Section 143(11) of the Companies Act, 2013 requires that Auditor report of specified classes of Companies should disclose the compliance on the specified matters. These reporting requirements have been prescribed under Companies (Auditor’s Report) Order, 2016 (CARO, 2016). This is a step in the right direction to improve the quality of the Auditor’s Report through enhanced reporting and disclosures. This will increase the relevance of the financial statement to the stakeholders.
APPLICABILITY OF CARO, 2016:
Every Audit Report made under Section 143 of the Companies Act, 2013 for FY commencing on or after 01st April 2015 would include CARO, 2016.
This is welcome relief that this will not apply to the auditor’s report on consolidated financial statements.
CARO would be applicable to all the companies including foreign companies except the following:
| Sl No. | Companies on which CARO is not applicable |
| 1 | A banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 |
| 2 | An insurance company as defined under the Insurance Act,1938 |
| 3 | Companies incorporated in India with charitable objects under Section 8 of the Companies Act, 2013 |
| 4 | One Person Company under Section 2(62) of Companies Act, 2013 |
| 5 | Small Company as defined under Section 2(85) of the Companies Act, 2013 |
| 6 | A Private Company, not being a subsidiary or holding of public company:
· Having Paid up share capital and reserves and surplus not more than Rs. 1 Crore · Does not have total borrowings exceeding Rs. 1 Crore from any bank or financial institution at any point of time during the financial year · Does not have a total revenue as disclosed in Scheduled III to the Companies Act, 2013 · (including revenue from discontinuing operations) exceeding Rs. 10 Crores during the financial year |
NEW DISCLOSURES UNDER CARO:
As compared to CARO, 2015 the new reporting requirements under CARO, 2016 have increased.
The following are the new disclosures under CARO, 2016:
| Brief Area | Details of Disclosures Required to be made |
| Fixed Assets | · Whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets?
· 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? |
| Loans/ Investment/ Guarantee | · 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 Sec 185 prohibits the granting of a loan to Directors and Sec 186 defines that only two layers of investments would be allowed by the company subject to compliance of provisions |
| Managerial Remuneration | · 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; Sec 197 defines the overall maximum managerial remuneration and remuneration in case of absence or inadequacy of profits |
| Related Party | ·, 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 per Sec 177, every related party transaction shall be approved by the Audit Committee and Section 188 defines the thresholds up to which board or shareholder approval is required. |
| Preferential Allotment or Private Placement | · 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 has been complied with
· Whether the amount raised has 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 Sec 42 provides that the company may make an offer to issue securities through private placement. It defines the complete procedure to issue security through private placement. |
| Details of Non-Cash transaction with Directors | · 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
Sec 192 prescribes that every non-cash transaction involving directors shall be approved by shareholders in general meeting. |
| The requirement for Nidhi company only | · 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 liability |
OLD DISCLOSURES WITH MODIFICATION UNDER CARO:
Certain reporting requirements which were also in CARO, 2015 has been amended.
The following are the modified disclosures under CARO, 2016:
| Brief Area | Details of Disclosures Required to be made |
| Immovable Property | · Whether the title deeds of immovable properties are held in the name of the company.
If not, provide the details thereof. |
| 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, whether they have been properly dealt with in the books of account. |
| Loans: Secured or Unsecured | · Whether the company has granted any loans, secured or unsecured to companies, firms, LLP or other parties covered in the register maintained under section 189 of the Companies Act, 2013. If so:
o whether the terms and conditions of the grant of such loans are not prejudicial to the company’s interest; o whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular o if the amount is overdue, state the total amount overdue for more than ninety days, and whether reasonable steps have been taken by the company for recovery of the principal and interest Sec 189 prescribes that a register of contracts or arrangement in which Directors are interested shall be maintained by the company and all entries of disclosures of interest and related party transaction shall be made in this register. |
| Acceptance of Deposit | · 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, 2013 and the rules framed thereunder, where applicable, have been complied with?
If not, the nature of such contraventions 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? Sec 73 to 76 read with The Companies (Acceptance of Deposits) Rules, 2014 defines the number of compliances in case the company accepts the deposit. |
| Maintenance of Cost Records | · Whether maintenance of cost records has been specified by the Central Government under sub-section (1) of section 148 of the Companies Act, 2013 and whether such accounts and records have been so made and maintained?
Sec 148 provides that central government specify certain companies to conduct cost audit and report shall include the particulars like manufacturing of goods, utilization of labor, material, etc |
| Statutory Payments | · Whether the company is regular in depositing undisputed statutory dues including provident fund, employees’ state insurance, income tax, sales tax, service tax, the duty of customs, the duty of excise, value-added tax, cess and any other statutory dues to the appropriate authorities
o If not, the extent of the arrears of outstanding statutory dues as on 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; o Where 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 (please note that mere representation to the department will not amount to dispute) |
| Repayment of Loans and Borrowings | · 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 · In case of defaults to banks, financial institutions, and Government, lender wise details to be provided. |
| Use of funds raised through IPO and FPO | · Whether money raised by way of an 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; |
| Fraud | · 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 |
| Registration with RBI | · 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 |
In addition to the above disclosures,
- Where, in the auditor’s report, the answer to any of the above questions is unfavorable or qualified, the auditor’s report shall also state the basis for such unfavorable or qualified answer, as the case may be.
- Where the auditor is unable to express any opinion on any specified matter, his report shall indicate such fact together with the reasons as to why it is not possible for him to give his opinion on the same.
