In continuation to my previous blog which briefed about financial statements and its contents I would like to update about The Companies (Auditor’s Report) Order,2015 which has replaced about a decade old Companies (Auditor's Report) Order, 2003.
Now, there are less reporting requirements as per CARO, 2015 in comparison to the CARO, 2003 as many of such reporting requirements have already been incorporated in the Companies Act, 2013.
DATE OF APPLICABILITY
CARO,2015 is applicable for the financial year commencing on or after 1st April,2014. Therefore, auditor's report accompanying Annual Report for the year 2014-15 shall report on the matters specified under CARO, 2015
COMPANIES ON WHICH APPLICABLE
Order is applicable on every company including foreign company which is required to prepare annual report for Indian operations.
However, such order is not applicable on following -
1.) Banking Company
2.) Insurance Company
3.) Company licensed u/s 8 of the Companies Act, 2013
4.) One Person Company
5.) Small Company (i.e. a private company having turnover not exceeding 2 crores and paid up share capital not exceeding 50 lacs),and
6.) A private Company having (at any point of time during financial year)
I) (Paid up capital and reserves) less than or equal to 50 lacs, and
II) (Loan outstanding from any financial institution or bank) less than or equal to 25 lacs, and
III) (Turnover) less than or equal to 5 crore.
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 unfavorable or qualified, the auditor’s report shall state the reason for such unfavorable 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.
There are 12 matters to be specifically reported under CARO.
CONTENTS OF THE ORDER
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
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;
3.) LOAND AND 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;
4.) ADEQUACY OF INTERNAL CONTROL
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.
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.
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.
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.
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.
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 debenture holders? If yes, the period and amount of default to be reported.
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.
11.) APPLICABILITY OF FUNDS BY COMPANY
Whether term loans were applied for the purpose for which the loans were obtained.
12.) 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
I have tried to cover the bare points as briefly as possible. For point wise analysis of the duties and responsibilities of the auditor refer to my next blog.
CA Mahershi Vijay
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