In accordance with the provisions of section 143(11) of the Companies Act, 2013 (CA, 2013), the auditor’s report of certain class or description of companies shall include a statement on certain specified matters.
These reporting requirements on specified matters has now been prescribed under the Companies (Auditor’s Report) Order, 2016 (CARO – 2016) issued by the Ministry of Corporate Affairs (MCA) vide Order No. S.O. 1228(E) dated 29th March, 2016.
CARO – 2016 has been issued in supersession of the Companies (Auditor’s Report) Order, 2015 and the same shall be applicable from the financial year 2015-16.
Background of the Companies (Auditor’s Report) Order 2016:
Earlier to CARO-2016, the Companies (Auditor’s Report) Order, 2015 (CARO – 2015) was issued vide MCA Order No. S.O. 990(E) w.e.f. 10-04-2015. Actually, CARO – 2015 had replaced the Companies (Auditor’s Report) Order, 2003 (CARO – 2003) issued by MCA in pursuance with the provisions of section 227(4A) of the Companies Act, 1956.
With effect from 1st April, 2014, section 227(4A) of the Companies Act, 1956 ceased to be operational after notification of section 143(11) of CA, 2013 vide Notification No. S.O. 902(E) issued dated 27.03.2014.
Thereafter, in exercise of the powers conferred by sub-section (11) of section 143 of CA, 2013 and in supersession of the CARO 2003, the Central Government after consultation with the Institute of Chartered Accountants of India makes the CARO 2015.
But, now the similar Order (CARO – 2016) has been issued vide Order No. S.O. 1228(E) dated 29th March, 2016 to be applicable from the financial year 2015-16 onwards. Hence, you are required to comply with the requirements of CARO – 2016 from financial year commencing on and after first day of April 2015 i.e. FY 2015-16.
Is it mandatory to Comply CARO – 2016?
Yes! In section 143(11) of CA, 2013 it is clearly stated that the Central Government may order for the inclusion of a Statement on specified matters in the Auditor’s Report for specified class or description of Companies.
Accordingly, CARO – 2016 is issued by the CG in pursuance with the provisions of sub-section (11) of section 143 as an additional matters to be included in the report of auditors. Therefore, CARO – 2016 should be complied by the Statutory Auditor of every Company on which it applies.
From which Financial Year CARO – 2016 is Applicable?
Every report made by the auditor in pursuance with the provisions of section 143 of CA, 2013 for Financial Year commencing on or after first day of April, 2015 should include CARO – 2016.
Hence, the Companies (Auditor’s Report) Order, 2016 is applicable from FY 2015-16 and the matters specified therein shall be included in each report made by auditor u/s 143 on the accounts of every company to which CARO – 2016 applies.
Type of Companies covered under the CARO – 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 CA, 2013, Foreign Company means any company or body corporate incorporated outside India which—
(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
(b) conducts any business activity in India in any other manner.
Class of companies which are excluded from applicability of CARO – 2016
All types of Companies specified in paragraph 1 of CARO – 2016 are specifically exempted from application of CARO. In other words, CARO – 2016 applies to all Companies except certain categories or class of Companies specifically exempted therein.
Accordingly, following are the class of companies whose auditors are not required to comment on matters specified in CARO – 2016.
(i) Banking Company:
CARO – 2016 shall not apply to a banking company as defined u/s 5(c) of the Banking Regulation Act, 1949.
(ii) Insurance Company:
CARO – 2016 shall not be applicable to an insurance company as defined under the Insurance Act, 1938.
(iii) Companies registered with Charitable Objects:
Any company which has been incorporated and licensed to operate under section 8 of CA, 2013 shall not be required to comply with CARO – 2016.
(iv) One Person Company:
A One Person Company (OPC) as defined under clause (62) of section 2 of CA, 2013 is not covered under CARO – 2016. OPC means a company which has only one person as a member.
(v) Small Company:
A small company as defined under section 2(85) of the Companies Act, 2013 is excluded from the scope of CARO – 2016.
According to section 2(85) of CA, 2013 small company means a company, other than a public company,—
(i) paid-up share capital of which does not exceed ₹50 Lakhs or such higher amount as may be prescribed which shall not be more than ₹5 Crore; and
(ii) 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:
Note that the definition of Small Company has been amended vide the Companies (Removal of Difficulties) Order, 2015 [S.O. 504(E)] w.e.f. 13th February, 2015. However, following companies will not qualify as a Small Company:
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;
(vi) Private Company:
The auditors of the following private limited companies are not required to comment on the matters prescribed under CARO – 2016:
a) Holding/Subsidiary of Public Company: A private company which is not a subsidiary or holding company of a public company; and
b) Capital ≤ ₹1 Crore: A private company having a paid up capital and reserves and surplus not more than rupees ONE Crore as on the balance sheet date; and
c) Loan ≤ ₹1 Crore: Such private company does not have total borrowings exceeding rupees ONE Crore from any bank or financial institution at any point of time during the financial year; and
d) Turnover ≤ ₹10 Crore: Such private company does not have a total revenue exceeding rupees TEN Crore during the financial year as per the financial statements.
Such revenue means revenue as disclosed in Scheduled III to the Companies Act, 2013 and includes revenue from discontinuing operations.
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.
