Comparative analysis
of CARO, 2015 with CARO, 2003
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Niddhi Parmar
Brief Comparison between CARO, 2003 & CARO, 2015
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Niddhi Parmar
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Disclaimer:
This write up is intended to initiate academic debate on a pertinent question. It is not intended to be a professional advice and should not be relied upon for real life facts.
The Central Government in consultation with the
Institute of Chartered Accountants of India, constituted under the Chartered
Accountants Act, 1949 (38 of 1949) came up with the Companies (Auditor's Report) Order, 2003[1]
(referred to as “CARO, 2003”) effective
from 12th June, 2003 (date of publication in Official Gazette) by virtue of
power conferred by sub-section (4A) of Section 227 of the Companies Act, 1956
(hereinafter referred to as “Act, 1956”)
wherein the order specified 22 matters
which were required to be specified in the Auditor’s Report.
Simultaneously, by virtue of sub-section (11) of
Section 143 of Companies Act, 2013 (hereinafter referred to as “Act, 2013”), the Central Government has
conferred its powers and have issued an order to be called as Companies (Auditor's Report) Order, 20l5[2]
(referred to as “CARO, 2015”) dated
10th April, 2015 specifying only 13
matter required to be specified in the Auditor’s Report for the financial
year ending 31st March, 2015.
Brief Comparison between CARO, 2003 & CARO, 2015
PARTICULARS
|
CARO, 2015
|
CARO, 2003
|
REMARKS
|
Effective from
|
To
come into force on the date of its publication in Official Gazette.
|
To
come into force on the 1st day of July, 2003.
|
|
Financial Year
|
This
Order will be applicable for the financial year commencing on or after 1st
April, 2014
|
This
Order was applicable for every financial year ending on any day on or after
the commencement of this Order
|
Auditor
will include statement as per CARO, 2015 in their auditor report for
Financial Statement prepared for FY ending 31st March, 2015
|
Applicability
|
CARO,
2015 shall apply to every company including a foreign company as defined u/s
2(42)[3]
of Act, 2013.
|
CARO,
2003 was applicable to every company including a foreign company as defined
under Section 591[4]
of Act, 1956
|
Applicability
and the excepted companies more or less are constant. There has been addition
of One Person Companies to the list of companies not required to follow CARO,
2015
|
Exceptions
|
(i)
a banking company as defined in clause
(c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
|
(i)
a banking company as defined in clause
(c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
|
Same
exception
|
(ii)
an insurance company as defined under the
Insurance Act,1938 (4 of 1938);
|
(ii) an insurance
company as defined in clause (21) of section 2 of the Act;
|
Unlike
in Act, 1956 an insurance company is not defined in Act, 2013. Hence the
reference has been made to definition under Insurance Act, 1938
|
|
(iii)
a company licensed to operate under
section 8 of the Companies Act;
|
(iii) a
company licensed to operate under section 25 of the Act; and
|
Same
exception
|
|
(iv)
a One Person Company as defined under
clause (62) of section 2 of the Companies Act and a small company as defined
under clause (85) of section 2 of the Companies Act; and
|
No such exception.
|
Since
the concept of One Person Companies has been introduced under Act, 2013.
|
|
(v)
a private limited company with a
|
(iv) a
private limited company with a
·
paid
up capital and reserves not more than fifty lakh rupees; and
·
has
not accepted any public deposit; and
·
does
not have loan outstanding ten lakh rupees or more from any bank or financial
institution; and
·
does
not have a turnover exceeding five crore rupees.
|
·
Limit for amount of loan outstanding has
been raised from INR 10 lakh to 25 lakhs. However, no increase in the limit
of turnover has been made.
·
Small companies under Act, 2013 will not
get covered unless the outstanding loan crosses the stipulated limits.
|
|
Matters to be included in the Auditor’s
Report
|
|||
(i)
Reporting on maintaining, verifying
and disposing off the 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;
|
(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;
|
Requirement to report
disposing off of substantial part of fixed assets during the year, if any,
has been done away with.
|
(ii) Physical Verification
and maintenance of records of Inventories
|
(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;
|
(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;
|
Same
Provision
|
(iii) Reporting on repayment
of loans granted 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. If so,
(a)
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;
|
(a) has the company either granted or taken any
loans, secured or unsecured to/from companies, firms or other parties covered
in the register maintained under section 301 of the Act. If so, give the
number of parties and amount involved in the transactions.
(b) whether the rate of interest and other
terms and conditions of loans given or taken by the company, secured or
unsecured, are prima facie prejudicial to the interest of the company;
(c) whether payment of the principal
amount and interest are also regular;
(d) if overdue amount is more than one
lakh, whether reasonable steps have been taken by the company for
recovery/payment of the principal and interest;
|
·
Reporting of loans taken by the Company
not included in CARO, 2015.
