In this article we will be discussing the provisions of the CARO regulations and the circumstances under which it is applicable to companies.

The Existence of CARO, 2016

The Companies Auditor’s Report Order, 2016, commonly known by its acronym “CARO,” was introduced by the Ministry of Corporate Affairs (MCA) with the objective of ensuring important issues are reported in the audit reports of certain entities along with their financial statements. Auditors of the prescribed entities are required to report on the specific points mentioned in this order after conducting the necessary verification procedures. Understanding the CARO full form is crucial for comprehending the responsibilities laid out for auditors under this order.

Applicability of CARO 2016

CARO, 2016 is applicable to all companies except for the following entities that are specifically excluded:

1. Banking Companies
2. Insurance Companies
3. Companies registered for Charitable Purposes
4. One Person Company
5. Small Companies (Companies with Paid-up capital ≤ Rs. 2 crore and Last reported turnover ≤ Rs. 20 crores)

Additionally, certain private companies are also exempted from the requirements of CARO, 2016 if they meet specific criteria related to their capital, reserves, borrowings, and revenue. Foreign companies are also subject to CARO, 2016, and their auditors are required to report on the matters specified in the order.

Matters specified in CARO 2016

CARO, 2016 mandates auditors to report on specific matters, including:

1. Fixed Assets
2. Inventory
3. Loans given by the Company
4. Loan to Directors and Investment by the Company
5. Deposits
6. Cost records
7. Statutory Dues
8. Repayment of Loans
9. Utilization of Funds
10. Reporting of Fraud
11. Approval of Managerial Remuneration
12. Nidhi Company
13. Related Party Transactions
14. Private Placement of Preferential Issues
15. Non-Cash Transactions
16. Registration under RBI Act

These specified matters ensure that auditors provide a comprehensive report on crucial aspects of a company’s operations and compliance.

Companies Not Under the Purview of CARO

The following companies are exempt from the requirements of CARO 2020:

1. One Person Company
2. Small companies (Companies with paid-up capital less than or equal to Rs 50 lakh and with a last reported turnover less than or equal to Rs 2 crore)
3. Banking companies
4. Companies registered for charitable purposes
5. Insurance companies

Additionally, certain private companies are also exempt from the requirements of CARO 2020. These private companies meet the following criteria:

1. Gross receipts or revenue (including revenue from discontinuing operations) less than or equal to Rs 10 crore in the financial year.
2. Paid-up share capital plus reserves less than or equal to Rs 1 crore as on the balance sheet date.
3. Not a holding or subsidiary of a public company.
4. Borrowings less than or equal to Rs 1 crore at any time during the financial year.

For these exempted companies, the provisions of CARO 2020 do not apply, and they are not required to comply with its reporting requirements during their statutory audits.

CARO 2016 Report Format

Here is a brief summary of the reporting requirements under each clause:

Fixed Assets

• Verify if proper records of fixed assets, including quantity and location, are maintained.
• Confirm if physical verification of fixed assets is conducted at reasonable intervals by management.
• Report any material discrepancies found during physical verification and if they are accounted for in the books of accounts.
• Check if the title deeds of immovable properties are in the name of the company.
• Inventory
• Confirm if the management conducts physical verification of inventory at reasonable intervals.
• Report any material discrepancies found during physical verification and if they are accounted for in the books of accounts.

Loans given By Company

• Determine if the company has provided secured or unsecured loans to other companies, LLPs, firms, or parties mentioned in the register under Section 189 of the Companies Act, 2013.
• Verify if the terms of such loans are not detrimental to the company’s interest.
• Confirm if the repayment of loans and their receipts are proper.
• Report any loans with outstanding repayments exceeding 90 days and the recovery position.
• Loan to Directors and Investment by the Company
• Check if loans and guarantees to directors comply with the limits prescribed under Sections 185 and 186 of the Companies Act, 2013.

Deposits

• Ascertain if the company has accepted any deposits and if they have followed the directives of the RBI.
• Ensure compliance with provisions regarding the acceptance of deposits under Sections 73 to 76 of the Companies Act, 2013.
• Disclose any non-compliance with deposit-related orders passed by courts or tribunals.
• Report the nature of non-compliance, if any.

Cost Records

• Determine if the company is required to maintain cost records as prescribed by the Central Government.
• Verify if the cost records have been properly maintained.

Statutory Dues

• Report whether the company regularly deposits statutory dues such as provident fund, employees’ state insurance, income tax, sales tax, service tax, customs duty, excise duty, value-added tax, cess, and other statutory dues.
• Disclose any outstanding statutory dues that have remained unpaid for more than 6 months.
• If taxes have not been deposited due to disputes, disclose the amount in dispute and the ongoing litigation forum.

Repayment of Loans

• Report any default in the repayment of loans to banks, the government, 

debenture-holders, etc., including the amount and period of default.

Utilization of Funds

• Verify if funds raised through IPOs or other public offers have been utilized for the intended purpose.
• Report any delays or defaults in the utilization of funds.

Reporting of Fraud

• Report any instances of fraud committed by the company or its employees during the year.
• Disclose the nature and amount involved in the fraud.

Approval of Managerial Remuneration

• Verify if the limits prescribed under the Companies Act, 2013, for managerial remuneration have been adhered to.
• Report any excess amount involved and steps taken for recovery.