Scope of Applicability of CARO – 2016:
The scope of applicability of CARO – 2016 covers more number of companies in compare to the previous CARO – 2003. However, the MCA has now relaxed the application/scope of CARO on the private companies by increasing the applicability thresholds limit and therefore, CARO – 2016 would be applicable to less number of companies w.e.f. April 2015.
You should note that the concept of OPC and Small Company were not existed under the companies Act, 1956 and such class of companies are newly introduced under the provisions of the Companies Act, 2013.
There are mainly two factors which has widened the application of CARO- 2016 viz. Small Companies and Foreign Companies.
A) Small Companies: As we know that the concept of Small Company is newly introduced in the Companies Act, 2013. Further, the definition of Small Company has been amended vide the Companies (Removal of Difficulties) Order, 2015 w.e.f. 13th February, 2015.
According to the revised definition of Small Company, the both conditions as prescribed in sub-clause (i) and (ii) of clause (85) of section 2 i.e. paid-up share capital and turnover criteria should be met by company to fall under the definition of Small Company.
Thus, fewer companies are expected to meet the criteria to fall under the definition of Small Company and therefore be outside the scope of applicability of CARO – 2016.
B) Foreign Company: In compare to the Companies Act, 1956, the definition of Foreign Company has also been widened in section 2(42) of the Companies Act, 2013. Now, a company shall become foreign company if such company or body corporate incorporated outside India 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.
Hence, more companies would get covered under the applicability of CARO – 2016. Additionally, the reporting requirement has also been enlarged in CARO – 2016 to increase the responsibility of the statutory auditors while preparing their reports in compliance with the provisions of section 143 of the Companies Act, 2013.
Which Matters are required to be included in Auditors Report?
As compared to the CARO – 2003, the reporting requirements under the CARO – 2015 (FY 2014-2015) were significantly reduced from 21 clauses to 12 clauses. However, the Central Government has further increased the number of reporting clauses from 12 to 16 in CARO – 2016 for financial years commencing on or after 1st April, 2015.
As per paragraph 3 of CARO – 2016, following certain matters shall be included in the report made by the auditor under section 143 of the Companies Act, for the financial year commencing on or after 1st April, 2014:
1) Fixed Assets [Clause 3(i)]:
Following matters shall be included in the auditor’s report relating to Fixed Assets of the company.
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 Deed: Whether the title deeds of immovable properties are held in the name of the company. If not, provide the details thereof;
2) Inventory [Clause 3(ii)]:
Following matters shall be included in the auditor’s report relating to Inventory of the company.
Physical Verification:Whether physical verification of inventory has been conducted at reasonable intervals by the management;
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;
3) Loan given by Company [Clause 3(iii)]:
Whether the company has granted any loans, secured or unsecured to companies, firms, Limited Liability Partnerships (LLP) 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) Regular Recovery: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: If the amount is overdue, state the total amount overdue for more than 90 days, and whether reasonable steps have been taken by the company for recovery of the principal and interest.
4) Loan 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.
5) 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 (RBI);The provisions of sections 73 to 76 or any other relevant provisions of the Companies Act, 2013 and the rules framed thereunder; andIf an order has been passed by Company Law Board (CLB) or National Company Law Tribunal (NCLT) or Reserve Bank of India (RBI) or any court or any other tribunal.
However, if any of the above not complied with, the nature of contraventions should be stated.
6) Cost Records [Clause 3(vi)]:
If the Central Government has specified maintenance of cost records under section 148(1) of the Companies Act, 2013 whether such accounts and records have been made and maintained.
7) Statutory Dues [Clause 3(vii)]:
Following matters shall be reported for statutory dues and disputes for tax and duties.
a) Statutory Dues for more than 6 Months:Whether the company is regular in depositing undisputed statutory dues with the appropriate authorities including:
i) Provident fund;
ii) Employees’ state insurance;
v) Service tax;
vi) Duty of customs;
vii) Duty of excise;
viii) Value Added Tax (VAT);
ix) Cess; and
x) Any other statutory dues.
If the company is not regular in depositing such statutory dues, 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.
b) Dispute for Tax and Duty: In case 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.
Note that a mere representation to the concerned Department shall not constitute a dispute.
8) 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.
Note that in case of defaults to banks, financial institutions, and Government, lender wise details to be provided.
9) Utilisation of IPO and further Public Offer [Clause 3(ix)]:
Whether moneys raised by way of Initial Public Offer (IPO) 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;
10) Reporting of 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;
11) 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 2013? If not, state the amount involved and steps taken by the company for securing refund of the same;
12) 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 10% unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability;
13) Related Party Transactions [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;
14) 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;
15) Non-cash Transactions [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;
16) Register under RBI Act 1934 [Cause 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.
Reasons to be stated for Unfavorable or Qualified Answers
1) Unfavourable or Qualified Answer:
Where, in the auditor’s report, the answer to any of the questions referred to in paragraph 3 is unfavourable or qualified, the auditor’s report shall also state the reasons for such unfavourable or qualified answer, as the case may be.
2) Unable to Express Opinion:
Where the auditor is unable to express any opinion in answer to a particular question, his report shall indicate such fact together with the reasons why it is not possible for him to give an answer to such question.
Hence, as per paragraph 4 of CARO – 2016, the auditor must give the reasons for unfavourable or qualified answers to the above 16 clauses referred in paragraph 3 of CARO – 2016. However, if the auditor is not able to express his opinion the fact and reason for the same should be indicated in the report.