·
Reporting on rates charged not required
under CARO, 2015 as company will charge as per Section 186 (7).
|
(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.
|
Is
there an adequate internal control procedure 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. Whether there is a continuing failure
to correct major weaknesses in internal control;
|
Reporting
on adequate internal control procedure for sale of services also included
under CARO, 2015
|
Transactions entered by the
company in which the director(s) is/are interested
|
No
such provision
|
(a) whether
transactions that need to be entered into a register in pursuance of section
301 of the Act have been so entered;
(b) whether
each of these transactions 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
five lakh rupees in respect of any party and in any one financial year).
|
·
Reporting on whether transactions in
which directors are interested and pricing of these transactions are not
required.
·
Act, 2013 mandates Audit Committee to
review all related party transactions inter-alia determining whether the same
has been conducted on arm’s length basis on not. Merely charging at
prevailing market price is no more the criteria. Entire transaction needs to
be on arm’s length basis.
|
(v) Acceptance 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 there under,
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 Reserve Bank of India or any court or any other tribunal, whether the same
has been complied with or not?
|
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 and 58AA 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 Company Law Board whether the same has
been complied with or not?
|
Same
provision
|
Internal Audit System
|
No
such provision
|
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 five crore
rupees 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;
|
The
purpose of internal audit is to identify that whether the compliance system
is adequate commensurate with the size of the company. Act, 2013 mandates the
Directors to report the same under Director’s Responsibility Statement under
Section 134.
|
(vi) Cost Records
|
Where maintenance of cost records has been specified
by central Government under sub-section (l) of section 148 of the Companies
Act, whether such accounts and records have been made and maintained.
|
Where
maintenance of cost records has been prescribed by the Central Government
under clause (d) of sub-section (1) of section 209 of the Act, whether such
accounts and records have been made and maintained.
|
Same
Provision
|
(vii) Payment of applicable
taxes
|
(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 ii 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.
|
(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, Custom Duty, Excise Duty, 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 sales tax/income tax/custom tax/wealth tax/excise duty/cess have
not been deposited on account of any dispute, then the amounts involved and
the forum where dispute is pending may please be mentioned.
(A mere representation to the Department
shall not constitute the dispute).
|
CARO,
2015 mandates the reporting whether 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.
|
(viii) 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 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;
|
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 financial year
immediately preceding such financial year also;
|
Same
Provision
|
(ix) Default in repayment of
dues
|
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.
|
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.
|
Same
Provision
|
Records required to be
maintained by the company
|
No
Such Provision
|
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.
|
CARO,
2015 does not mandate reporting of the same as pledge of shares has been
included in the definition of charge and the auditor can assess the same by
viewing relevant forms for the same.
|
Compliance of special statue
provisions
|
No
such provision
|
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/default/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
repayment capacity of the borrower and would be conducive to recovery of the
loan amount;
|
|
Records maintained
|
No
such provision
|
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 securities 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;
|
|
(x) Guarantee for loan taken
|
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.
|
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.
|
Same
Provision
|
(xi) Applicability of term
loan
|
Whether
term loans were applied for the purpose for which the loans were obtained.
|
Whether
term loans were applied for the purpose for which the loans were obtained.
|
Same
Provision
|
Details of funds raised
|
No
such provision
|
Whether
the funds raised on short-term basis have been used for long term investment
and vice versa; If yes, the nature and amount is to be indicated.
|
|
Preferential Allotment and determination
of arm’s length price
|
No
such provision
|
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;
|
Act,
2013 mandates under Section 62 (1) (c) obtaining valuation report for
preferential allotment made, which takes care of pricing issue. Thus, the
same has not been included under CARO, 2015
|
Creation of security
|
No
such provision
|
Whether
securities have been created in respect of debentures issued?
|
|
End-use of money raised
|
No
such provision
|
Whether
the management has disclosed on the end use
of money
raised by public issues and the same has
been verified.
|
|
(xii) Reporting of 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.
|
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.
|
Same
Provision
|
Reasons to be stated for unfavourable or qualified
answers
|
·
Where, in the auditor's report, the
answer to any of the questions referred to in paragraph 3 is unfavorable or
qualified, the auditor's report shall also state the reasons for such
unfavorable or qualified answer, as the case may be.
·
Where
the auditor is unable to express any opinion in 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.
|
·
Where,
in the auditor's report, the answer to any of the questions referred to in
paragraph 4 is unfavourable or qualified, the auditor's 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 in 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.
|
Same
Provision
|
[3]“foreign company” means any company or body
corporate incorporated outside India which— (a) has a place of business in
India whether by itself or through an agent, physically or through electronic
mode; and (b) conducts any business activity in India in any other manner
[4]“foreign company” means - (a) companies
incorporated outside India which, after the commencement of this Act, establish
a place of business within India ; and (b) companies incorporated outside India
which have, before the commencement of this Act, established a place of
business within India and continue to have an established place of business
within India at the commencement of this Act.
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