Date of Applicability

CARO,2015 is applicable for the financial year commencing on or after 1^st April,2014.

 

Applicability

It is applicable on every company, including foreign company.

It shall apply to every company including a foreign company as defined in clause (42) of section 2 of the Companies Act, 2013 (18 of 2013) [hereinafter referred to as the Companies Act], except –

(i)  a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);

(ii) an insurance company as defined under the Insurance Act,1938 (4 of 1938);

(iii) a company licensed to operate under section 8 of the Companies Act;

(iv) a One Person Company as defined under clause (62) of section 2 of the Companies Act and a small company as defined under clause (85) of section 2 of the Companies Act; and

(v) a private limited company with a paid up capital and reserves not more than rupees fifty lakh and which does not have loan outstanding exceeding rupees twenty five lakh from any bank or financial institution and does not have a turnover exceeding rupees five crore at any point of time during the financial year.

Main Provisions

The Statutory Auditor of the company, while preparing the audit report on the accounts of the company examined by him,shall report on the matters specified under the CARO.

 

In case, the answer to any of the questions on the matters mentioned in the CARO is unfavourable or qualified, the auditor’s report shall state the reason for such unfavourable or qualified comment.

 

Where the auditor is unable to express any opinion in the answer to a particular question, his report shall indicate such facts together with the reasons why it is not possible for him to give an answer to such question.

 

Matters to be reported under CARO

There are 12 specific matters in the CARO,2015 which require the company’s auditor to specifically comment upon the same.

1. Fixed Assets
2. Whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets;
3. 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

Analysis of the Clause

The clause requires the auditor to comment whether:-

v  The fixed assets of the company have been physically verified by the management at reasonable intervals;

v  Any material discrepancies were noticed on such verification & if so,

v  The same have been properly dealt with in the books of account

v  Physical verification of the assets has to be made by the management and not by the auditor. It is, however, necessary that the auditor satisfies himself that such verification was done and that there is adequate evidence on the basis of which he can arrive at such a conclusion.

v  What constitutes “reasonable intervals” depends upon the circumstances of each case.

v  Auditor’s Duty

Ø  To examine the instructions given by the management to the staff for verification;

Ø  To be physically present at the time of verification, if possible;

Ø  In case it is impracticable for the auditor to attend the physical verification, the auditor should examine the working papers of the staff to substantiate the fact that the verification was done,

Ø  To examine whether the method of verification was reasonable,

Ø  To obtain MRL from the management confirming that the assets are physically verified by the company.

 

2. Inventory
3. Whether physical verification of inventory has been conducted at reasonable intervals by the management;
4. 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;
5. 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;

Analysis of the Clause

The clause requires the auditor to report upon “Reasonability” of the following things:-

ü  Time in regards to physical verification of inventory;

ü  Procedures adopted by the management for physical verification of inventory.

ü  Inventory Records

 

3. Loans & Advances given by the company

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.

1. If so, whether receipt of the principal amount and interest are also regular; and
2. 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;

Analysis of the Clause

v  This clause is applicable where the company has granted any type of loan to any person covered in the register maintained u/s 189 of the Companies Act,2013.

v  Part (a) This part of the clause requires the auditor to report upon the regularity of receipt of principal amount of loans and interest thereon. The word ‘regular’ should be taken to mean that the principal and interest should normally be received whenever they fall due, respectively.

For Example:-

In case of	Due Date
Term Loan	Whenever due
Due date not Specified	Assume Annually
Demand Loan	When the lender calls back the loan

v  Part (b) This clause requires the auditor to state whether reasonable steps have been taken by the company for recovery of the principal and interest, wherever the overdue amount is more than rupees one lakh.It is not necessary that steps to be taken must necessarily be legal steps. It depends upon the facts & circumstances.

 

4. Adequacy of Internal Controls

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.

Analysis of the Clause

v  This clause requires the auditor to comment upon the adequacy of internal control system with regards to the :-

Ø  Purchase of Inventory,

Ø  Purchase of fixed assets &

Ø  Sales of goods & services.

v  The requirement of this clause is confined only to internal control procedures for specific things. But it does not mean the auditor’s duty to examine internal controls  with regards to other areas is in any way diminished.

v  This clause only means that special emphasis has to be given by the auditor on internal control system with regards to the items specified in the clause.

v  The main thing to be noted is that the above mentioned clause has two aspects i.e. adequacy of internal controls and continuing failure to correct major weakness(es) are not inter related.

v  The first aspect requires the auditor to comment on the adequacy of internal controls in regards to specified areas whereas the second aspects requires the auditor to comment whether there was a continuing failure to correct major weakness in internal control system.

Therefore, it can be concluded that if no major weakness was reported during the period covered by the audit report, the internal system is adequate.

 

5. Any default in repayment 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 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 RBI or any court or any other tribunal, whether the same has been complied with or not.

