Company Auditor’s Report Order (CARO), 2016

COMPANIES AUDITOR REPORT ORDER (CARO) RULES, 2016

Company Auditor’s Report Order (CARO), 2016 – Reporting Requirements

1. The Existence of CARO, 2016

MCA was of the objective that there are certain particular issues which are important to be reported with the financial statements for certain entities as a part of their audit reports. The auditor of such prescribed entities is required to report on the points mentioned under this order after performing procedures for verification of the same.

2. Applicability of CARO 2016

CARO 2016 is applicable to all the companies except the following (which) are specifically excluded from its purview:
A. Banking Companies
B. Insurance Companies
C. Companies registered for Charitable Purposes
D. One Person Company
E. Small Companies (Companies with Paid up capital less than or equal to Rs. 50 Lakhs and Last reported turnover less than or equal to Rs. 2 Crores)
F. The following Private Companies are also exempt from the requirements of CARO, 2016
i. Not a holding or subsidiary of a Public company
ii. Paid up Capital plus Reserves less than or equal to Rs. 1 Crore as at the reporting date
iii. Borrowings less than or equal to Rs. 1 Crore at any time during the year
iv. Revenue less than or equal to Rs. 10 Crores in the financial year
The auditors of all other class or classes of companies are required to report on the matters specified in this order. This order applies to foreign companies also and thus, the auditors for such companies are also required to report on the matters specified in CARO, 2016.

3. Matters specified in CARO 2016

The Company Auditor’s Report Order (CARO), 2016 includes the following matters on which the auditor is required to report mandatorily:
A. Fixed Assets
B. Inventory
C. Loans given by Company
D. Loan to Directors and Investment by the Company
E. Deposits
F. Cost records
G. Statutory Dues
H. Repayment of Loans
I. The utilisation of funds
J. Reporting of Fraud
K. Approval of Managerial Remuneration
L. Nidhi Company
M. Related Party Transactions
N. Private placement of Preferential Issues
O. Non-Cash Transactions
P. Registration under RBI Act

4. Reporting Requirement Under Each Clause

A brief of reporting requirements under each of the above clauses is hereunder:
A. Fixed Assets
i. Whether the company maintains proper records showing full particulars including details of quantity and situation of the fixed assets
ii. Whether physical verification of the fixed assets is conducted by the management at reasonable intervals
iii. If any material discrepancies were noticed on physical verification, whether it has been accounted for in books of accounts

B. Inventory
i. Whether at reasonable intervals the management has conducted physical verification of inventory
ii. If any material discrepancies were noticed on physical verification, whether it has been accounted for in books of accounts

C. Loans given by Company
Whether the company has granted any secured or unsecured loans to related parties. IF they have granted such loans, to check the following:
i. Whether the terms of such loans are not prejudicial to company’s interest
ii. Whether the repayment and its receipt are proper
iii. To report with loans repayment outstanding for more than 90 days and what is the recovery position

D. Loan to Directors and Investment by the Company
Whether the loans and guarantees to directors are in order and in compliance with the limits prescribed.

E. Deposits
Whether the company has accepted any deposits and if yes, have they followed RBI’s directives as under:
i. The provisions regarding acceptance of deposits under section 73 to 76 of the Companies Act, 2013 have been followed
ii. If the order is passed by the court or any other tribunal like RBI, CLB, etc
iii. In case of non-compliance, the nature of the same has to be reported

F. Cost Records
If Central Government has prescribed maintaining cost records, whether the same have been properly maintained or not.

G. Statutory Dues
The auditor shall report whether the company:
i. Is regularly depositing its statutory dues
ii. If not regular, statutory dues outstanding for more than 6 months should be disclosed
iii. If any taxes have not been deposited because of any dispute, the amount of dispute and the forum where the litigation is ongoing should be disclosed

H. Repayment of Loans
If the company has defaulted in repayment of loans to banks, government, debenture-holders, etc. then the amount and period of default is to be reported.

I. Utilisation of funds
If any funds were raised under a public offer or loan, have they been applied to the purpose for which they were raised. Also, the auditor has to report in case of any delay and defaults.

J. Reporting of Fraud
If any fraud by the company or its employees has occurred during the year. If yes, nature and amount involved have to be reported.

K. Approval of Managerial Remuneration
Whether the limits prescribed under the Company’s Act 2013 for managerial remuneration have been adhered to. If not, the amount of excess amount involved and steps for recovery being taken have to be reported.

L. Nidhi Company
In case of a Nidhi company, whether the following have been complied with has complied with:
i. Maintain net owned funds to deposit in the ratio of 1:20 to meet out the liability
ii. Maintain 10% unattached term deposits to meet out the liability

M. Related Party Transactions
The compliances with rules specified in Companies Act 2013 for transactions with related parties have been complied with or not. Also, the same is disclosed appropriately in the financial statements or not.

