On March 29, 2016, the MCA issued the Companies (Auditor’s Report) Order, 2016 (CARO 2016). This order replaces the Companies (Auditor’s Report) Order, 2015, and applies to financial statements of companies whose fiscal year begins on or after April 1, 2015.
MCA was of the objective that there are certain particular issues that 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.
Some important clauses of CARO 2016 include
In the Audit Report, the following items must be shown :
Relevant Records: Does the company have appropriate records showing full details? The details must include the quantity and condition of the asset.
Practical Verification: Whether its fixed assets are guaranteed by management from time to time. These times may vary depending on the property. Were they in the same condition as stated in the bookkeeping and accounting, at the time of verification? If any material conflict was discovered, or if the same has been properly addressed, in the literature?
Deeds: Are title deeds of immovable property in the name of the company? If not, provide details.
The following items, relating to the company’s inventory, should be included in the Auditor’s Report.
Loan Offered by the Company: That the company has provided any loans (secured or unsecured) to any related parties included under Section 189 of the Companies Act, 2013. If so, check the following:
- Do the terms and conditions of lending not contradict the company’s interest?
- What if the payments are reasonable and do not expire?
- Whether the overdue value of more than 90 days been reported? And the steps were taken by the company to recover the value make sense?
- That the benefits or loans of directors meet the set criteria? The provisions under sections 185 and 186 must be complied with, in the case of loans, investments, and guarantees. If not, are the details provided?
- Whether the company accepts any deposit? If so, did they follow the RBI instructions outlined below:
- If the Directions/Orders issued by the Reserve Bank of India are complied with?
- The provisions of Sections 73 to 76 and any other provisions of the Companies Act, 2013, as applicable.
- Any order passed by the NCLT, the Corporate Law Board (CLB), or any other court or tribunal.
- If there is a non-compliance, the type of violation should be reported.
- If the company has failed to repay loans from banks, government, creditors, etc. the amount and duration of non-payment should be reported.
- If any funds collected by the company through an IPO or other public benefits (including debt) are included for the purpose for which they were collected. Also, the auditor should report any delays and errors.
- If there is any fraud committed by the company or its employees during the year. If so, the type and amount involved should be reported.
- Whether the restrictions set out in the Companies Act 2013 of management have been complied with. If not, the amount involved and the steps to be taken must be reported.
- Compliance with the rules set out in the Companies Act 2013 on transactions with related organizations is complied with or not. Also, whether the same is properly disclosed in the financial statements or not.
Whether the company complies with the terms and conditions of the Companies Act 2013 regarding non-financial transactions with directors.
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. 2 crore and Last reported turnover less than or equal to Rs. 20 crores)
F. The following Private Companies are also exempt from the requirements of CARO, 2016
- Not a holding or subsidiary of a Public company
- Paid-up Capital plus Reserves less than or equal to Rs. 1 Crore as of the reporting date
- Borrowings less than or equal to Rs. 1 Crore at any time during the year
- 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.
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 [Clause 3(i)]
B. Inventory [Clause 3(ii)]
C. Loans given by Company [Clause 3(iii)]
D. Loan to Directors and Investment by the Company [Clause 3(iv)]
E. Deposits [Clause 3(v)]
F. Cost records [Clause 3(vi)]
G. Statutory Dues [Clause 3(vii)]
H. Repayment of Loans [Clause 3(viii)]
I. The utilisation of funds [Clause 3(ix)]
J. Reporting of Fraud [Clause 3(x)]
K. Approval of Managerial Remuneration [Clause 3(xi)]
L. Nidhi Company [Clause 3(xii)]
M. Related Party Transactions [Clause 3(xiii)]
N. Private placement of Preferential Issues [Clause 3(xiv)]
O. Non-Cash Transactions [Clause 3(xv)]
P. Registration under RBI Act [Clause 3(xvi)]
CARO 2020
A new model for statutory audits of companies has been introduced by the Ministry of Corporate Affairs (MCA). On February 25, 2020, the MCA published the Companies (Auditor’s Report) Order, 2020. (CARO 2020). The order (CARO 2020) supersedes the Companies (Auditor’s Report) Order, 2016, which was issued before. CARO 2020 is a new audit report format for statutory audits of companies conducted under the Companies Act, 2013. Following talks with the National Financial Reporting Authority, CARO 2020 now includes new reporting obligations (NFRA). The NFRA is an independent regulatory agency in India that oversees the audit and accounting professions. The goal of CARO 2020 is to improve the overall quality of business auditor reporting.
The following are some of the key changes in CARO 2020 that strive to secure a greater level of due diligence:
- Visiting the CSR details that were not in CARO 2016 to give more accountability to companies that did not take CSR seriously.