Analysis of the Clause

The clause, in addition to requiring the auditors to report on compliance with the requirements of section 73 to 76 of the Companies Act,2013 and the directives of the Reserve Bank of India for acceptance of public deposits, also requires the auditor to:

Ø  Report on compliance with the provisions of section 58AA of the Act; and

Ø  Report on compliance with the order, if any, passed by the Company Law Board or National Company Law Tribunal or Reserve Bank of India or any Court or any other Tribunal.

 

 

 

 

 

6. Adequacy of Cost Records

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;

Analysis of the Clause

v  The Company Audit Report Order requires the auditor to report whether cost accounts and records have been made and maintained. The word “made” applies in respect of cost accounts (or cost statements) and the word “maintained” applies in respect of cost records relating to materials, labour, overheads, etc.

v  The auditor has to report under the clause irrespective of whether a cost audit has been ordered by the Central Government.

v  Where the auditor finds that the records have not been written up or are not prima facie complete, it will be necessary for the auditor to make a suitable comment in his report.

 

7. Payment of Statutory Dues
8. 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.
9. 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).
10. 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.

Analysis of the Clause

Part (a)

v  This clause requires the auditor to report upon the regularity of the company in depositing undisputed statutory dues.

v  As per this clause, the scope of the auditor’s enquiry is restricted to only those statutory dues, which the company is required to deposit regularly to the authority.

v  Obligation to pay a statutory due is created or arises out of a statute, rather than being based on an independent contractual or legal relationship.

v  Any sum, which is to be regularly paid to an appropriate authority under a statute (whether Central, State or Local or foreign) applicable to the company, should be considered as a “statutory due” for the purpose of this clause.

Some Cases to be dealt:-

Any sum payable to an electricity company as electricity bill would not constitute a statutory due despite the fact that such a company has been established under a statute. This is so because the due has arisen on account of contract of supply of goods or services between the parties.

However, care shall have to be taken that in case any dues are recoverable as arrears of land revenue by the concerned authority, the same shall be treated as a statutory due.

Part (b)

v  This clause is applicable only in case of non-payment of statutory dues on account of any dispute.

v  It is clarified here that mere representation to the concerned Department does not constitute dispute. According to the Order, it is necessary that there should be an appeal before the relevant appellate authority.

v  The amounts to be reported under clause 4(ix)(b) of the Order are those which have not been deposited on account of any dispute, irrespective of the treatment of such disputed amounts in accounts.

v  It is also possible that an amount is disputed, has been deposited and on consideration of the likely outcome of the dispute, has been shown as a recoverable. Though such an amount is not contemplated for reporting under the clause, since it has been deposited, the fact of such deposit having been made under protest should be brought out by the auditor in his report under the clause

Some cases to be dealt:-

Cases	Justification	Auditor’s Duty
Mere Issue of Show cause notice by the Assessing officer	Can’t be regarded as dispute/ demand payable by the company as it only contains the queries of the Assessing Officer.	Not required to report under this Clause.
Issue of Show cause notice along with the demand letter	In such cases, the demand would not be construed to have arisen till the time the assessee has disposed of the requirements of the show cause order.	To evaluate each situation individually.
Tax Demands that have set aside by courts	Are clearly not dues.	Not required to report under this Clause.
If the demand has been referred for reassessment & due to such referral old demand is cancelled	This would not constitute an amount due.	Not required to report under this Clause.
If the demand has been referred for reassessment & due to such referral old demand has not been cancelled	It will constitute/ remain disputed dues.	Required to report under this clause.
Stay has been granted on dues payable	As far as demands that have been stayed are concerned, these should be regarded as disputed dues. The fact that a stay has been granted does not mean that the authority granting the stay has held that the amount in question is not a valid demand against the company. The stay normally is a concession that the amount may not be deposited immediately or that it may be deposited in instalments.	Required to report under this clause along with the fact of stay.
Case has decided in favour of the company but the department may prefer to make appeal to the higher authority	No dispute until the time the Department makes an appeal to the relevant appellate authority.	Not required to report until the department makes an appeal.
Amount under the dispute is pending for an appeal to be filed and the time limit for filing the appeal has lapsed	The disputed amount would become a statutory due and the reporting responsibilities of the auditor as are applicable to any other undisputed statutory due under clause 4(ix)(a) of the Order would become applicable.

 

Part (c) It requires the auditor to comment upon the compliance of provisions in regards to transfer of required amount to Investor Education & Protection Fund.

8. Losses by the company

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;

Analysis of the Clause

v  This clause is applicable to all the companies that have been in existence for 5 years or more from the date of registration till the last day of financial year covered by the audit report.

v  The clause requires the auditor to report whether :-

Ø  The accumulated losses at the end of the financial year are not less than 50% of its net worth; &

Ø  The company has incurred cash losses during the period covered by the report & in the immediately preceding financial year

 

9. Any default by company in repayment of Loans

Whether the company has defaulted in repayment of dues to a financial institution or bank or debentureholders? If yes, the period and amount of default to be reported;

Analysis of the clause:-

v  This clause is applicable only when the company has defaulted in repayment of dues to:-

Ø  Financial Institutions;

Ø  Bank; or

Ø  Debenture holders

Some cases to be dealt:-

v  Whether the scope of the auditor’s inquiry would cover defaults made by the company in current year only or whether the defaults committed in the previous year & continuing up to the current year  end would also be covered?

