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caroThe MCA has vide its order dated 29.03.2016 introduced Companies (Auditor’s Report) Order 2016 replacing CARO, 2015.

Applicability

This applies to all companies including foreign companies with the exception of the below companies to which this not applicable

Banking Company
Insurance Company
Section 8 Company
One Person Company and Small Company
Private company which satisfies all the below requirement
It is neither a subsidiary or holding of public company
It’s paid up capital and reserves and surplus does not exceed Rupees One Crore as at Balance Sheet Date
Its total borrowings from Banks and Financial Institution does not exceed Rupees One Crore at any time during the financial year
Its total revenue for the financial year including that of the discontinued operations does not exceed Rupees Ten Crore

Matters to be included in the Auditor’s Report

Auditors report has to include matters specified Paragraphs 3 and 4 in the audit report of all the companies to whom this order is applicable. The matters specified fall under the below categories with comments in the brackets being the present authors personal views on what needs to be done to ensure compliance.

1.Fixed Assets

Whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets; (Basically Fixed Asset Register maintained or not) 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; ( Management should have a well documented fixed asset verification programme such that all material assets are covered at least every 3-4 years) whether the title deeds of immovable properties are held in the name of the company. If not, provide the details thereof; (Auditor needs to check the title deeds of property)

2. 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; (Auditor should ensure that the management has a well documented programme for physical verification of inventory such that material portion of inventory is subjected to physical verification every year)

3. Loans to related parties

Whether the company has granted any loans, secured or unsecured to companies, firms, Limited Liability Partnerships or other parties covered in the register maintained under section 189 of the Companies Act, 2013. If so, whether the terms and conditions of the grant of such loans are not prejudicial to the company’s interest; ( The auditor has to see many things like terms on which similar loans are made to unrelated parties, justification if loans made at zero or lower interest rates such as commercial expediency benefiting the group as a whole etc.) whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular; ( See terms on which loans made, repayment schedules and actual repayments) 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; (This is one situation auditor would not want to be. Normally after correspondence with third party delinquent borrowers if the borrowers still fail companies resort to legal remedies but in case of group companies this would be rare case at most. In many circumstances auditor might be forced to qualify his report to this extent)

4. Section 185 and 186 of the Companies Act, 2013

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. (Section 185 restricts a company from making loans to directors or any other person in whom a director is interested. Any contravention is a punishable offence. There are three exceptions a) loans to Managing Director or Whole Time Directors on terms extended to all employees b) approval of scheme by shareholders through special resolution c) company which is into money lending business provided the rate of interest charged is not lower than the Bank Rate declared by the Reserve Bank of India. The auditor will have to make analysis of all related party loans from the perspective of 185 and check if the exceptions are attracted and that proper documents like special resolutions, well documented employee schemes are in place)

(Section 186 contains restriction on companies making investments with more than two layers of investment companies. It further contains restriction on a company from making a loan, giving guarantee or providing security above a threshold limit. The auditor should check that where threshold limits for making loans etc. have been crossed proper authorization has been obtained. In particular auditor must verify unanimous board resolution, shareholders special resolution, permission from the financial institutions when the company has defaulted in payments of loans etc., documents filed with the ROC and the register maintained in Form MBP2. The auditor should also verify that rate of interest is not lower than that for the prevailing rate on Government Securities and that proper disclosure has been made in the financial statements)

(In respect of investment through investment companies the auditor should total details of investments of all the investee and sub investee companies to see that there is not more than two layers of investment)

5. Public 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, 2013 and the rules framed there under, 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?

( The auditor will have to check a lot documents including but not restricted to circulars circulated amongst members, annual credit rating obtained, deposit insurance policy, advertisements in newspapers at the time of raising money, form filed with the ROC for creation of charge and disclosure for unsecured deposits, deposit of the 15 per cent of the money due in current and next year with scheduled bank, compliance with RBI rules and regulations etc. )

6. 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.

(Wherever applicable the auditor must see that whether the company is maintaining the prescribed cost records)

7. Statutory Dues

Whether the company is regular in depositing undisputed statutory dues including provident fund, employees’ state insurance, income-tax, sales-tax, service tax, duty of customs, duty of excise, value added tax, cess and any other statutory dues to the appropriate authorities and 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; ( The auditor will have to calculate various statutory dues applicable on the company and verify with proper challans and other proof of payments whether or not the undisputed dues have been paid on time or not and report irregularities) 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. A mere representation to the concerned Department shall not be treated as a dispute.

(The auditor will have to obtain a list of cases pending is dispute under these laws including copies of appeals filed by the assesse company or the government department)

8. Default in loan Repayments

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. (The auditor has obtain loan agreements and details of repayments made. The auditor should also obtain documents pertaining to CDR, SDR agreements)

Application of money raised through public issue or term loans whether moneys raised by way of 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;

(The auditor should verify prospectus, offer letter or agreement of term loan as the case maybe studying in detail the purpose of raising money. The auditor should also make a detailed study of balance sheet, cash flow statement and other relevant documents to obtain an detailed understanding of how funds obtained has been utilized. In case of delay the auditor should examine the justification provided by the management and whether it has obtained permission from shareholders, debenture holders, banks or financial institutions as the case may be. He must also analyze whether money has become repayable as result of default by the company)

9. Frauds

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;

(The auditors procedures are not normally designed to detect frauds but to provide a reasonable assurance that the financial statements provide a true and fair view. The auditor should obtain a management representation in this regard that no fraud has taken place or reported during the year. If the auditor during the course of his audit comes across a major fraud, particularly where management or those charged with governance are involved he should consider withdrawing from such engagement after properly documenting the reasons for withdrawal and obtaining legal opinion if considered appropriate)

10. 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;

(The auditor needs to calculate the maximum managerial remuneration in light of section 197,198 and other relevant provisions of the Act and the relevant rules. If limits are crossed the auditor needs to check compliances with schedule V, Shareholder approval and Central Government permission. In any case the director holds excess remuneration in trust for the company and is liable to return the money. The auditor should verify whether director has returned the money to the company or not. The company and director might have a understanding that instead of returning the money the same may be adjusted against the future dues of the director. This however has to be properly documented and disclosed in the financials)

11. Nidhi Company

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 per cent unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability;

(This is a specific requirement for the auditor of a Nidhi Company. The auditor should check Net Owned Funds to Deposits ratio and documents relating to all unencumbered term deposits)

12. Related Party Transactions

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;

(These provisions applicable to listed companies and certain specified class of unlisted companies. Certain kinds of related party transactions require shareholders approval and in many cases also require shareholder approval. They are also required to be disclosed in the Board Report and Financial Statements.)

13. Allotment of shares or debentures

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;

(It is to be noted that if a company allots shares or debentures in non compliance of section 42 it will be deemed to be a public offer and consequently the provisions of SEBI Act, SCRA will apply to the company. The auditor has to check many things like Special Resolution, Valuation Report, Offer Letter, Return of Allotment, Whether separate bank account opened or not, allotment within 60 of receiving subscription money etc.)

14. Non Cash Transactions with directors etc.

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;

(The auditor must check shareholders approval and whether the notice sent to the shareholders contain adequate details about the proposed non cash transaction)

15. Registration with the 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.

(The auditor must check registration documents in appropriate cases)

16. Other Points

Where, in the auditor’s report, the answer to any of the questions referred to in paragraph 3 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.

Further this order is not applicable to auditor’s report on the consolidated financial statements.

(This article is submitted for refreshment of CARO 2016 related matters)

 

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