An Overview of CARO 2016

An Overview of CARO 2016

Overview of CARO 2016

The (Ministry of Corporate Affairs) MCA has issued the Companies (Auditor’s Report) Order, 2016 (CARO 2016) which is applicable for audits of financial statements for periods beginning on or after April 1, 2015.

CARO 2016 has been issued under the Section 143(11) of the Companies Act, 2013 (18 of 2013) and in supersession of the Companies (Auditor’s Report) Order, 2015 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (ii), vide number S.O. 990 (E), dated the 10th April, 2015, except as respects things done or omitted to be done before such supersession, the Central Government, after consultation with the, committee constituted under proviso to sub- section (11) of section 143 of the Companies Act, 2013 hereby makes the following Order.

Total Clauses:

It has total 16 clauses compared to 12 clauses in CARO 2015.

Seven new clauses added to CARO 2015. Three Clauses has been removed and modification has been made in some Clauses.

Applicability of The Companies (Auditor’s Report) Order 2016 :

The Companies (Auditor’s Report) Order 2016 shall apply to every company including a foreign company as defined in clause (42) of section 2 of the companies act, 2013.

According to section 2(42) of companies Act, 2013 Foreign Company means any company or body corporate incorporated outside India which has a place of business in India whether by itself or through an agent, physically or through electronic mode; and conducts any business activity in India in any other manner.

Non Applicability of CARO 2016 on Companies:

  • Banking Company: A banking company as defined in the clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
  • Insurance Company: Insurance company as defined under the Insurance Act,1938 (4 of 1938);
  • Company registered with Charitable Objects: a company licensed to operate under section 8 of the Companies Act;
  • One Person Company: A One Person Company as defined under the clause (62) of section 2 of the Companies Act;
  • Small Company: A small company as defined under clause (85) of section 2 of the Companies Act;
  • Private Limited Company a private limited company, not being a subsidiary or holding company of a public company:
    (1) Capital (including reserves and Surplus) not more than Rs. 1 Crore having a paid up capital and reserves and surplus not more than rupees one crore as on the balance sheet date.
    (2) Borrowings not more than Rs. 1 crore which does not have total borrowings exceeding rupees one crore from any bank or financial institution at any point of time during the financial year.
    (3) Turnover not more than Rs. 10 Crore which does not have a total revenue as disclosed in Schedule III to the Companies Act, 2013 (including revenue from discontinuing operations) exceeding rupees ten crore during the financial year as per the financial statements.

Difference between in CARO 2015 and CARO 2016:

Particular Limit in CARO 2015 (In Rs.) Limit in CARO 2016 (In Rs.)
Paid up Capital and Reserves
and Surplus
50 lakh 1 Crore
Total Borrowings 25 lakh 1 Crore
Total Revenue 5 Crore 10 Crore

NOTE:

Not apply to the auditor’s report on Consolidated Financial Statements (CFS): There is another relief for the companies is that the companies (Auditor’s Report) Order, 2016 shall also not apply to the auditor’s report on Consolidated Financial Statements (CFS) of the company.

Various matters to be included in Auditors Report:

(i) Fixed Asset [Clause 3(i)]:

(a) Proper records: Whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets;
(b) Physical Verification: 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) Title Deeds: Whether the title deeds of immovable properties are held in the name of the company. If not, provide the details thereof; (Newly Inserted sub-point)

What changes has been done in comparison of CARO 2015: Earlier as per CARO 2015, this clause is limited to only proper records and physical verification of fixed assets but now it includes title deeds for immovable property to check whether property is held in the name of the company or not.

(ii) Inventory [Clause 3(ii)]:

Physical Verification: Whether physical verification of inventory has been conducted at reasonable intervals by the management
Material Discrepancies: Whether any material discrepancies were noticed and if so, whether they have been properly dealt with in the books of account.

What changes has been done in comparison of CARO 2015: Earlier as per CARO 2015, auditor has to report on whether company has followed adequate physical verification according to the size and nature of the company and maintained proper records of inventory. Now this requirement has been removed.

(iii) Loan given by Company [Clause 3(iii)]:

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) Terms and conditions: Whether the terms and conditions of the grant of such loans are not prejudicial to the company’s interest;
(b) Repayment of Principal and Payment of Interest: Whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular;
(c) Steps for Recovery of the Principal and Interest: If the amount is overdue for more than ninety days, and whether reasonable steps have been taken by the company for recovery of the principal and interest;

What changes has been done in comparison of CARO 2015: Now CARO 2016 includes reporting by auditor on the Loans given by the Company to companies, firms, Limited Liability partnerships and also includes giving report that such loans are not against the interest of the company.
The limit for overdue amount of Rs. 1 lakh has been removed which was earlier. And it includes that company has taken necessary actions to recover the principal and interest in case of any amount is overdue for more than 90 days. (Sec 189: Register of contracts or arrangements in which directors are interested)

(iv) Loan given to Directors and Investment by Company [Clause 3(iv)]:

In respect of loans, investments, guarantees, and security whether provisions of section 185 and 186 of the Companies Act, 2013 have been complied with. If not, provide the details thereof. (This provision has been newly inserted.)

