CARO 2016- Applicability & Reporting Requirements

Rajat Aggarwal

Background

Section 143(11) of the Companies act, 2013 (2013 Act) requires that the Auditor’s report of specified class of companies should include a statement on the prescribed matters. These reporting requirements have been prescribed under the companies (Auditor’s Report) Order, 2015 (CARO 2015) issued by the Ministry of Corporate Affairs (MCA) 10th April 2015.

New Development

The MCA had setup a committee on 16 September 2015 to examine and recommend matters that should form part of the statement. This statement would be attached with the auditor’s report under section 143(11) for the financial year FY 2015-16 and thereafter.

The committee made the recommendations on the matters to be included in the statement and on the basis of recommendations, MCA issued the draft companies (Auditor’s report) Order, 2016 (CARO 2016) on 9 February 2016.

Applicability of CARO, 2016

Every Report made by the auditor under section 143 of the 2013 would include CARO 2016 and CARO 2016 is applicable for Financial Year 2015-16, Financial Year 2016-17 and subsequent years. It would be applicable to every company (except some companies) including a foreign company defined under section 2(42) of the 2013 Act. The CARO, 2016 would not be applicable to the auditor’s report on consolidated financial statements.

Companies Exempted under the CARO-2016

In these companies the auditor is exempted to comment on matters prescribed under the CARO 2016 with compared to CARO 2015.

Companies not covered under CARO 2016

1. Banking Companies as defined under section 5(c) of the Banking Regulation Act, 1949

2. Insurance Company as defined under the Insurance Act, 1938

3. Companies Incorporated with Charitable objects etc, i.e. companies licensed to operate under section 8 of Act 2013

4. One company as defined under section 2(62) of the 2013 Act

5. Small Company as defined under 2(85) of the 2013 Act

6. Private company not being a holding or a subsidiary company of a public company:

• with a paid a paid up capital and reserves and surplus not more than INR 1crore
• does not have total borrowings exceeding INR 1crore from any bank or any financial institution at any point of time during the FY and
• does not have total revenue as defined in schedule III, to the 2013 Act (including revenue from discontinuing operations) exceeding INR  10 crore during the financial year as per the financial statements.

Companies not covered under CARO 2015

1. Banking Companies as defined under section 5(c) of the Banking Regulation Act, 1949

2. Insurance Company as defined under the Insurance Act, 1938

3. Companies Incorporated with Charitable objects etc, i.e. companies licensed to operate under section 8 of Act 2013

4. One company as defined under section 2(62) of the 2013 Act

5. Small Company as defined under 2(85) of the 2013 Act

6. Private company not being a holding or a subsidiary company of a public company:

• with a paid up capital and reserves and surplus not more than 50 Lakhs
• does not have outstanding loan liability exceeding INR 25 Lakhs from any bank or any financial institution, and
• does not have a turnover exceeding INR 5crore at any point of time during the financial year

Matters to be included in CARO 2016

As compared to CARO 2015, the reporting requirements under CARO 2016 have been increased. There are some new requirements which are as follows:

a. Fixed Assets

• Whether title deeds of immovable properties are held in the name of company, if not, provide details thereof.

b. Loans and Investments

• In respect of loans, investments and guarantees, whether provisions of Section 185 and 186 of the 2013 Act have been complied with. If not provide details thereof.

c. Managerial Remuneration

• Whether managerial remuneration has been paid/provided in accordance with the requisite approvals mandated by the provisions of section 197 read with schedule of 2013 Act, if not state the amount and steps involved by the company for securing refund of the same.

d. Related Party Transactions

• Whether all transactions with related parties are in compliance with section 188 and 177 of the 2013 Act where applicable and the details have been disclosed in the financial statements etc. as required by the accounting standards and 2013 Act.

e. Preferential Allotment/ Private Placement

• Whether the company has made any preferential allotment/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 2013 Act have been complied with and the amount raised has been used for the purposes for which the funds were raised. If not provide details thereof.

f.  Non-Cash Transactions

• Whether the company has entered into any non-cash transactions with directors or persons connected with him and if so, whether provisions of section 192 of the 2013 act have been complied with.

Requirements that have been carried forward with certain modifications:- 

a. Inventory

• Whether physical verification of inventory has been conducted at reasonable intervals by the management and whether any material discrepancies were noticed and if so, how they have been dealt with in the books of accounts.

b. DELETED REQUIREMENT

• Are the procedures of physical verification of inventory followed by theØ management reasonable and adequate in relation to the size of company and the nature of its business.
• Whether the company is maintaining proper records of inventory.

c.  Default in payment of dues

Whether the company has defaulted in repayment of dues to a financial institution or bank or debenture-holder, if yes then the period and amount of default to be reported (in case of banks and financial institution, lender wise details to be provided) New Requirement  It relates to lender wise-details of period and amount of default.

d. Fraud Reporting

Whether any fraud by the company or any fraud on the company by its officers/employees has been noticed or reported during the year, If yes, the nature and the amount involved should be indicated. New Requirement  It is restricted to officers and employees of the company.Ø

Requirements that have been deleted as compared to CARO 2015

a. Internal Control System

Is there an adequate internal control system commensurate with the size of the company and the nature of its business for the purchase of its inventory and fixed assets and for the sale of goods and services Whether there is a continuing failure to correct major weakness in internal control system.

b. Deposit of Statutory Dues

Whether the amount required to be transferred to Investor and Education Protection fund in accordance with relevant provisions of the companies Act, 1956 and rules made thereunder has been transferred to such fund within time.

c. Guarantee for Loans by others from banks or financial institution

Whether the company has given any guarantee for loans taken by banks from banks or financial institutions, the terms and conditions whereof are prejudicial to the interest of the company.

(Author can be reached at rjt.garg68@gmail.com)