Brief Note on Applicability of CARO 2016

CA Akhil Rastogi , Last updated: 28 February 2021
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Update: In its announcement dated 17th December 2020, The Ministry of Corporate Affairs has extended the applicability of the Companies (Auditor's Report) Order, 2020 (CARO 2020) to 1st April 2021.

Note: CA Students may note that Companies (Auditor’s Report) Order, 2016 issued by the Ministry of Corporate Affairs would be applicable for May 2021 Examination, since the applicability of Companies (Auditor's Report) 2020 has been deferred by the Ministry of Corporate Affairs. Read the official announcement here.

Update: In exercise of the powers conferred by sub-section (11) of section 143 of the Companies Act, 2013 and in supersession of the Companies (Auditor's Report) Order, 2016, the Central Government, after consultation with the National Financial Reporting Authority constituted under section 132 of the Companies Act, 2013, has issued Companies (Auditor’s Report) Order, 2020 on 25th February 2020.

Introduction:

The MCA has issued the Companies (Auditor’s Report) Order, 2016 (CARO 2016), on 29th March 2016. This order has been issued in supersession of the Companies (Auditor’s Report) Order, 2015, and is applicable for reporting on financial statements of companies whose financial year commences on or after 1st April 2015.

It was of the opinion of MCA that there are certain matters which is considered to be important for reporting financial statements for some entities as a part of Auditor’s report. There is a requirement on the part of the auditor of those certain entities to report on some particulars points as mentioned under section 143 of the Companies Act, 2013 after doing all the necessary inspections and verifications of the same.

Applicability:

CARO 2016 is applicable to all the companies including a foreign Company except the following (which) are specifically excluded from its purview:

Banking Company as defined under Section 5 (c) of the Banking Regulation Act, 1949.
Insurance Company as defined under the Insurance Act 1938.
Company licensed to operate under Section 8 of the Companies Act 2013 (Companies registered with charitable object).
A one-person company (OPC) as defined under clause (62) of Section 2 of Companies Act 2013 (OPC means a company which has only one person as a member).
A small company under Section 2 (85) of the Companies Act, 2013.

Scope:

Number of Companies are now covered in CARO, 2016. There are mainly two factors that have widened the application of CARO 2016 viz. Small Companies and Foreign Companies

As per sec 2(85) of Companies Act 2013 small company means a company, other than a public company:

a) Paid up share capital of which does not exceed 50 lacs or such higher amount as may be prescribed which shall not be more than 5 crores, and

b) Turnover of which as per its last profit and loss account does not exceed 2 crore or such higher amount as may be prescribed which shall not be more than 20 crores.

Note: The following company shall not qualify as a small company:

a) A holding company or a subsidiary company.
b) A company registered under Section 8 of the Act.
c) A company or body corporate governed by any special act.

The definition of Foreign Company has been also widened in section 2 (42) under Companies Act, 2013. Now, a Company shall become foreign Company if such Company or body corporate incorporated outside India has a place of business in India whether by itself or through an agent, physically or through electronic mode and conducts any business activity in India in any other manner.

Note:

The auditor of the following Private Company is not required to comment on the matter prescribed under CARO 2016:

i) A private company which is not holding or subsidiary Company of a public company;

ii) A private company having paid up capital and reserve and surplus not more than Rs 1 Crore as on the balance sheet;

iii) A private company which does not have total borrowing exceeding Rs. 1 crore from any bank and financial institution at any point of time during the financial year;

iv) A private company which does not have total revenue exceeding Rs 10 Crore during the financial year; and
v) CARO shall also not apply to the auditor's report on the consolidated financial statement (CFS) of the Company.

Such revenue means revenue as disclosed in schedule III to the Companies Act 2013 and includes revenue from discontinuing operation.

SOME IMPORTANT DEFINITIONS:

Revenue:

The term, “revenue”, has been defined by the Order as total revenue disclosed in Schedule III of the Act. Accordingly, the total revenue would include other income as per Schedule III.
Here revenue will also include revenue from discontinuing operations as specified in the Order

Revenue – Schedule III:

Revenue from operations
Other income
Total Revenue (I + II)

In respect of a company other than a finance company revenue from operations shall disclose separately in the notes revenue from:

Sale of products;
Sale of services;
Other operating revenues (Less)
Excise duty.

Other income shall be classified as:

Interest Income (in the case of a company other than a finance company);
Dividend Income;
Net gain/loss on sale of investments;
Other non-operating income (net of expenses directly attributable to such income).

Paid-up Capital, and Reserve & Surplus:

“Paid-up share capital” as, “that part of the subscribed share capital for which consideration in cash or otherwise has been received. This includes bonus shares allotted by the corporate enterprise”
Includes both equities as well as the preference
Amount of calls unpaid to be deducted
Paid-up on forfeited shares to be added
Share application money received not to be considered
“Reserves & Surplus” to be considered as disclosed in the financial statements prepared as per schedule III of Companies Act 2013;
To be reckoned as at the balance sheet date.

Borrowings from Banks and Financial Institutions:

Any time of the financial year;
Can be long term / short term / term loans / demand loans / export credits /Ø cash credits / overdraft facilities / bills purchased or discounted;
Non-fund based credit facilities (to the extent) devolved;
For term loans, interest accrued and due is considered as a borrowingØ {interest accrued but not due is not considered as a borrowing;

Financial Institutions:

Sub-section (39) of section 2 of the Act defines the term “financial institution” to include a scheduled bank, and any other financial institution defined or notified under the Reserve Bank of India Act, 1934;
The term “financial institution” shall also cover a non-banking financialØ company (NBFC);
Private Banks or foreign banks are banking institutions under the BankingØ Regulation Act, 1949.