N. Private placement of Preferential Issues
Whether the company has made any preferential or private allotments of shares and debentures. Also, whether the amount Raised has been utilized towards the purpose for which it was raised.

O. Non-Cash Transactions
Whether the company has followed the limits and conditions as per Companies Act 2013 in respect of non-cash transactions with directors or their relatives.

P. Registration under RBI Act
Whether the company is required to be registered under RBI Act and if yes, then whether the registration is obtained or not.
All the above-stated clauses are mandatory to be reported on. Also, the disclosures are to be given appropriately.

Bare Act given below

The MCA has issued the Companies (Auditor’s Report) Order, 2016 (CARO 2016), on 29th March 2016. This order has been issued in supersession of the Companies (Auditor’s Report) Order, 2015, and is applicable for reporting on financial statements of companies whose financial year commences on or after 1st April 2015. CARO 2015 was issued by MCA in supersession of CARO 2003 which was issued earlier in pursuance with the provision of Section 227 (4A) of Companies Act 1956.

Now, the MCA has relaxed the applicability of CARO 2016 to private companies by increasing applicability thresholds. CARO 2016 will not apply to the auditor’s report on consolidated financial statements. The total number of clauses in the new CARO is 16. CARO 2016 has enhanced the auditor’s reporting requirements in certain areas, such as related party transaction and managerial remuneration. The provisions of the CARO 2016 are furnished below:

CARO 2016 is applicable from FY 2015-16 and the matters specified therein shall be included in each report made by the auditor under Section 143 of the Companies Act, 2013 on the account of every company to which CARO 2016 applies.

Section 143 (11) of the Act stipulates that the Central Government may order for the inclusion of statement on specified matter in the auditor’s report for specified class or description of companies. Accordingly, CARO 2016 is issued in pursuance of Section 143 (11) of Companies Act 2013 for inclusion of the matters specified therein in auditors’ report. Hence, CARO 2016 should be complied by the statutory auditor of every company on which it applies.

CARO 2016 applicable to every company including a foreign company as defined in clause (42) of Section 2 of the Companies Act 2013.

The following classes of companies are outside the purview of the CARO 2016.

(a) Banking company as defined under Section 5 (c) of the Banking Regulation Act, 1949.

(b) Insurance company as defined under the Insurance Act 1938.

(d) A one person company (OPC) as defined under clause (62) of Section 2 of Companies Act 2013 (OPC means a company which has only one person as a member).

(e) A small company under Section 2 (85) of the Companies Act, 2013.

(1) As per sec 2(85) of Companies Act 2013 small company means a company, other than a public company:

a) Paid up share capital of which does not exceed ` 50 lacs or such higher amount as may be prescribed which shall not be more than ` 5 crore, and

b) Turnover of which as per its last profit and loss account does not exceed ` 2 crore or such higher amount as may be prescribed which shall not be more than ` 20 crore.

(2) The following company shall not qualify as a small company:

a) A holding company or a subsidiary company.

b) A company registered under Section 8 of the Act.

c) A company or body corporate governed by any special act.

(f) The auditor of following type of Private Companies are not required to comment on the matter prescribed under CARO 2016:

(1) A private company which is not holding or subsidiary company of a public company, and

(2) A private company having a paid up capital and reserve and surplus not more than ` 1 crore as on the balance sheet date, and

(3) A private company which does not have total borrowing exceeding ` 1 crore from any bank and financial institution at any point of time during the financial year, and

(4) A private company which does not have total revenue exceeding ` 10 crore during the financial year.

Note: Such revenue means revenue as disclosed in scheduled III to the Companies Act, 2013 and includes revenue from discontinuing operation.

Matters included in CARO 2016 are discussed below:

Fixed Asset [clause 3 (i)]

(a) Whether the company is maintain proper records showing full particulars including quantitative details and situation of fixed asset.

(b) Whether these fixed asset have been physically verified by management at reasonable interval.

(c) 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.

Inventory [Clause 3 (ii)]

(a) Whether physical verification of inventory has been conducted at reasonable interval by the management.

(b) Whether any material discrepancies has been noticed on such verification and if so, whether the same has been properly dealt with in the books of account

Loan given by Company [Clause 3 (iii)]

Whether the company has granted any loans, secured or unsecured to companies, firms, LLP or other parties covered in the registered maintained under Section 189 of the Companies Act, 2013. If so,

(a) Whether terms and conditions of the grant of such loan are not prejudicial to the company’s interest.

(b) Whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments and receipts are regular

(c) If the amount is overdue, state the total amount overdue, state the total amount overduefor more than 90 days and whether reasonable steps have been taken by the company for recovery of principal.

Loan to director and investment by the company [Clause 3 (iv)]

In respect of loan, investment, guarantees and security whether provision of Sections 185 and 186 of the Companies Act, 2013 has been complied with. If not, provide the details thereof.

