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After the enactment of the Companies Act, 2013, the Companies Act, 1956 ('Old Act') ceased to have effect from April 1, 2014. As a corollary, the Companies (Auditor's Report) Order, 2003 (CARO, 2003) also ceased to have effect from the said date.
The Institute of Chartered Accountants of India ('ICAI') were receiving queries from the members regarding applicability of CARO, 2003 along with Auditors' Report on financial statements of companies for the financial year 2014-15. To clear the air on this issue, the ICAI made announcement on April 8, 2014, wherein it was provided that a smaller version of CARO 2003, applicable for the financial year 2014-15, might be notified under section 143(11) of the Companies Act, 2013 ('New Act').
Now the new CARO (herein referred to as 'CARO 2015') has been notified by the Government vide order dated April 10, 2015 which would be applicable from financial year 2014-15. New CARO excludes One Person Company and small company from its purview. For exclusion of private limited company, the ceiling of paid-up capital and reserve, and turnover remain unchanged. However, the ceiling of outstanding loan has been increased from 10 lakhs to Rs. 25 lakh.
CARO, 2015 requires auditor to report whether there is an adequate internal control procedures for sale of services in addition to report on adequacy of internal control for purchase of inventory, fixed assets and sale of goods.
This article has been divided into three parts as under:
i.) PART-A highlights the comparative study of CARO, 2003 vis-à-vis CARO, 2015 along with corresponding changes.
ii.) PART-B deals with the reporting requirements which were present in CARO, 2003 but have been removed in CARO 2015.
iii.) PART-C lists out reporting requirements in CARO, 2015 which are same as were specified under CARO, 2003.
PART A
A Comparative study of requirements of CARO, 2003 and CARO, 2015:
| Parameters: |
CARO, 2003:- |
CARO, 2015:- |
Changes:- |
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Applicability
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It shall apply to every company including a foreign company as defined in section 591 of the Act, except the following :-
(i) a Banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949;
(ii) an insurance company as defined in clause (21) of section 2 of the Act;
(iii) a company licensed to operate under section 25 of the Act
(iv) a private limited company with a paid up capital and reserves not more than 50 lakh rupees and has not accepted any public deposit and does not have loan outstanding 10 lakh rupees or more from any bank or financial institution and does not have a turnover exceeding 5 crore rupees.
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It shall apply to every company including a foreign company as defined in clause (42) of section 2 of the Companies Act, 2O13 except -
(i) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949
(ii) an insurance company as defined under the Insurance Act,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 New Act; and
(v) a private limited company with a paid up capital and reserves not more than 50 lakh rupees and which does not have loan outstanding exceeding 25 lakh rupees from any bank or financial institution and does not have a turnover exceeding 5 crore rupees at any point of time during the financial year.
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In addition to exclusion of banking company, insurance company and companies with charitable objects following companies are also excluded from purview of CARO:
a) Open Person Company',
b) 'Small Company',
Note: For exclusion of private limited company, the ceiling of paid-up capital and reserve, and turnover remains unchanged. However, the ceiling of outstanding loan has been increased from 10 lakhs to Rs. 25 lakh.
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| Matters to be included in auditor's report |
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Fixed Assets
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a) Whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets?;
b) 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) If a substantial part of fixed assets have been disposed off during the year, whether it has affected the going concern?
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(a) Whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets?;
(b) 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?
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No change vis-à-vis CARO, 2003. However, the requirement of reporting whether disposition of substantial part of fixed assets has affected the going concern has been dispensed with.
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Loans
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a) Has the company either granted or taken any loans, secured or unsecured to/from companies, firms or other parties covered in the register maintained under section 301 of the Old Act. If so, give the number of parties and amount involved in the transactions.
b) whether the rate of interest and other terms and conditions of loans given or taken by the company, secured or unsecured, are prima facie prejudicial to the interest of the company;
c) Whether payment of the principal amount and interest are also regular;
d) if overdue amount is more than one lakh, whether reasonable steps have been taken by the company for recovery/payment of the principal and interest;
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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 New Act. If so,
(a) whether receipt of the principal amount and interest are also regular;
(b) if overdue amount is more than 1 lakh rupees, whether reasonable steps have been taken by the company for recovery of the principal and interest;
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CARO 2015 deals only with the loans granted by the Company, unlike CARO, 2003 which also dealt with loans taken by the Company.
Details like number of parties and amount involved in the transactions have been removed.
Further, the requirement of reporting whether rate of interest and other conditions of loans were prejudicial to interest of Company has been done away with in the new CARO.
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Internal Control
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Is there an adequate internal control procedure 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?. Whether there is a continuing failure to correct major weaknesses in internal control?
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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?
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In CARO, 2003 auditor was required to report whether there was an adequate internal control procedure for purchase of inventory, fixed assets and sale of goods?
In addition to above CARO, 2015 requires auditor to report on adequacy of internal control on sale of services as well.
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Orders passed by Courts or Tribunals
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If an order has been passed by Company Law Board whether same has been complied with or not?
