CARO,2015
is applicable for the financial year commencing on or after 1st
April,2014.
Applicability
It
is applicable on every company, including foreign company.
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
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
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
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;
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.
a. If
so, whether receipt of the principal amount and interest are also regular; and
b. 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:-
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In case of
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Due Date
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Term Loan
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Whenever due
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Due date not Specified
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Assume Annually
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Demand Loan
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When the lender calls back the loan
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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
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 amounts 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 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:-
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Cases
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Justification
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Auditor’s
Duty
|
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Mere
Issue of Show cause notice by the Assessing officer
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Can’t
be regarded as dispute/ demand payable by the company as it only contains the
queries of the Assessing Officer.
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Not
required to report under this Clause.
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Issue of Show cause notice along with the demand letter
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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.
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To evaluate each situation individually.
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Tax
Demands that have set aside by courts
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Are
clearly not dues.
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Not
required to report under this Clause.
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If
the demand has been referred for reassessment & due to such referral old
demand is cancelled
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This
would not constitute an amount due.
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Not
required to report under this Clause.
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If
the demand has been referred for reassessment & due to such referral old
demand has not been cancelled
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It will constitute/ remain disputed dues.
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Required
to report under this clause.
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Stay
has been granted on dues payable
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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.
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Required
to report under this clause along with the fact of stay.
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Case
has decided in favour of the company but the department may prefer to make
appeal to the higher authority
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No
dispute until the time the Department makes an appeal to the relevant
appellate authority.
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Not
required to report until the department makes an appeal.
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Amount
under the dispute is pending for an appeal to be filed and the time limit for
filing the appeal has lapsed
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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.
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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
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Conditions
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Analysis
of the Condition
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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.
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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
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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.
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Condition
No. 3
Its
turnover does not exceed `
5 Crores
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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.
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