated losses and
cash losses
Accumulated losses and cash
losses
19
Removed
Guarantees for loan taken
by others
Guarantees for loan taken by
others
20
Removed
Removed
Internal audit system
5
Reporting Areas
S.No
.
CARO 2016
CARO 2015
CARO 2003
21
Removed
Removed
Advance granted on security of
shares/other securties
22
Removed
Removed
Short term funds used for long
term
23
Removed
Removed
Securities and charge on
debenture issue
6
Fixed Assets
Area
Fixed Assets
CARO 2016 clause
a. whether the company is maintaining proper records showing full particulars,
including quantitative details and situation of fixed assets;
b. whether these fixed assets have been physically verified by the management
at reasonable intervals; whether any material discrepancies were noticed on
such verification and if so, whether the same have been properly dealt with in
the books of account
c. whether the title deeds of immovable properties arc held in the name of
the company. lf not, provide the details thereof (NEW CLAUSE)
CARO 2015 clause
Same as clause a and clause b given in CARO 2016.
DOCUMENTATION
a. Updated fixed asset register with all details (Quantity/location/cost,
depreciation, accumulated depreciation/WDV/Asset ID etc.) tallied with general
ledger
b. Evidence of physical verification and adjustment of differences
c. Get a list of freehold immovable properties with name of property, location,
extent, Cost as per accounts. List separately any leased properties included
under Fixed assets also. Immovable property shown as Investment property or
as Inventory need not be included.. If as per IND AS lands are not included
under fixed assets list them separately as well though the requirement may not
apply to them.
7
Inventories
Area
CARO 2016 clause
whether physical verification of inventory has been conducted at reasonable
intervals by the management and whether any material discrepancies were noticed
and if so, whether they have been properly dealt with in the books of account
CARO 2015 clause
Inventories
a. whether physical verification of inventory has been conducted at reasonable
intervals by the management;
b. are the procedures of physical verification of inventory followed by the
management reasonable and adequate in relation to the size of the company and
the nature of its business. If not, the inadequacies in such procedures should be
Reported
c. whether the company is maintaining proper records of inventory and whether any
material discrepancies were noticed on physical verification and if so, whether
the same have been properly dealt with in the books of account
DOCUMENTATION
a. Evidence
of
physical
verification
and
to
comment
monthly/quarterly/annual physical verification is reasonable
b. Adjustment of discrepancies in financial statement
8
whether
Loans to related parties
Area
Loans to related
parties
CARO 2016 clause
whether the company has granted any loans, secured or unsecured to companies,
firms, Limited Liability partnerships or other parties covered in the register
maintained under section 189 of the Companies Act, 2013. If so:
a. whether the terms and conditions of the grant of such loans are not
prejudicial to the company's interest (NEW CLAUSE)
b. whether the schedule of repayment of principal and payment of interest has
been stipulated and whether the repayments or receipts are Regular
c. if the amount is overdue, state the total amount overdue for more than
ninety days, and whether reasonable steps have been taken by the
company for recovery of the principal and interest (NEW CLAUSE)
CARO 2015 clause
whether the company has granted any loans, secured or unsecured to companies,
firms or other parties covered in the register maintained under section 189 of the
Companies Act. If so:
a. whether receipt of the principal amount and interest are also regular
b. If overdue amount is more than rupees one lakh, whether reasonable steps
have been taken by the company for recovery of the principal and interest
(REMOVED)
DOCUMENTATION
Get a copy of 189 register and verify the same. Check if repayment of interest and
principal is regular. If overdue for more than 90 days, state the amount and steps
taken for recovering the same.
9
Loans, Investments and Guarantees
Area
CARO 2016 clause
in respect of loans, investments, guarantees, and security whether
provisions of section 185 and I86 of the Companies Act, 2Ol3 have been
complied with. If not, provide the details thereof (NEW CLAUSE)
CARO 2015 clause
Loans,
Investments and
Guarantees
Not included
DOCUMENTATION
Check compliance with Section 185 and Section 186 of Companies Act 2013. Refer
PKF Company law checklist. Qualify if there is non-compliance with above
sections.
