Company Auditor's Report Order (CARO), 2016 - Reporting Requirements

Latest Updates

The Ministry of Corporate Affairs (MCA) issued the Companies (Auditor’s Report) Order, 2020 on 25 February 2020, applicable from 1 April 2021, corresponding to the financial year 2020-21. Thus, the CARO 2016 is now replaced by CARO 2020, and companies must prepare report as per CARO 2020.

The Ministry of Corporate Affairs (MCA) issued Company Auditor’s Report Order (CARO), 2016 on 29th March 2016. This order superseded the earlier order (CARO 2015).

The Existence of CARO, 2016

MCA was of the objective that there are certain particular issues that are important to be reported with the financial statements for certain entities as a part of their audit reports. The auditor of such prescribed entities is required to report on the points mentioned under this order after performing procedures for verification of the same.

Applicability of CARO 2016

CARO 2016 is applicable to all the companies except the following (which) are specifically excluded from its purview:

A. Banking Companies

B. Insurance Companies

C. Companies registered for Charitable Purposes

D. One Person Company

E. Small Companies (Companies with Paid-up capital less than or equal to Rs. 2 crore and Last reported turnover less than or equal to Rs. 20 crores)

F. The following Private Companies are also exempt from the requirements of CARO, 2016

• Not a holding or subsidiary of a Public company
• Paid-up Capital plus Reserves less than or equal to Rs. 1 Crore as of the reporting date
• Borrowings less than or equal to Rs. 1 Crore at any time during the year
• Revenue less than or equal to Rs. 10 Crores in the financial year

The auditors of all other class or classes of companies are required to report on the matters specified in this order. This order applies to foreign companies also and thus, the auditors for such companies are also required to report on the matters specified in CARO, 2016.

Matters specified in CARO 2016

The Company Auditor’s Report Order (CARO), 2016 includes the following matters on which the auditor is required to report mandatorily:

A. Fixed Assets [Clause 3(i)]

B. Inventory [Clause 3(ii)]

C. Loans given by Company [Clause 3(iii)]

D. Loan to Directors and Investment by the Company [Clause 3(iv)]

E. Deposits [Clause 3(v)]

F. Cost records [Clause 3(vi)]

G. Statutory Dues [Clause 3(vii)]

H. Repayment of Loans [Clause 3(viii)]

I. The utilisation of funds [Clause 3(ix)]

J. Reporting of Fraud [Clause 3(x)]

K. Approval of Managerial Remuneration [Clause 3(xi)]

L. Nidhi Company [Clause 3(xii)]

M. Related Party Transactions [Clause 3(xiii)]

N. Private placement of Preferential Issues [Clause 3(xiv)]

O. Non-Cash Transactions [Clause 3(xv)]

P. Registration under RBI Act [Clause 3(xvi)]

Reporting Requirements Under Each Clause

A brief of reporting requirements under each of the above clauses is hereunder:

Fixed Assets

i. Whether the company maintains proper records showing full particulars including details of quantity and situation of the fixed assets

ii. Whether physical verification of the fixed assets is conducted by the management at reasonable intervals

iii. If any material discrepancies were noticed on physical verification, whether it has been accounted for in books of accounts

iv. Whether the title deeds of the immovable properties are in the name of the company

Inventory

i. Whether at reasonable intervals the management has conducted physical verification of inventory

ii. If any material discrepancies were noticed on physical verification, whether it has been accounted for in books of accounts

Loans given by Company

Whether the company has granted any secured or unsecured loans to companies, Limited Liability Partnerships (LLPs), firms, or other parties mentioned in the register maintained under Section 189 of the Companies Act, 2013. If they have granted such loans, to check the following:

i. Whether the terms of such loans are not prejudicial to the company’s interest

ii. Whether the repayment and its receipt are proper

iii. To report with loans repayment outstanding for more than 90 days and what is the recovery position

Loan to Directors and Investment by the Company

Whether the loans and guarantees to directors are in order and in compliance with the limits prescribed under Section 185 and 186 of the Companies Act, 2013.

Deposits

Whether the company has accepted any deposits and if yes, have they followed RBI’s directives as under:

i. The provisions regarding acceptance of deposits under section 73 to 76 of the Companies Act, 2013 have been followed

ii. If the order is passed by the court or any other tribunal like RBI, CLB, etc

iii. In case of non-compliance, the nature of the same has to be reported

Cost Records

If Central Government has prescribed maintaining cost records, whether the same have been properly maintained or not.