What changes has been done in comparison of CARO 2015: This provision has been Newly inserted.

Note:

According to “Section 185”, no company can give loan directly or indirectly to any of its director or provide any guarantee or security in connection with the loan.
According to “Sec 186 (1)”, no Company can make investment through not more than two layers of investment unless this section gives permit to make investment more than two layers.
According to “Sec 186(2)”, no company shall give directly or indirectly loans to any person or other body corporates.

(v) Deposits [Clause 3(v)]:

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, 2013 and the rules framed thereunder, where applicable, have been complied with? If not, the nature of such contraventions be stated; If 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?

What changes has been done in comparison of CARO 2015: No change has been taken in this provision.

(vi) Maintenance of Cost Records [Clause 3(vi)]:

whether maintenance of cost records has been specified by the Central Government under sub-section (1) of section 148 of the Companies Act, 2013 and whether such accounts and records have been so made and maintained.

What changes has been done in comparison of CARO 2015: No change has been taken in this provision.

(vii) Statutory Dues [Clause 3(vii)]:

(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) Dispute for Tax and Duty: 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. (A mere representation to the concerned Department shall not be treated as a dispute).

What changes has been done in comparison of CARO 2015: Earlier as per CARO, 2015, auditor have to report that company has transferred money to Investor Education & Protection Fund as per the Companies Act, 2013. Now it has been removed. And also the Wealth Tax is excluded from CARO 2016.

(viii) Default in Repayment of Loans [Clause 3(viii)]:

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).

What changes has been done in comparison of CARO 2015: Earlier as per CARO, 2015, no requirement to give the lender wise details by auditor in case of any default in payment to a financial institution and banks.

(ix) Corporate Guarantee given for other’s loan [Clause 3(ix)]:

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.

What changes has been done in comparison of CARO 2015: Earlier CARO, 2015 not includes money raised by Public issue & Debt Instruments. And Auditors will also report for any delay for non-application of the term loan and money raised by other.

(x) Reporting on Fraud [Clause 3(x)]:

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;

What changes has been done in comparison of CARO 2015: Earlier CARO, 2015 not includes Fraud by the Officers or employees of the company. But now it is included in CARO 2016.

(xi) Approval of Managerial Remuneration [Clause 3(xi)]:

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. (This provision has been Newly inserted.)

What changes has been done in comparison of CARO 2015: This provision has been newly inserted. The statement is recently embedded and manages announcing of evaluator with respect to Managerial compensation paid by Company under section 197 read with Schedule V to the Companies Act.

(xii) Requirements by a Nidhi Company [Clause 3(xii)]:

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. (This provision has been newly inserted.)

What changes has been done in comparison of CARO 2015: Earlier Similar provision was considered in CARO 2003. But now it has been more secured.

(xiii) Related Party Transaction [Clause 3(xiii)]:

Whether all transactions with the related parties are in compliance with sections 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; (This provision has been newly inserted.)

What changes has been done in comparison of CARO 2015: This provision has been newly inserted.

(xiv) Private Placement or Preferential Issues [Clause 3(xiv)]:

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. (This provision has been newly inserted.)

What changes has been done in comparison of CARO 2015: Earlier Similar provision was considered in CARO 2003. Now this provision regarding report by Auditor in case of compliance of the provisions in relation to preferential allotment inserted in CARO, 2016.

(xv) Non-Cash Transaction [Clause 3(xv)]:

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. (This provision has been newly inserted.)

What changes has been done in comparison of CARO 2015:  This provision has been Newly inserted. 

“Non-cash transaction” means that to purchase assets of company by directors etc. for consideration other than cash.

(xvi) Register under RBI Act 1934 [Clause 3(xvi)]:

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. (This provision has been newly inserted.)

What changes has been done in comparison of CARO 2015: This provision has been Newly inserted. 

Reasons to be stated for Unfavorable or Qualified Answers-

(1) Unfavorable or Qualified Answer:

Where, in the auditor’s report, the answer to any of the questions referred to in paragraph 3 is unfavorable or qualified, the auditor’s report shall also state the basis for such unfavorable or qualified answer, as the case may be.

(2) Unable to Express any Opinion:

Where the auditor is unable to express any opinion on any specified matter, his report shall indicate such fact together with the reasons as to why it is not possible for him to give his opinion on the same.

Share with:

9 Comments

Hey There. I found your blog using msn. This is a really well written article. I’ll be sure to bookmark it and return to read more of your useful information. Thanks for the post. I’ll definitely comeback.

I like the helpful info you provide in your articles. I will bookmark your weblog and check again here regularly.

I like the helpful info you provide in your articles. I will bookmark your weblog and check again here regularly.

Leave a Reply

Your email address will not be published. Required fields are marked *