- Reporting is reinforced by adding a clause to the company’s ability to meet its liabilities
- Analysis of previous auditor issues
- Various reports of negative financial losses are reflected in the cash flow statement
- Activities performed by NBFCs or HFCs without valid certificates
- Disclosure of the work of internal auditors
- Reporting transactions not recorded in the books of account but provided for income tax analysis
- Giving proper recognition of the grievances of the wicked
- Strong and detailed disclosure of credit and development
- Explain the material differences in inventory prices and PPE prices
- Compliance with authorized companies with operating limits of more than Rs. 5 crores.
CARO 2020 vs. CARO 2016
Ministry of Corporate Affairs issued an order dated 25 February 2020 on Companies (Auditor’s Report) Order 2020 (CARO 2020). CARO 2020 operates on the same types of companies as CARO 2016. The key changes to the Audit Report requirements between CARO 2020 and CARO 2016 are as follows:
| Particulars | CARO 2016 | CARO 2020 |
| Fixed Assets | Reporting on all fixed assets |
|
| No format provided | If title to all immovable property is disclosed in the financial statements that are not withheld on behalf of the company, provide details in the standard format provided including the reason for non-management on behalf of the company. | |
| No such clause | Also report that the company owns any Benami property under the Benami Transactions (Prohibition) Act | |
| Inventory | Inventory Reporting | Also includes Inventory Reporting whether any 10% or more discrepancies in the rating of each category were identified at the time of physical verification and whether they have been properly addressed in the books of account. |
| Working capital limits | Not provided | Provide all the details if the company is approved for a transaction of more than five rupees, collectively, from banks or financial institutions based on the security of current assets. |
| Default in repayment of loans | style=”border: 1px solid #555″;No format given | If the company has failed to repay the loan, then provide details in the specified standard format. |
| Not provided | Also report if the company is said to be deliberately not paying by any bank, financial institution, or lender. | |
| Loan terms | Term loans reporting | Also, report on whether the term loan has been loaned to obtain a loan; if not, report the amount of the deviation loan and the purpose for which it is used. |
| Fraud Reporting | To be reported | Also report if the auditor has considered reporting complaints, if any, received by the company during the year. |
| Registered under the RBI Act | Registration details will be provided if available. | Also report if the company has performed any Non-Banking or Mortgage financing activities without a valid Registration Certificate (CoR) from the Reserve Bank of India in terms of the Bank of India Act, 1934. |
| Resignation of Official Auditors | Not provided | Report if there have been any cancellations of official auditors during the year, and reported on whether the auditor has taken into account the issues, objections, or complaints rose by the outgoing auditors. |
| Auditors’ remarks for Incorporated Companies | Not provided | Report if there have been qualifications or conflicting comments of the relevant auditors in the CARO reports of companies included in the consolidated financial statements. If available, the Auditor-General must provide company details and section numbers of the CARO report with the qualifications or objections. |
Reporting Requirements Under Each Clause
A brief of reporting requirements under each of the above clauses is hereunder:
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
iv. Whether the title deeds of the immovable properties are in the name of the company
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
Loans given by Company
Whether the company has granted any secured or unsecured loans to companies, Limited Liability Partnerships (LLPs), firms, or other parties mentioned in the register maintained under Section 189 of the Companies Act, 2013. If they have granted such loans, to check the following:
i. Whether the terms of such loans are not prejudicial to the 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
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 under Section 185 and 186 of the Companies Act, 2013.
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
Cost Records
If Central Government has prescribed maintaining cost records, whether the same have been properly maintained or not.
Statutory Dues
The auditor shall report whether the company:
i. Is regularly depositing its statutory dues, such as:
- Provident fund
- Employees’ State Insurance
- Income tax
- Sales tax
- Service tax
- Duty of customs
- Duty of excise
- Value-added tax
- Cess and other 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
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 are to be reported.
Utilisation of funds
If any funds were raised by the company through IPO or other public offers (including debt), have they been applied for the purpose they were raised. Also, the auditor has to report in case of any delay and defaults.
Reporting of Fraud
If any fraud by the company or its employees has occurred during the year. If yes, the nature and amount involved have to be reported.
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.
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 as specified in the Nidhi Rules, 2014 to meet out the liability
Related Party Transactions
The compliances with rules specified in the 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.
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.
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.
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.
FAQs
What is the difference between Caro 2016 and Caro 2020?
The CARO 2020 contains 21 clauses, whereas CARO 2016 has only 16 clauses. In CARO 2020, seven new clauses have been inserted, and the existing clauses of CARO 2016 have been re-drafted to elicit detailed comments from the auditors. CARO 2020 requires information in a more detailed format compared to CARO 2016. CARO 2020 strengthens the accountability of the management and enhances the due diligence responsibility of the auditors.
For which financial year is the CARO 2016 applicable?
The CARO 2016 was applicable for the financial years 2015-16, 2016-17, 2017-18, 2018-19 and 2019-20. Subsequently, the Ministry of Corporate Affairs (MCA) issued CARO 2020 for all statutory audits commencing on or after 1 April 2021 corresponding to the financial year 2020-21 onwards. Thus, currently, CARO 2020 is applicable to all companies.
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