Deposits [Clause 3 (v)]

In case, the company has accepted deposits, whether the following has been complied with:

Directives issued by the reserve bank of India

(a) The provision of sec 73 to 76 or any other relevant provision of Companies Act, 2013 and the rules framed there under, and

(b) If the order has been passed by company law board (CLB) or National company law tribunal (NCLT) or RBI or any court or any other tribunal.

Cost Records [Clause 3 (vi)]

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

Statutory Dues [Clause 3 (vii)]

(a) Whether the company is regular in depositing undisputed statutory dues with the appropriate authorities including Provident fund, Employees State Insurance fund, income tax, sales tax, service tax, duty of custom, duty of excise, value added tax, cess or any other statutory dues. If the company is not regular in depositing such statutory dues, the extent of arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they become payable, shall be indicated by the auditor.

(b) In case dues of income tax and sales tax or service tax or duty of custom or duty of excise or value added tax have not been deposited on account of any dispute, then the amount involved and the forum where dispute is pending shall be disclosed.

Repayment of Loan [Clause 3 (viii)]

Whether the company has defaulted in repayment of loans and borrowing to a financial institution, banks, government or dues to debenture holders. If yes, the period and the amount of default to be reported.

Utilisation of IPO and further public offer [Clause 3 (ix)]

Whether money raised by way of initial public offer or further public offer and the term loans were applied for the purpose for which those are raised. If not, the details together with delays and defaults and subsequent rectification, if any, as may be applicable, be reported

Reporting of Fraud [Clause 3 (x)]

Whether any fraud by the company or any fraud on the company by its officers and employees has been noticed or reported during the year: if yes, the nature and the amount involved is to be indicated.

Approval of managerial remuneration [Clause 3 (xi)

Whether managerial remuneration has been paid or provided in accordance with the requisite approvals mandated by the provision of Section 197 read with schedule 5 to the Companies Act, 2013. If not, state the amount involved and step taken by the company for securing refund of the same.

Nidhi Company [Clause 3 (xii)]

Whether the Nidhi company has complied with the net owned funds to deposit in the ratio of 1:20 to meet out the liability and whether the Nidhi company is maintain 10% unencumbered term deposit as specified in the Nidhi rules 2014 to meet out the liability.

Related Party Transaction [Clause 3 (xiii)]

Whether all transaction with the related party is in compliance with Section 177 and 188 of the Companies Act, 2013 where applicable and the details have been disclosed in the financial statement etc., as required by the applicable accounting standard.

Private Placement of 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 Companies Act, 2013 have been complied with and the amount raised has been used for the purpose for which the funds were raised. If not, provide the detail in respect of the amount involved and the nature of non-compliance.

Non Cash Transaction [Clause 3 (xv)]

Whether the company has entered into any non-cash transaction with the director or person concerned with his and if so, whether the provision of Section 192 of Companies Act, 2013 has been complied with.

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

Whether the company is required to be registered under Section 45 IA of Reserve Bank of India Act, 1934 and if so, whether the registration has been obtained.

ICAI’s Guidance Note on CARO 2016 by MCA [24 April, 2016]

The 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. The CARO 2016 contains several new/modified reporting requirements vis-a-vis the CARO 2003/ CARO 2015.

The ICAI, with a view to provide appropriate guidance to it’s members, has brought out Guidance Note on the

Companies (Auditor’s Report) Order, 2016. It is divided into:

(a) Relevant provision which contains Requirement of all clauses.

(b) Audit procedures and Reporting which covers Procedure to be adopted by auditor.

This Guidance Note has been written in an easy to understand language and contains detailed guidance on various Clauses of CARO 2016 and the various issues and intricacies involved therein, so that the requirements and expectations of the Order can be fulfilled in letter and spirit by the auditors. It’s a comprehensive and self contained reference document for the members.

Following is the comparison between CARO 2015 and 2016:

Sr. No.	Companies (Auditors’ Report) Order, 2015	Companies (Auditors’ Report) Order, 2016	Remarks
a.	Applicable on all companies other than:	Applicable on all companies other than:	Changes in respect of applicability of CARO on Private limited company
	-Banking Company	-Banking Company
	-Insurance Company	-Insurance Company
	-Sec 8 Company	-Sec 8 Company
	-One Person Company	-One Person Company
	– Private Limited company not having	– Private Limited company (not being holding/subsidiary of public company) not having
	:Paid up Capital and reserves>50 Lacs during the year	:Paid up Capital+ reserves>1 crores as on balance sheet date
	:loans outstanding> 25 Lacs during the year	:loans outstanding> 1 crores during the year
	:Turnover > 5 crores during the year	:Total revenue as per schedule II>10 crores