Solution:-

The auditor should report the period and amount of all defaults existing at the balance sheet date irrespective of when those defaults have occurred.

v  Sometimes it may be possible that the company might have submitted for application for rescheduling/ restructuring proposals to the lenders, But it does not meant that the no default has occurred. The auditor should report the period of default & the amount of the default.

v  In case of any dispute between the company & the lender, the auditor should give a disclaimer that he is unable to determine whether there is a default in repayment of dues to the lender concerned.

 

10.Guarantee given by the Company

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

Analysis of the Clause:-

v  This clause is applicable when the company has given guarantee on account of loan taken by others from financial institution.

v  But the scope of the auditor’s inquiry under the clause does not extend to the guarantees given by the Auditee company for loans taken by “others” from any sources other than bank or financial institutions.

v  The clause requires the auditor to determine :-

Ø  whether the company has given any guarantee for loans taken by others from bank or financial institutions and if yes,

Ø  Whether the terms and conditions of the guarantee are prejudicial

 

11.Term Loan Application

Whether term loans were applied for the purpose for which the loans were obtained

Analysis of the Clause:-

v  Term loan means a loan that have normally a fixed or predetermined maturity period repayment schedule.

v  This clause is applicable only when the company is availing any term loan facility. However the above clause is silent as to whether the clause will be applicable on the company which has obtained a term loan from persons/entities other than banks/ financial institutions. Therefore, we can conclude that it is irrelevant that who is the lender of the term loan? The main point is that the company must have term loan.

Some Cases to be dealt:-

v  A company had taken a term loan of  ` 5 Crores from the financial institution during the financial year 2014-15. The amount of loan was disbursed by the bank in the common account of the company from which the subsequently utilization was made. Whether it can be said that the term loan was not applied for the purpose for which it was taken.

Solution:-

It is not necessary to establish one to one relationship with its utilization & amount of term loan. Therefore, it should not be construed that the loan has not been applied for the purpose for which it was raised

 

12.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

Analysis of the clause:-

v  This clause requires to auditor to report on 2 things:-

Ø  Whether any fraud on or by the company has been noticed or reported during the year;

Ø  If yes, the nature and the amount involved

v  The point to be noted is that this clause does not require the auditor to discover the frauds of the company & by the company. The scope of auditor’s enquiry under this is clause is restricted to frauds noticed & reported during the year i.e. The use of the words “noticed or reported” indicates that the management of the company should have the knowledge about the frauds on the company or by the company that have occurred during the period covered by the auditor’s report.

v  On the other hand, this clause doesn’t relieve the auditor from his responsibility to consider fraud & error in an audit of financial statements i.e. the auditor is mandatorily required to comply with the requirements of SA 240,”The Auditor’s Responsibility to Consider Fraud and Error in an Audit of Financial Statements

 

 

 

Point to be Remembered while calculating the applicability of CARO,2015 on Private Limited Companies

 

Conditions	Analysis of the Condition
Condition No. 1 Its paid up capital & reserves does not exceed ` 50 lakhs at any time during the financial year Paid up capital v  Paid up share capital will include both (Equity +Preference) both. v  Any bonus shares issued by the company during the year shall be considered as a part of paid up capital. v  Share application money received but shares not allotted shall not be considered as a part of paid up share capital. Reserves v  The term “Reserves” includes both Capital Reserves & Revenue Reserves. v  Any Negative Balance in the Profit & loss a/c should be deducted from the Revenue Reserves only.
Condition No. 2 Its outstanding loan from any bank or financial institution are ` 25 lakhs or less at any time during the financial year;and	v  Financial institution will includes both private as well as foreign banks, v  Any bank or financial institution’, the limit of “exceeding twenty five lakh rupees” would apply in aggregate to all loans and not with reference to each bank or financial institution, v  Loan can be in any form such as:- Ø  Cash Credit; Ø  Overdraft; Ø  Term Loan; Ø  Export credits, Ø  Working capital limits, Ø  Overdraft facilities, Ø  Bills Purchased or discounted. Ø  Credit Card Facility, Ø  Loan Against Fixed Deposits, v  It is immaterial whether a liability is Current or Non-Current.
Condition No. 3 Its turnover does not exceed ` 5 Crores	v  The term “Turnover” would include both sale of goods as well as sale of services rendered by the company. v  The term “Turnover” is a commercial term & it should be construed in accordance with the method of accounting regularly employed by the company & as per the business of the company. v  Trade discount should be deducted from the figure of the turnover. v  Commission allowed to third parties should not be deducted from the figure of turnover; v  Sales tax collected or excise duty collected should not be taken into account if they are credited separately to sales tax account or excise duty account; v  Sales returns should be deducted from the figure of turnover even if the returns are from the sales made in the earlier years.