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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?
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Auditor is required to report whether the order passed by National Company Law Tribunal or Reserve Bank of India or any Court or any other Tribunal has been complied with or not?
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Statutory Dues
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a) Is the company regular in depositing undisputed statutory dues including PF, Investor Education and Protection Fund, Employees' State Insurance, Income-tax, Sales-tax, Wealth Tax, Custom Duty, Excise Duty, 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.
b) In case dues of sales tax/income tax/custom tax/wealth tax/excise duty/cess have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending may please be mentioned.
(A mere representation to the Department shall not constitute the dispute).
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(a) 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
(b) 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 amount involved and the forum where dispute is pending shall be mentioned.
(A mere representation to the concerned Department shall not constitute a dispute).
(c) 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 there under has been transferred to such fund within time.
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Service Tax, Value added tax have been added in the list. However, there is no change in reporting requirements.
CARO, 2015 requires an auditor to report whether the amount required to be transferred to investors 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?
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PART B
Reporting requirements specified under CARO, 2003, now removed in CARO, 2015
| Parameters |
Reporting requirements as specified under CARO 2003 |
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Transactions to be entered into register of contract
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a) Whether transactions that need to be entered into a register in pursuance of section 301 of the Old Act have been so entered;
b) Whether each of these transactions have been made at prices which are reasonable having regard to the prevailing market prices at the relevant time;
(This information is required only in case of transactions exceeding the value of five lakh rupees in respect of any party and in any one financial year).
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| Internal Control for specified companies |
In the case of listed companies and/or other companies having a paid-up capital and reserves exceeding Rs.50 lakhs as at the commencement of the financial year concerned, or having an average annual turnover exceeding five crore rupees for a period of three consecutive financial years immediately preceding the financial year concerned, whether the company has an internal audit system commensurate with its size and nature of its business; |
| Maintenance of documents relating to loans & advance |
Whether adequate documents and records are maintained in cases where the company has granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities; If not, the deficiencies to be pointed out. |
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Compliance with Special Statutes
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Whether the provisions of any special statute applicable to chit fund have been duly complied with? In respect of nidhi/ mutual benefit fund/societies;
(a) whether the net-owned funds to deposit liability ratio is more than 1:20 as on the date of balance sheet;
(b) whether the company has complied with the prudential norms on income recognition and provisioning against sub-standard/default/loss assets;
(c) whether the company has adequate procedures for appraisal of credit proposals/requests, assessment of credit needs and repayment capacity of the borrowers;
(d) whether the repayment schedule of various loans granted by the nidhi is based on the repayment capacity of the borrower and would be conducive to recovery of the loan amount;
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| Trading or dealing in shares and securities |
If the company is dealing or trading in shares, securities, debentures and other investments, whether proper records have been maintained of the transactions and contracts and whether timely entries have been made therein; also whether the shares, securities, debentures and other securities have been held by the company, in its own name except to the extent of the exemption, if any, granted under section 49 of the Old Act; |
| Use of short-term funds for long term investment and vice-versa |
Whether the funds raised on short-term basis have been used for long term investment and vice versa; If yes, the nature and amount is to be indicated; |
| Preferential allotment of shares |
Whether the company has made any preferential allotment of shares to parties and companies covered in the Register maintained under section 301 of the Act and if so whether the price at which shares have been issued is prejudicial to the interest of the company; |
| Creation of securities |
Whether securities have been created in respect of debentures issued? |
| Usage of proceeds from share issued |
Whether the management has disclosed on the end use of money raised by public issues and the same has been verified? |
PART C
No change in CARO, 2015 vis-à-vis CARO, 2003:-
| Parameters |
Reporting requirements specified by CARO, 2015 |
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Inventory
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a) Whether physical verification of inventory has been conducted at reasonable intervals by the management;
b) 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.
c) 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.
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| Acceptance of deposits from public |
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 New Act and the rules framed there under, where applicable, have been complied with? If not, the nature of contraventions should be stated; |
| Maintenance of Cost Records |
Where maintenance of cost records has been specified by the Central Government under sub-section (l) of section 148 of the New Act, whether such accounts and records have been made and maintained. |
| Accumulated losses |
Whether in case of a company which has been registered for a period not less than 5 years, its accumulated losses at the end of the financial year are not less than 50% of its net worth and whether it has incurred cash losses in such financial year and in the financial year immediately preceding such financial year also |
| Default in repayment of dues to Bank or Financial institutions |
Whether the company has defaulted in repayment of dues to a financial institution or bank or debenture holders? If yes, the period and amount of default to be reported |
| Guarantee for loans taken by others |
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; |
| Term loans |
Whether term loans were applied for the purpose for which the loans were obtained |
| Reporting of fraud |
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. |
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Reasons to be stated for unfavorable or qualified answers.
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Where, in the auditor's report, the answer to any of the questions are unfavorable or qualified, the auditor's report shall also state the reasons for such unfavourable or qualified answer, as the case may be.
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.
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CARO
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