29 November 2009
COMPANIES AUDITORS’ REPORT ORDER, 2003
Introduction
The Central Government, in exercise of the powers conferred under section 227(4A) of the Companies Act, 1956 (hereinafter referred to as “the Actâ€) has issued the Companies (Auditors Report) Order, 2003 (hereinafter referred to as “Order†or “CARO, 2003â€) vide Notification No. G.S.R. 480(E) dated June 12, 2003. The Order contains certain matters on which the auditors of companies (except certain companies which are specifically exempted under the Order) have to make a statement in their audit report. The Central Government amended the Order and issued the Companies (Auditor’s Report) (Amendment) Order, 2004.
The requirements of the Order are supplemental to the existing provisions of section 227 of the Act regarding the auditor’s report. The Order is not intended to limit the duties and responsibilities of auditors but only requires a statement to be included in the audit report in respect of the matters specified therein. In simple, the Order requires company auditor to report in his audit report on certain matters included in the Order.
Applicability of CARO, 2003
CARO, 2003 shall apply to every company including a foreign company as defined in section 591 of the Companies Act, 1956, except the following companies:
i) a banking company as defined in clause (c) of the section 5 of the Banking Regulation Act, 1949 (10 of 1949);
ii) an insurance company as defined in clause (21) of section 2 of the Companies Act, 1956;
iii) a company licensed to operate under section 25 of the Companies Act, 1956;
iv) a private company that satisfies all the following conditions:
a) its paid up capital and reserves is not more than Rs.50 lakhs, b) does not have loan outstanding exceeding Rs.25 lakhs from any bank or financial institution and c) does not have a turnover exceeding Rs.5 crores.
The Order would become applicable to a private limited company, if it does not satisfy any one of the above mentioned condition at any point of time, during the financial year covered by the audit report.
A private limited company, in order to be exempt from the applicability of the Order, must satisfy all the conditions mentioned above cumulatively. In other words, even if one of the conditions is not satisfied, a private limited company’s auditor has to report on the matters specified in the Order.
Matters to be included in the Auditor’s Report
The auditor’s report on the account of a company to which this Order applies shall include a statement on the following matters, namely:
i) 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;
c) if a substantial part of fixed assets have been disposed off, during the year, whether it has affected the going concern;
ii) 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;
iii) Loans:
a) has the company granted any loans, secured or unsecured to companies, firms or other parties covered in the register maintained under section 301 of the Act. If so, give the number of parties, maximum amount involved in the transaction and closing balance amount;
b) whether the rate of interest and other terms and conditions of loans given by the company, secured or unsecured, are prima facie prejudicial to the interest of the company; and
c) whether receipt of the principal amount and interest are also regular; and
d) if overdue amount is more than Rs.1,00,000, whether reasonable steps have been taken by the company for recovery/payment of the principal and interest;
e) has the company taken any loans, secured or unsecured from companies, firms or other parties covered in the register maintained under section 301 of the Act. If so, give the number of parties, maximum amount involved in the transaction and closing balance amount; and
f) whether the rate of interest and other terms and conditions of loans taken by the company, secured or unsecured, are prima facie prejudicial to the interest of the company; and
g) whether payment of the principal amount and interest are also regular;
iv) Internal control system:
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;
v) Contracts or arrangement covered under section 301 of the Act:
a) whether particulars of contracts or arrangements referred to in section of 301 of the Act have been entered in the register required to be maintained under that section; and
b) whether transactions made in pursuance of such contracts of arrangements 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 Rs.5,00,000 in respect of any party and in any one financial year);
vi) Public deposits:
in case the company has accepted deposits from the public, whether the directives issued by the Reserve Bank of India and the provisions of sections 58A, 58AA or any relevant provisions of the Act and the rules framed there under, where applicable, have been complied with. If not, the nature of contraventions should be stated; If an order has been passed by the Company law Board (CLB) 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?
vii) Internal audit system:
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 Rs.5 crores 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;
viii) Maintenance of cost records:
where maintenance of cost records has been prescribed by the Central Government under clause (d) of section 209(1) of the Act, whether such accounts and records have been made and maintained;
ix) Statutory dues:
a) is the company regular in depositing undisputed statutory dues including Provident Fund, Investor Education and Protection fund, Employees State Insurance, Income-tax, Sales-tax, Wealth-tax, Service-tax, Custom duty, Excise duty, Cess and any other statutory dues with the appropriated 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 / sales-tax / wealth-tax / service-tax / customs duty / excise duty / cess have not been deposited on account of any disputed, then the amounts involved and the forum where dispute is pending shall be mentioned.
(Note: a mere representation to the Department shall not constitute the dispute)
x) Accumulated losses:
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 50% of its net worth and whether it has incurred cash losses in such financial year and in the immediately preceding financial year;
xi) Repayment of dues to financial institution or bank or debenture holders:
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;
xii) Loans and advances on the basis of pledge of shares, debentures or other securities:
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;
xiii) Special statute applicable to chit fund / nidhi / mutual benefit fund / societies:
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 / doubtful / 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 payment capacity of the borrower;
xiv) Company dealing in shares, securities debentures and other investments:
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 investments 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 Act;
xv) 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;
xvi) Application of term loans:
whether the term loans were applied for the purpose for which the loans were obtained;
xvii) Application of short-term funds for long-term purpose:
whether the funds raised on short-term basis have been used for long-term investment; If yes, the nature and amount is to be indicated;
xviii) 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;
xix) Security or charge on debenture:
whether security or charge has been created in respect of debentures issued?
xx) End use of money raised by public issue:
whether the management has disclosed on the end use of money raised by public issues and the same has been verified;
xxi) 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.
Reason to be stated for unfavourable or qualified answers
Where an auditor in his auditor’s report give unfavourable or qualified answer to any of the questions stated in above mentioned matters, then his 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 or an 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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