10
Acceptance of Deposits
Area
CARO 2016 clause
Acceptance of
deposits
in case, the company has accepted deposits, whether the directives issued by the
Reserve Bank of India and the provisions of sections 73 to 76 or any other relevant
provisions of the Companies Act, 20 l3 and the rules framed thereunder, where
applicable, have been complied with? If not, the nature of such contraventions be
stated; lf an order has been passed by Company Law Board or National Company
Law Tribunal or Reserve Bank of India or any court or any other tribunal, whether
the same has been complied with or not?
CARO 2015 clause
Same as above
DOCUMENTATION
a. Check for compliance with directives issued by RBI
b. Check for compliance with Section 73-76 of Companies Act
c. Check whether order has been passed by CLB/NCLT and examine steps
taken by company to comply with the order.
11
Maintenance of cost records
Area
CARO 2016 clause
whether maintenance of cost records has been specified by the Central
Government under sub-section (1) of section l48 of the Companies Act, 2013 and
whether such accounts and records have been so made and maintained.
CARO 2015 clause
Maintenance of
cost records
Same as above
DOCUMENTATION
Verify whether proper cost accounts and records are made and maintained by the
Company as prescribed
12
Statutory dues
Area
Statutory dues
CARO 2016 clause
a. whether the company is regular in depositing undisputed statutory dues
including provident fund, employees' state insurance, income tax, sales-tax,
service tax, duty of customs, duty of excise, value added tax, cess and any
other statutory dues to the appropriate authorities and if not, the extent of the
arrears of outstanding statutory dues as on the last day of the financial year
concerned for a period of more than six months from the date they became
payable, shall be indicated
b. where dues of income tax or sales tax or service tax or duty of customs or duty
of excise or value added tax have not been deposited on account of any
dispute, then the amounts involved and the forum where dispute is pending
shall be mentioned.
CARO 2015 clause
Same as above. Following clause has been removed
whether the amount required to be transferred to investor education and protection
fund in accordance with the relevant provisions of the Companies Act, 1956 (1 of
1956) and rules made thereunder has been transferred to such fund within time
DOCUMENTATION
a. Obtain list of statutory dues company is required to deposit regularly.
b. Check due date and actual remittance date for all statutory dues and conclude
if there are delays in remittance.
c. Check if there are any arrears as on balance sheet date and whether the
arrears are outstanding for more than six months as on balance sheet date.
d. Identify legal tax related disputes by review of internal audit reports, board
minutes. Disclose legal tax disputes in the CARO report.
13
Defaults in repayment of Loan borrowed
Area
CARO 2016 clause
whether the company has defaulted in repayment of loans or borrowing to a
financial institution, bank, government or dues to debenture holders? If yes, the
period and the amount of default to be reported (in case of defaults to banks,
financial institutions, and government, lender wise details to be provided).
Default in
repayment of
loan borrowed
CARO 2015 clause
Same as above.
DOCUMENTATION
a. All defaults as on balance sheet date has to be reported
b. If application of re-schedulement of loan has been made/accepted or default
has been made good during the accounting period, whether the fact has been
stated.
c. Where there is dispute between lender and borrower, ensure that we comment
saying we are unable to determine whether there is default in repayment of
dues to lender concerned
d. Specifically, disclose lender wise details of period and amount of default to
bank/FI or Government.
14
Application of funds received from IPO/loans
Area
CARO 2016 clause
whether moneys raised by way of initial public offer or further public offer
{including debt instruments) and term loans were applied for the purposes for
which those are raised. If not, the details together with delays or default and
subsequent rectification, if any, as may be applicable, be reported
Application of
funds received
from IPO/Loans
CARO 2015 clause
whether term loans were applied for the purpose for which the loans were obtained;
DOCUMENTATION
Check and take copies of the documents like Prospectus which state the purpose
for which money is raised. Ensure the actual spending is in line for each such
purpose. Check Board minutes /agenda where the reporting for such expenditure
has been made and take excerpts. List exceptions and report.