1	-Whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets.	-Whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets.	New CARO demands additional reporting for such immovable assets whose title are not owned by the company.
	-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;	-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;
		-Whether the company holds title of immovable property held by the company, If not provides the details thereof

2	-whether physical verification of inventory has been conducted at reasonable intervals by the management	-whether physical verification of inventory has been conducted at reasonable intervals by the management and if any discrepancies has been notices are properly dealt with or not.	The requirement has been curtailed to physical verification and treatment of discrepancies noticed. The auditor no need to report for records maintained by the company for inventories.
	-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
	-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;

3	-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,	-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,	– The new CARO provides for the term and conditions of loan provided.
	-whether receipt of the principal amount and interest are also regular; and	-Whether the schedule of repayment is stipulated, whether the repayment is regular or not.	– The new carob provides for overdue payment for more than 90 days instead outstanding of amount above the threshold limit of 1 lac
	-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;	-Whether the term and conditions of the grant of such loan are prejudicial to the interest of the company
		-If the amount is over due , then state the amount over due for more than 90 days and what steps company has followed.

4	-Is there an adequate internal control system commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods and services. Whether there is a continuing failure to correct major weaknesses in internal control system.	-In respect of loans, investments, guarantees, and security whether provisions of section 185 and I86 of the Companies Act, 2013 have been complied with. If not, provide the detail thereof.	The new CARO instead of internal control provides for the loans and investments and other which are covered under sec 185 and 186 of the 2013 Act.

5	-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 and the rules framed thereunder, where applicable, have been complied with? If not, the nature of contraventions should 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?	-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 and the rules framed thereunder, where applicable, have been complied with? If not, the nature of contraventions should 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?	No Change

6	where maintenance of cost records has been specified by the Central Government under sub-section (1) of section 148 of the Companies Act, whether such accounts and records have been made and maintained;	where maintenance of cost records has been specified by the Central Government under sub-section (1) of section 148 of the Companies Act, whether such accounts and records have been made and maintained;	No Change

7	-Is the company regular in depositing undisputed statutory dues including provident fund, employees’ state insurance, income-tax, sales-tax, wealth tax, service tax, duty of customs, duty of excise, value added tax, cess and any other statutory dues with the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as at 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 by the auditor.	-Is the company regular in depositing undisputed statutory dues including provident fund, employees’ state insurance, income-tax, sales-tax, wealth tax, service tax, duty of customs, duty of excise, value added tax, cess and any other statutory dues with the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as at 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 by the auditor.	In new CARO the auditor need not provide for third limb of old CARO requirement
	-In case dues of income tax or sales tax or wealth tax or service tax or duty of customs or duty of excise or value added tax or cess 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 constitute a dispute).	-In case dues of income tax or sales tax or wealth tax or service tax or duty of customs or duty of excise or value added tax or cess 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 constitute a dispute).
	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.

8	-Whether in case of a company which has been registered for a period not less than five years, its accumulated losses at the end of the financial year are not less than fifty per cent of its net worth and whether it has incurred cash losses in such financial year and in the immediately preceding financial year;	-Whether the company has defaulted in repayment of dues to a financial institution or bank or debenture holders? If yes, the period and amount of default to be reported	The auditor need not report on point 8 of old CARO instead point 9 of Old CARO has been shifted to Point 8 of new CARO.

9	whether the company has defaulted in repayment of dues to a financial institution or bank or debenture holders? If yes, the period and amount of default to be reported	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;	Point 9 of old CARO has been shifted to point 8 of new CARO. Point 9 of new CARO asks for utilization of end use of money raised through IPO and debt instruments

10	whether the company has given any guarantee for loans taken by others from bank or financial institutions, the terms and conditions whereof are prejudicial to the interest of the company;	whether any fraud by the company or officers or employees has been noticed the nature and the amount involved is any fraud on the Company by its or reported during the year; If yes, to be indicated;	-Point no 12 of Old CARO has been shifted to point 10 of New CARO.
			– Point 10 is no more in existence

11	whether term loans were applied for the purpose for which the loans were obtained;	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;	-Point 11 of old CARO is covered in point 9 of new CARO. – Point 11 of New CARO is new insertion.

12	whether any fraud by the company or officers or employees has been noticed the nature and the amount involved is any fraud on the Company by its or reported during the year; If yes, to be indicated;	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 percent unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liabilities:	-Point no 12 of Old CARO has been shifted to point 10 of New CARO. – Point 12 of new CARO is new insertion.

13	–	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 insertion

14	–	whether the company has made any preferential allotment or private placement of shares or fully or partly convertibles 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 insertion

15	–	Whether the company has entered into any non-cash transactions with directors or persons connected with him and iI so, whether the provisions of section 192 of Companies Act, 2013 have been complied with;	New insertion

16	–	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 insertion

Company Auditor’s Report Order (CARO), 2016

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