Companies Audit Report Order 2016

BY MALLAMPALLI RUTHVIK

MAOCARO 1998

CARO 2003

Companies Act 2013

CARO 2015

CARO 2016

19982003

2013

2015

2016

HISTORY OF CARO

PREFACE

Auditor Reporting a few additional matters as a part of Audit report for a specified list of companies which helps the stakeholders to understand the company in a much better way.

INTRODUCTION

Came into Enforcement on 29th March 2016. CARO 2016 has replaced into CARO 2015 with additional

focus on Frauds committed by company, Fund raising & its utilisation etc.

Applicable for reporting for the FY 2015-16 i.e. as it was made applicable from the 1st April 2016.

APPLICABILITY OF CARO 2016 Applicable for all companies including the foreign company u/s

42 of CA 2013. Exceptions –

Banking Company Insurance Company Section 8 Companies OPC##

Private Limited-Paid up Capital & Reserves- Not Exceeding INR 1 CrTotal Borrowings Outstanding- Not Exceeding INR 1 Cr from

any Bank or FITurnover not exceeding INR 10 cr during FY at any point of

time

Reporting on Fixed Assets

Reporting on the Maintenance of proper books records like quantitative details of fixed assets

Verification of fixed assets by the management at fixed intervals to verify if any material discrepancies exist, if any.

Verify the Title deeds of Immovable assets if there are held in the name of the company.

CRITICAL ANALYSIS Quantitative details mainly include items

like Asset Classifications, Freehold Premises, Assets under Deferred payment Guarantee, Source of procuring funds.

Physical Verification always depends on the case to case i.e. type & size of company.

Verification of title deeds is a new provision as per CA 2013 which ensures that the director’s personal property is not added in the companies Books of accounts.

Reporting on Inventory

Reporting on the Physical verification of Inventory at reasonable intervals.

Verify if any material discrepancies were noticed during such stock verification and try to understand the reason of such discrepancies if material.

CRITICAL ANALYSIS Inventory mainly includes Raw material ,

Work in Progress & Finished goods. Physical Verification always depends on

the case to case i.e. type & size of company.

Proper records include the inventory reports, verification reports, scrap report from costing department.

Internal controls for inventory should be checked so that any weaknesses should be reported and rectified by them management

Reporting on Secured & Unsecured Loans

Maintenances of Register under Section 189 of CA 2013 for the grant of Secured, Unsecured loans to LLP, Companies, Firms.

Verify whether T&C for grant of loans are not against the interest of the companies.

Schedule of Interest & Principal amount is duly maintained by the company.

Amounts overdue for 90 days, proper action has been taken to recover the same.

CRITICAL ANALYSIS Increase of the auditor

responsibility to cover LLP’s even in the grant of loans by company.

Bringing better transparency in terms of defaulters by replacing the monetary value of INR 1 lac in CARO 2015 with the pre-defined period of 90 days.

Verification of the Loan agreements & Related party transactions.

Reporting on Section 185 & 186

Compliance with Section 185 & 186. If not, the details have to be

submitted reasons stating about the particulars.

CRITICAL ANALYSIS Increase of the auditor responsibility

to ensure that the auditors along with directors be punishable for non-compliance of the provisions.

Boom to Private companies post Notification in June 2015 mentioning the applicability to Pvt Ltd.

Additional step to bring more transparency for the corporate where public has vested interest.

Reporting on Deposits

Compliance to the Directives issues by RBI and compliance to Section 73-76 & rules framed under CA 2013.

If not, the nature of contravention has to be mentioned.

Any order passed by Company Law Board or National Company Law Tribunal or Reserve Bank of India or any court or any other tribunal has to be specified.

Reporting on Cost Audit

Compliance of Cost Records u/s 148 of CA 2013 whether proper accounts & books have been maintained.

Reporting on Statutory dues

Company’s timely payment of Statutory dues like EPF, ESI, Income tax, Sales Tax, Customs , Service tax & Excise.

If there is any amount outstanding for a period more than 6 months as on the 31st March it has to be reported along with the reason.

Any Statutory amount pending against disputes, if not deposited against the order raised by concerned department has to be reported

CRITICAL ANALYSIS CARO 2016 has abolished the focus

on Wealth tax and included Service tax into the compliance list

CARO 2016 has removed the IPEF transfer of funds which was a part of CARO 2015.