Statutory Dues

The auditor shall report whether the company:

i. Is regularly depositing its statutory dues, such as:

• Provident fund
• Employees’ State Insurance
• Income tax
• Sales tax
• Service tax
• Duty of customs
• Duty of excise
• Value-added tax
• Cess and other statutory dues

ii. If not regular, statutory dues outstanding for more than 6 months should be disclosed

iii. If any taxes have not been deposited because of any dispute, the amount of dispute and the forum where the litigation is ongoing should be disclosed

Repayment of Loans

If the company has defaulted in repayment of loans to banks, government, debenture-holders, etc. then the amount and period of default are to be reported.

Utilisation of funds

If any funds were raised by the company through IPO or other public offers (including debt), have they been applied for the purpose they were raised. Also, the auditor has to report in case of any delay and defaults.

Reporting of Fraud

If any fraud by the company or its employees has occurred during the year. If yes, the nature and amount involved have to be reported.

Approval of Managerial Remuneration

Whether the limits prescribed under the Company’s Act 2013 for managerial remuneration have been adhered to. If not, the amount of excess amount involved and steps for recovery being taken have to be reported.

Nidhi Company

In case of a Nidhi company, whether the following have been complied with has complied with:

i. Maintain net owned funds to deposit in the ratio of 1:20 to meet out the liability

ii. Maintain 10% unattached term deposits as specified in the Nidhi Rules, 2014 to meet out the liability

Related Party Transactions

The compliances with rules specified in the Companies Act 2013 for transactions with related parties have been complied with or not. Also, the same is disclosed appropriately in the financial statements or not.

Private placement of Preferential Issues

Whether the company has made any preferential or private allotments of shares and debentures. Also, whether the amount Raised has been utilized towards the purpose for which it was raised.

Non-Cash Transactions

Whether the company has followed the limits and conditions as per Companies Act 2013 in respect of non-cash transactions with directors or their relatives.

Registration under RBI Act

Whether the company is required to be registered under RBI Act and if yes, then whether the registration is obtained or not. All the above-stated clauses are mandatory to be reported on. Also, the disclosures are to be given appropriately.

Frequently Asked Questions

What is the difference between Caro 2016 and Caro 2020?
 

The CARO 2020 contains​ 21 clauses, whereas CARO 2016 has only 16 clauses.​​ In CARO 2020, seven new clauses have been inserted, and the existing clauses of CARO 2016 have been re-drafted to elicit detailed comments from the auditors. CARO 2020 requires information in a more detailed format compared to CARO 2016. CARO 2020 strengthens the accountability of the management and enhances the due diligence responsibility of the auditors.

What is the difference between Caro 2016 and Caro 2015?
 

The CARO 2016 contains​ 16 clauses, whereas CARO 2015 has only 12 clauses. In CARO 2016, seven new clauses have been inserted, and three clauses of CARO 2015 were deleted. CARO 2016 added new clauses, such as reporting on approval of managerial remuneration, Nidhi company, related party transaction, private placement of preferential issues, non-cash transactions and registration under RBI act, etc.

Additionally, many clauses were re-drafted with changes in reporting format. CARO 2016 deals with important issues that need to be reported along with the financial statements for certain companies as part of their audit reports.

For which financial year is the CARO 2016 applicable?

The CARO 2016 was applicable for the financial years 2015-16, 2016-17, 2017-18, 2018-19 and 2019-20. Subsequently, the Ministry of Corporate Affairs (MCA) issued CARO 2020 for all statutory audits commencing on or after 1 April 2021 corresponding to the financial year 2020-21 onwards. Thus, currently, CARO 2020 is applicable to all companies.
 

Is CARO 2016 applicable to the consolidated financial statements?

The CARO 2016 will not apply to the auditor’s report on consolidated financial statements. But, the CARO 2020 contains a clause that is now applicable to report on consolidated financial statements.
 

Should the companies follow CARO 2016 or CARO 2020?

The CARO 2020 is applicable from 1 April 2021, thus, the companies should follow CARO 2020. The CARO 2020 was passed in supersession of the CARO 2016. Thus, CARO 2016 is no longer applicable and auditors must prepare the audit report as provided under CARO 2020.