Nidhi Company

• Confirm compliance with net owned funds to deposit ratio of 1:20 and maintenance of 10% unattached term deposits as specified in the Nidhi Rules, 2014.

Related Party Transactions

• Ascertain compliance with the rules specified in the Companies Act, 2013, for transactions with related parties.
• Ensure appropriate disclosure of related party transactions in the financial statements.

Private Placement of Preferential Issues

• Verify if the company has made preferential or private allotments of shares and debentures.
• Confirm if the amount raised has been utilized for the intended purpose.

Non-Cash Transactions

• Check if the company has followed the limits and conditions as per the Companies Act, 2013, for non-cash transactions with directors or their relatives.

Registration under RBI Act

• Determine if the company is required to be registered under the RBI Act.
• Report whether the registration has been obtained or not.

All the above clauses have mandatory reporting requirements under CARO 2016 Report Format, and the necessary disclosures should be provided accordingly.

Companies Auditor’s Report Order 2016

CARO 2016 Applies to All Companies, Including Foreign Companies-

As per section 2, clause (42) of the companies Act 2013; which defines a foreign company as an organisation established outside India with;

• An Indian office run by the company or through a business agent, with an actual physical office or a digital office, or
• Running business operations in India, in other different ways.

CARO is Not Applicable to the Following Companies;

1. Financial/banking institutions as defined under Section 5 (c) of the Banking Regulation Act, 1949. 
2. The company authorised to function with a charitable objective as per section 8 of the companies Act 2013
3. Insurance companies as defined under the Insurance Act 1938. 
4. A one-person company (OPC) or a one-member company as defined under clause (62) of Section 2 of the Companies Act 2013 
5. Small companies as defined under Section 2 (85) of the Companies Act, 2013.
6. Any company other than a public company with: 

• A maximum of Rs. 50 lakhs as paid-up share capital unless a higher amount has been prescribed (or approved) which does not exceed Rs. 5 crores. 
• Yearly turnover as per profit and loss statement does not exceed Rs. 2 crores unless a higher amount has been prescribed (or approved), which does not exceed Rs. 20 crores.
  

However, the following companies will not be classified as a small company:  

• A business enterprise registered under Section of the Companies Act, 2013.
• A holding or a subsidiary company. 
• Any business or corporate governed by any special act.

Loan To Director And Investments By The Company

Cost Records 

Maintenance of cost records under sec 148(1) of the Companies Act, 2013 as per the instructions of the Central Government.

Loan Repayment

In case the company has not repaid its loans or borrowings to banks/financial institutions or other entities, the auditor will report the time period and total unpaid amount.

Statutory Dues 

• Regular deposits of statutory dues such as Provident Fund, Employees State Insurance fund, income tax, sales tax, service tax, etc with the respective regulatory bodies. In case the deposits are not regular, the auditor will indicate in his/her report the outstanding amount of deposits on the last day of the financial year over a period of 6 months to the date from the first date of payment.
• If statutory dues such as income, sales, service or duties have not been deposited due to disputes, then the auditor will report the total pending deposits and the forum where the dispute is pending.

Reporting Of Fraud

The auditor needs to report any kind of fraud activities perpetrated by the company or its employees, its nature and the amount involved in the fraud.

Managerial Remuneration

The auditor verifies that paid managerial remuneration is in lieu of approvals, as per the provision of Section 197 read with Schedule 5 to the Companies Act, 2013. In case if unapproved, the auditor needs to report the amount of remuneration and the procedure to acquire a refund on the same.

IPO And Further Public Offers 

The auditor reports funds raised through initial public offer and further public offer, and application for term loans for the same. If not the auditor reports defaults, delays, and rectification.

Nidhi Company

The auditor needs to report if the Nidhi has complied with the deposit of net owned fund in 1:20 ratio, to meet out the liability, as well as the maintenance of 10% unencumbered term deposits as per the Nidhi rules 2014

Related Party Transaction 

The auditor ensures related party transactions comply with Section 177 and 188 of the Companies Act, 2013. These transactions appear in various financial statements, as per the standard practices of accounting.

Non-Cash Transactions

In case the company has engaged with the Director for non-cash transactions (or people associated with him), the auditor needs to verify if the company has complied with Section 192 of Companies Act, 2013.

Preferential Allotment Of Shares

The auditor needs to ensure if the company has made a preferential allotment of shares or debentures as per Section 42 of the Companies Act, 2013, for the same financial year that the auditor is reviewing.

The auditor verifies funds raised for a cause are used for the same. If not, the auditor will report the funds used for other causes and the type of non-compliance with respect to the preferential allotment of shares or debentures.

Registration Under RBI Act 1934 

The auditor verifies if the company has to register under Section 45 IA of the Reserve Bank of India Act, 1934. In which case, the auditor checks on how to obtain the registration.

Conclusion

While ease of doing business is important, proper checks and balances that ensure good corporate governance, such as those outlined in the Companies Auditor’s Report Order (CARO full form Companies Auditor’s Report Order), are equally important. A company is funded by a collective of people who may not be in charge of running the company on a day-to-day basis.

They depend completely on the report of the auditor to understand the functional dynamics of the company. Companies Auditor’s Report Order 2016 serves this very purpose, i.e, to ensure that companies are complying with the provisions of the law and all activities are being reported transparently.

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