Reporting on Default on payment to Banks & Fin

Institutions Report if any company has defaulted in repayment to Financial institutions or banks or debenture holders at any point of time during the year.

If yes, the following details have to provided- Period of default. Amount Lender wise details in case of

default to bank & FI’s .

CRITICAL ANALYSIS Awaking call by Govt to ensure we

don’t see any more Sahara’s or any other Financial frauds happening..

Step to increase the transparency and Corporate governance by keeping a eye of defaulters.

List of Lender will the help Govt to understand the exposure of each of Lender to the company.

Reporting on Utilisation of money raised

Reporting on Utilisation of money raised by the way of Public Issue / Further issue / Debt funding raising or term loans for purpose it has been raised.

If not, then the details together with delays / default and subsequent rectification, if any, as may be applicable, be reported.

CRITICAL ANALYSIS New emphasis has been made on

Public issue & Further issue has been made in addition to the term loans.

Focus towards the Primary & Secondary market helps to keep the track on how & where the money is spent.

Delay in utilisation of fund raised helps the management to be cautious before the fund raise.

Fraud Reporting

Reporting on the frauds which have been committed on or by company or any frauds which have been committed its officers / employees.

CRITICAL ANALYSIS Special focus has been made for the

frauds which have been committed which have committed by the officers/ employees towards the company.

This is a addition to CARO 2015 where the focus was restricted to frauds by the company.

Strict check to ensure the employees don’t take the company for granted and the regulators are vigilant to ensure we don’t see another Satyam again.

Reporting on Managerial Remuneration

Reporting on whether the Remuneration payable to board of directors i.e. MD, Whole time directors, Non Executive directors has been in compliance to section 197 of the CA 2013.

If not, the excess amount has to be stated and process should be initiated to get the refund .

CRITICAL ANALYSIS A new inclusion in CARO 2016 to

keep the check that profit making companies don’t take the step to decrease the profits and end in losses to avoid of taxes.

A checkpoint to ensure the black money through tax evasion is been caught hold and the dummy directors been cautioned.

Reporting on Nidhi Company

Reporting on whether the Nidhi Company has complied with the Net Owned Fund in the ratio of 1: 20 to meet out the liability &

whether the Nidhi Company is maintaining 10% liquid assets to meet out the unencumbered liability.

CRITICAL ANALYSIS A new inclusion in CARO 2016

which was earlier in CARO 2003 where the special emphasis was laid towards chit fund companies.

Reporting on Related party transactions

Reporting on all the related party transactions by ensuring the compliance to Section 177 & 188 of the CA 2013, Accounting standard, where ever applicable.

The same should be disclosed in the financial statements too

CRITICAL ANALYSIS A new inclusion in CARO 2016 to

ensure the false practice are put a check by the regulatory and bring in the concept of Arm length Pricing transactions for conduct of business.

Additional responsibility on auditor to prevent the frauds happening like DLF & Robert Vadra case.

Reporting on Funds raising

Reporting whether company has made any preferential allotment / private placement of shares or fully or partly convertible debentures during the year

If YES, then the compliance to Section 42 of the Companies Act, 2013 & the amount raised have been used for the purposes for which the funds were raised.

If not, the details have to be reported.

CRITICAL ANALYSIS A new inclusion in CARO 2016 as

India has been undergoing through a Fund Raising activities for many start-ups & Mid-size companies.

Earlier CARO 2003 have focused only on preferential allotment only and Private placement has newly been added.

Reporting on Non-Cash transactions

Reporting on whether any directors or any persons concerned with of the company has entered in any non-cash transactions.

If yes, verify whether the compliance of Section 192 of the CA 2013.

CRITICAL ANALYSIS This is a new inclusion in CARO

2016 The significance of this section is to

identify if that no director takes any undue advantage for entering into a non-cash transaction with passing a proper board resolution and mentioning the particulars of such asset & its value as per the registered value.

CONCLUSIONIt is now clearly evident that areas mentioned in the Companies (Audit Report) Order 2016 will help the stakeholders to identify any weaknesses in the company will help them to take a decision whether the financial statements show True and fair view of the company.

The new additions relating to the Managerial remuneration, non-cash transactions with directors, Nidhi Company regulations, Related party transactions have put a heavy load on the Auditor to report any deviations from the provisions of the act.

It’s always better early than be late……………….