New reporting requirements of CARO 2016
The Ministry of Corporate Affairs has issued Companies (Auditor’s Report) Order, 2016 on 29th March 2016 which has replaced the CARO, 2015. CARO, 2016 has introduced many new reporting requirements.
CARO, 2016 is applicable for financial years commencing on or after April 1, 2015. CARO, 2016 is applicable to all companies including Foreign Companies except the following:
1. Insurance Companies
2. Banking Companies
3. Companies registered under Section 8 of the Companies Act, 2013
4. One Person Companies
5. Private Companies if:
a. It is not subsidiary or holding Company of a Public Company and
b. The Paid Up Capital and Reserve and Surplus is not more than rupees One Crore as on Balance Sheet date and total borrowings not exceeding Rupees One Crore at any time during the year and Total Revenue does not exceeding rupees ten crore during the financial year.
It is specifically not applicable to Auditor’s Report on Consolidated Financial Statements.
Paragraph 3 of the Order states the matters to be included in the Auditor’s Report. CARO, 2016 has provided some new reporting requirements and has omitted some reporting requirements which were there in CARO, 2015.
Clause wise Amendments-
CARO, 2016 has introduced following changes in existing reporting requirements/ New reporting requirements:
a. Fixed Assets –
New Sub-Clause under the clause of fixed assets that whether the title deeds of immovable properties are held in the name of the company and if not then its details
Reporting Requirement for “Maintaining Proper Record of Inventory” and “Procedure of Physical verification of Inventory” has been removed.
c. Loans Given by Company-
Under Clause of Loans granted to parties there are three changes
i. LLPs have been included in list of Parties
ii. Reporting of amount overdue for more than ninety days, and whether reasonable steps have been taken by the company for recovery of the principal and interest. Limit of Rs. 100,000 have been removed.
iii. It is also required to be stated that whether the terms and conditions of the grant of such loans are not prejudicial to the company’s interest.
d. Compliance of Section 185 and 186- This is a new Clause where it is required to be stated that whether provisions of section 185 and 186 of the Companies Act, 2013 have been complied with or not. In case of non-compliance, details are required to be reported.
e. Acceptance of Deposit-
There is no Change. The Auditor has to report compliance with 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 thereunder.
f. Maintenance of Cost Records-
There is no Change. The Auditor has to report whether cost records are required to be maintained and if yes, then whether they have maintained or not.
g. Payment of Statutory Dues-
Under the list of statutory dues, “Wealth Tax” have been removed.
h. Repayment of Loans-
In clause related to repayment of Loans, Government has been included in list of parties.
Also, in case of defaults to banks, financial institutions, and Government, lender wise details is to be given.
i. End Use of fund raised-
Under this clause now money raised through IPO/FPO is also included apart from term Loans.
j. Fraud by or on Company-
The scope of this clause has been restricted. Earlier this clause covered a) Fraud by Company b) Fraud on Company. Now Fraud on Company by Officers and Employees is required to be covered which been Fraud on Company by third parties have been excluded.
k. Managerial Remuneration-
This is a new Clause where compliance with provisions of section 197 read with Schedule V to the Companies Act, 2013 is required to be reported. In case of non-compliance, amount and steps taken by the company for securing refund is required to be stated.
l. Nidhi Company-
This is a new Clause wherein
a. the compliance by Nidhi Company with the Net Owned Funds to Deposits in the ratio of 1: 20 to meet out the liability and
b. the Nidhi Company is maintaining ten per cent unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability is required to be reported.
m. Related Party Transactions–
This is a new Clause where compliance with provisions of section 177 and 188 of the Companies Act, 2013 is required to be reported in case of related party transactions. Also the disclosure in the Financial Statements as required by the applicable accounting standards has to be reported.
n. Preferential Allotment or Private Placement of Shares-
This is a new Clause where compliance with provisions of section 42 of the Companies Act, 2013 is required to be reported in case of preferential allotment or private placement of shares or fully or partly convertible debentures during the year under review. Also, End use of funds raised is required to be stated.
o. Non-cash transactions with directors or persons connected with him-
If the company has entered into Non-cash transactions with directors or persons connected with him it is required to be reported that whether it has complied with section 192 of the Companies Act, 2013.
p. Registration under section 45-IA of the Reserve Bank of India Act, 1934- This is a new clause that whether Company his required to be registered under section 45-IA of the RBI Act, 1934. If yes, then whether it has obtained this registration.
a. Requirement of adequate internal control system for the purchase of inventory and fixed assets and for the sale of goods and services have been removed.
b. Clause related to accumulated losses at the end of the financial year are not less than fifty per cent of its net worth is omitted.
c. Clause related to the amount required to be transferred to investor education and protection fund is also omitted.
Unfavourable or Qualified Answers
As per paragraph 4 of the order, if the answer to any of the clauses is unfavourable or qualified, the auditor’s report shall state:
The basis for such unfavourable or qualified answer.
If he is unable to express any opinion on any specified matter, then such fact along with the reasons as to why it is not possible for him to give his opinion on the same is required to be stated.
ICAI Guidance Note-
The Institute of Chartered Accountants of India has issued Guidance Note on CARO 2016 on April 23, 2016. It contains guidelines on requirements of CARO, 2016. It is divided into:
Relevant Provisions which contains requirements of all clauses.
Audit Procedures and Reporting which covers procedure to be adopted by auditor.