As per CARO 2016, An auditor’s report of certain specified descriptions and classes of companies needs to include a statement on certain prescribed matters. It is as per the provisions under Section 143 (11) of the Companies Act. 2013. The requirements with regards to Auditors Report are provided under CARO. The full form of CARO is Company Auditor’s Report Order. This article will look at CARO applicability, master specified, reporting requirement under each clause, etc.
Did you know?
There are 21 clauses in CARO 2020, compared with 16 clauses in 2016. 7 ne7 new clauses were added, 1 clause was merged with another, and 1 was deleted.
The Existence of CARO, 2016
The MCA (Ministry of Corporate Affairs) issued CARO 2016 on the 29th of March, 2016. The order was issued in suppression of CARO 2015. CARO 16 has since then been pertinent for reporting financial reports of companies where the financial year commences after the 1st of April in 2015. A clear objective of the 2016 CARO applicability was to ensure that certain particular types of issues needed to be reported in the financial statements for some entities as a part of the audit report.
CARO 2016 Applicability
CARO 2016 applicability is meant for only certain company types registered in India, including foreign companies. The auditors are hence obligated to report matters stated in this order. Below are the types of companies where CARO applicability is necessary:
- Companies that have a paid-up capital of greater than ₹1 crore;
- Companies that have borrowed more than ₹1 crore from any financial institution or bank within a particular financial year;
- Companies that are a subsidiary or holding company; and
- Companies that exceed a total revenue of more than ₹10 crores within a financial year.
Companies that do not meet the above criteria are exempted from CARO 2016 requirements. Below are companies that do not fall under CARO 2016, and CARO applicability is exempted for them. These are:
- Insurance companies,
- Banking companies,
- Section 8 companies- companies with non-profit objectives like charitable companies, social welfare etc.,
- One person company, and
- Small or private limited companies (companies with a paid-up capital of less than or equal to ₹50 lakhs, and the reported turnover is less than equal to ₹2 crores).
Matters specified in CARO 2016
The MCA (Ministry of Corporate Affairs) has made changes to the requirements in CARO 2016. Below are the following matters that an auditor mandatorily needs to report:
- Information on Fixed Assets
- Loans Given by Companies
- Loans and investments
- Cost Records
- Statutory Dues
- Repayment of Loans
- The utilisation of funds
- Fraud Reporting
- Approval of Managerial Remuneration
- Nidhi Company
- Related Party Transactions
- Private Placements of Preferential Issues
- Non-cash Transaction
- Registration under RBI Act
Reporting Requirements Under Each Clause
Details of the CARO report requirement under each clause of CARO 2016 are mentioned below:
An auditors report needs to include the following matters related to Fixed Assets of the company:
- Proper Records: If the company can correct records, including details of quantity and condition of the fixed assets.
- Physical Verification: The assets need to be physically verified in periodical intervals by the organisation. If any material discrepancy is noticed, the same needs to be correctly updated in the book of accounts.
- Title Deeds: Any permanent property needs to be registered in the company’s name. Otherwise, the details need to be shared.
The below matter needs to be included in the auditor’s report related to the company's inventory management.
- Physical Verification: The inventory needs to be physically verified periodically by the organisation, and the same needs to be properly accounted for in a discrepancy during verification.
- Proper Records: Whether accurate records of inward and outward inventory are maintained.
Loans Given by Companies
Whether the firm has approved any loan (secured or unsecured) to the related parties, firms, companies, firms, LLP (Limited Liability Partnership) under Section 189 of the Companies Act, 2013.
- If the terms & conditions of the loans approved are not detrimental to the company’s interest;
- Whether the repayments are regular within a stipulated time along with receipts;
- Any loan amount that is outstanding or unsettled for more than 90 days has been reported with the details of the recovery process.
Loans and Investments
Whether regarding loans, investments and guarantees, are provisions of Sections 185 and 186 in compliance. Otherwise, are the relevant details provided.
If the firm has accepted deposits, and if the orders given by the Reserve Bank of India have been complied with, as below:
- The provisions for accepting deposits under the Companies Act, 2013 under Sections 73 to 76 have been followed.
- Is there any order passed by the Court, Tribunal, NCLT, CLB or RBI etc.?
- In case of any non-compliance, the details of infringements need to be reported.
Whether the cost records are being maintained as specified by Central Government.
- The auditor needs to report if statutory dues are being deposited regularly. These include Provident Fund, Sales Tax, ESI, Income Tax, VAT, Service Tax, GST, Customs Duty and Excise Duty.
- Any statutory dues outstanding for more than six months need to be reported.
- If statutory deposits are not being made due to any dispute, in that case, all details of the amount involved and the scene where the litigation is pending need to be disclosed.
Repayment of Loans
Whether the company has had a default in repaying any loans or borrowed from a financial institution, banks, Government or Debenture Holders, the details of the amount, time, and the lender need to be reported clearly.
The Utilization of Funds
If the company raises money through a public offering or IPO, any term loan that was applied along with the purpose needs to be verified in case of any delay or default observed during the CARO audit; the same needs to be reported.
Any fraud in the company or by its officers & employees has occurred throughout the year. The same needs to be reported with the details of the amount and the nature of the fraud.
Approval of Managerial Remuneration
Whether the managerial remuneration was paid according to the necessary approvals under Section 197 of the Companies Act, 2013, if not, the excess amount needs to be reported with all the required details of the steps taken to recover the amount that needs to be mentioned clearly.
- For a Nidhi company, the auditors need to validate that the company has been compliant with the net owned funds to deposits in the ratio of 1:20 to meet the obligatory issues.
- Whether the companies are maintaining 10% unattached term deposits as stated in Nidhi Rules of 2014 to meet the obligation.
Related Party Transactions
It needs to be established whether all transactions with related parties comply with the rules stated in the Companies Act, 2013. And whether the same needs have been revealed in the company financial reports.
Private Placements of Preferential Issues
In reviewing the CARO report, whether the firm makes any preferential allotment or private settlement of shares or partly or fully convertible debentures through the financial year? Whether the amount raised has been rightly used for the same purpose these funds were raised.
Whether the company was involved in any non-cash transaction with the director or the people associated with them if the conditions comply with Section192 of the Companies Act, 2013.
Registration Under RBI Act
If applicable, whether the company is mandated to be registered under the provisions mentioned in section 45-IA by the Reserve Bank of India, 1934. if applicable? If yes, then was the registration obtained or not.
CARO 2016 is not necessarily applicable to all the CARO report issued by the chartered accountant of a company. Anywhere the auditor cannot answer a question, the auditor needs to provide facts and reasons why they cannot give an opinion. CARO 2020 applicability has more details required than the old CARO 2016 report, and different types of information needed to be shared are also in CARO 2020.
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