15
Reporting on Frauds
Area
CARO 2016 clause
whether any fraud by the company or any fraud on the company by its officers or
employees has been noticed or reported during the year; if yes, the nature and the
amount involved is to be indicated
CARO 2015 clause
Reporting on
Frauds
whether any fraud on or by the company has been noticed or reported during the
year; If yes, the nature and the amount involved is to be indicated
DOCUMENTATION
• Review internal audit reports
• enquire from the management about any frauds on or by the company that it
has noticed or that have been reported to it.
• Examine the minutes of the book of the board meeting, audit committee etc., of
the company in this regard.
16
Managerial Remuneration
Area
CARO 2016 clause
whether managerial remuneration has been paid or provided in accordance
with the requisite approvals mandated by the provisions of section 197 read
with Schedule V to the Companies Act? If not, state the amount involved and
steps taken by the company for securing refund of the same (NEW CLAUSE)
Managerial
Remuneration
CARO 2015 clause
Not included
DOCUMENTATION
• Check managerial remuneration account as well as related perks accounts
• Check with resolutions of Remuneration committee, Board and Members as
applicable (and CG approval if any)
• Check Secretarial audit report.
• State steps taken by company to get refund of excess moneys paid which could
be mails, letters and where there is dispute legal notice sent etc
17
Nidhi Companies
Area
CARO 2016 clause
Whether the Nidhi Company has complied with the Net Owned Funds to
Deposits in the ratio of 1: 20 to meet out the liability and whether the Nidhi
Company is maintaining ten per cent unencumbered term deposits as
specified in the Nidhi Rules, 2014 to meet out the liability. (NEW CLAUSE)
Nidhi Companies
CARO 2015 clause
Not included
DOCUMENTATION
IN case of Nidhi company check out the above matters and report; In other
companies state ‘this clause is not applicable as it is not a Nidhi co.
18
Related party transactions
Area
CARO 2016 clause
whether all transactions with the related parties are in compliance with
section 177 and 188 of Companies Act, 2013 where applicable and the details
have been disclosed in the Financial Statements etc.. as required by the
applicable accounting standards (NEW CLAUSE)
Related party
Transactions
CARO 2015 clause
Not included
DOCUMENTATION
• Ensure transactions have been below the limits if any specified by AC/Board
• Where there are deviations report
• Cross refer disclosures of RPT as per Accounting standards in FS
• Do a reco. between AS and what is disclosed in Board report.
19
Preferential allotment
Area
CARO 2016 clause
Preferential
Allotment
whether the company has made any preferential allotment or private
placement of shares or fully or partly convertible debentures during the year
under review and if so, as to whether the requirement of section 42 of the
Companies Act,2013 have been complied with and the amount raised have
been used for the purposes for which the funds were raised. If not, provide
the details in respect of the amount involved and nature of non-compliance:
(NEW CLAUSE)
CARO 2015 clause
Not included
DOCUMENTATION
Applicable only if there has been a preferential allotment or private placement of
shares of PCD or FCD. If so, check compliance with S 42 and document the same
here. Check purpose of issue and see if complied with. List all exceptions and
report
20
Non-cash transactions with Directors
Area
CARO 2016 clause
whether the company has entered into any non-cash transactions with
directors or persons connected with him and if so, whether the provisions of
section 192 of Companies Act, 2013 have been complied with (NEW CLAUSE)
CARO 2015 clause
Non-cash
transactions
Not included
DOCUMENTATION
• Check whether there are acquisitions of assets by Company from a director
/connected persons or
• Acquisitions of assets by director/connected persons from company and
consideration is non cash (like issue of shares etc)
• Check Board minutes, AC minutes etc
• Check if Members’ resolution has been passed as required by Section and take
a copy. If not complied with report
21
Registration under RBI Act
Area
CARO 2016 clause
whether the company is required to be registered under section 45 IA of the
Reserve Bank of India Act, 1934 and if so, whether the registration has been
obtained (NEW CLAUSE)
CARO 2015 clause
Registration
under RBI Act
Not included
DOCUMENTATION
Mainly Applicable for NBFC. If registered get a copy of Registration certificate. In
some cases whether registration is required is itself a contentious matter and if so
request Company to obtain a legal opinion
22
Thank You!