Matters to be Included in CARO 2016:

CLAUSE	HEADS	EXPLANATION
3 (i)	Fixed Asset	a) whether proper records have been maintained by the Company showing full particulars of fixed assets; b) whether physical verification has been done by management in respect of fixed assets at reasonable intervals; c) whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the books of accounts.
Clause 3 (ii)	Inventory	a) whether physical verification in respect of inventory has been conducted by the management at reasonable intervals; b) whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the books of accounts.
Clause 3 (iii)	Loan given by Company	a) whether any term or condition of the grant of such loan are prejudicial to the Company’s interest; b) Whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments and receipts are regular; c) If the amount is overdue, state the total amount overdue, state the total amount overdue for more than 90 days and whether reasonable steps have been taken by the Company for recovery of principal.
Clause 3 (iv)	Loan to director and investment by the company	Whether the provision of Sections 185 and 186 of the Companies Act, 2013 has been complied with in respect of a loan, investment, guarantees and security. If not, provide the complete disclosures and details thereof.
Clause 3 (v)	Deposits	In case the Company has accepted deposits, whether the following conditions have been complied with: Directives issued by the reserve bank of India (a) The provision of sec 73 to 76 or any other relevant provision of Companies Act, 2013 and the rules framed thereunder, and (b) If the order has been passed by company law board (CLB) or National company law tribunal (NCLT) or RBI or any court or any other tribunal. (c) However, if any of the above not complied with, the nature of contraventions should be stated.
Clause 3 (vi)	Cost Records	Whether accounts and records have been made and maintained by the Company where Central Government has specified maintenance of cost records under sec 148 (1) of Companies Act, 2013
Clause 3 (vii)	Statutory Dues	(a) Whether the company is regular in depositing undisputed statutory dues with the appropriate authorities including Provident fund, Employees State Insurance fund, income tax, sales tax, service tax, duty of custom, duty of excise, value added tax, cess or any other statutory dues. If the company is not regular in depositing such statutory dues, the extent of 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 become payable shall be indicated by the auditor. (b) In case dues of income tax and sales tax or service tax or duty of custom or duty of excise or value-added tax have not been deposited on account of any dispute, then the amount involved and the forum where the dispute is pending shall be disclosed.
Clause 3 (viii)	Repayment of Loan	If the Company has made default in repayment of loans and borrowings to an FI, Bank, Government or dues to any debenture holder, then in such case whether the period and amount of default has been reported.
Clause 3 (ix)	Utilisation of IPO and further public	Where the Company has raised money through IPO or FPO and the term loans, whether the same has been utilised for the purpose for which the money had been raised. If not, the details along with the defaults or delays must be reported.
Clause 3 (x)	Reporting of Fraud	Whether any fraud by the company or any fraud on the company by its officers and employees has been noticed or reported during the year. If yes, the nature and amount of such fraud shall be properly indicated and reported.
Clause 3 (xi)	Approval of managerial remuneration	Whether the payment in respect of managerial remuneration has been made in accordance of them with the requisite approvals as mandated under section 197 read with Schedule V of the Companies Act, 2013. If not, the amount involved and step was taken by the Company for the refund shall be stated properly.
Clause 3 (xii)	Nidhi Company	Whether the Nidhi Company7: a) has complied with the net owned funds to deposit in the ratio of 1:20 to meet out the liability b) is maintaining 10% unencumbered term deposit as specified in Nidhi Rules, 2014
Clause 3 (xiii)	Related party transactions	Whether all the related party transaction is in compliance with the section 188 of the Companies Act, 2013 and whether the disclosure has been made in the Financial Statements of the Company.
Clause 3 (xiv)	Private Placement of Preferential Issues	Whether the company has made any preferential allotment or private placement of shares or fully or partly convertible debentures during the year the requirement of Section 42 of Companies Act, 2013 and whether the amount has been used for the purpose for which the amount was raised.
Clause 3 (xv)	Non-Cash Transaction	If the Company has entered into any non-cash transaction with its Directors or any other person concerned, the provisions of section 192 have been complied with.
Clause 3 (xvi)	Register under RBI Act 1934	Whether the company is required to be registered under Section 45 IA of Reserve Bank of India Act, 1934 and if so, whether the registration has been obtained.

ICAI’s Guidance Note on CARO 2016 by MCA [24 April, 2016]

The MCA has issued the Companies (Auditor’s Report) Order, 2016 (CARO, 2016) which is applicable for audits of financial statements for periods beginning on or after April 1, 2015. The CARO 2016 contains several new/modified reporting requirements vis-a-vis the CARO 2003/ CARO 2015.

The ICAI, with a view to providing appropriate guidance to its members, has brought out Guidance Note on the Companies (Auditor’s Report) Order, 2016. It is divided into:

(a) The relevant provision which contains Requirement of all clauses;

The below linked Guidance Note has been written in an easy to understand language and contains detailed guidance on various Clauses of CARO 2016 and the various issues and intricacies involved therein so that the requirements and expectations of the Order can be fulfilled in letter and spirit by the auditors. It’s a comprehensive and self-contained reference document for the members.

(b) Audit procedures and Reporting which cover Procedure to be adopted by the auditor.

Read all about CARO 2020: