The Company Auditors’ Report Order, better known as CARO, contains specific regulations that auditors of corporate entities in India need to comply with. CARO sets out additional reporting requirements for auditors above the main audit report.
In this detailed blog, we demystify the CARO regulations for practicing Chartered Accountants undertaking statutory audits.
Applicability of CARO Provisions
As per Section 143(11) of the Companies Act 2013, CARO regulations have to be adhered to by auditors when conducting statutory audits of the following companies:
- All public limited companies
- All private limited companies
- One person companies
- Small companies
- Producer companies
- Companies registered under Section 8
Key exemptions from CARO include:
- Banking companies
- Insurance companies
- Companies under insolvency resolution process
Additionally, if any excluded category also falls under Section 139(5) or 139(7) of the Act, CARO provisions become applicable.
Clause-wise CARO Requirements
CARO contains several specific clauses that auditors need to examine and report on. Let us look at them in detail:
Clause 1 – Adequacy of Fixed Asset Records
Auditors must review whether the company has maintained proper records containing full particulars of its fixed assets. Any material discrepancies or inconsistencies in the fixed asset records have to be reported.
Clause 2 – Physical Verification and Discrepancies of Fixed Assets
Whether physical verification of fixed assets has been conducted at reasonable intervals during the year has to be checked. Discrepancies if any noticed on such verification need to be adequately reported based on materiality.
Clause 3 – Title Deeds of Immovable Properties
The auditor needs to verify whether title deeds of all immovable properties disclosed in the financial statements are held in the company’s name. Properties not held in the company’s name have to be specifically reported.
Clause 4 – Revaluation of Property, Plant and Equipment
In case there has been any revaluation of property, plant, and equipment during the financial year, the auditor has to report details like date of revaluation, value before revaluation, revalued amount, and whether it is based on a valuation by a registered valuer.
Clause 5 – Loans and Advances under Section 186
Details of all loans, investments made and guarantees or securities provided during the year as covered under Section 186 have to be examined and reported adherence to.
Clause 6 – Compliance with Sections 185 and 186
The auditor needs to report specifically on any transactions attracting compliance with Section 185 and Section 186 concerning granting loans, making investments, and providing guarantees and securities.
Clause 7 – Deposits Accepted from Public
Whether the company has accepted any deposits from the public during the financial year has to be reviewed. If yes, then compliance with directives issued by RBI and relevant provisions of the Companies Act should be ensured.
Clause 8 – Maintenance of Cost Records
Where maintenance of cost records has been specified for the company under Section 148(1), the auditor has to report on whether such required accounts and records are properly maintained.
Clause 9 – Payment of Statutory Dues
Auditors need to report if any undisputed statutory dues payable for more than 6 months are outstanding as of the last day of the financial year. Details of any statutory payment delays and defaults need to be reported.
Clause 10 – Repayment of Loans and Interest
The auditor should review whether any loans taken from financial institutions, banks, government, or through debentures have fallen due and remained unpaid. Reporting on any defaults requires disclosure of the amount and period of default.
Clause 11 – Fraud Reporting
Details regarding any fraud detected or reported by the company during the audit period as covered under sub-section 12 of Section 143 have to be examined and reported.
Clause 12 – Managerial Remuneration
The auditor needs to ensure that managerial remuneration paid or payable during the year is in accordance with requisite approvals mandated under Section 197 of the Companies Act. Non-compliance has to be reported.
Clause 13 – Compliance by Nidhi Companies
In companies regulated as Nidhis under the Special Clause Act, compliance with Nidhi Rules 2014 is to be examined and reported upon by auditors.
Clause 14 – Related Party Transactions
If the company has entered into related party transactions that are prejudicial to its interests, the nature and value of such transactions have to be analyzed and reported by auditors.
Clause 15 – Private Placement/Preferential Issues
Auditors have to review and report on compliance with Section 42 of the Companies Act by the company about funds raised through private placement of shares or preferential allotment during the year.
Clause 16 – Non-Cash Transactions
Examining whether the company has entered into any non-cash transactions with directors or connected persons covered under Section 192 and related reporting is part of CARO.
Clause 17 – Registration under RBI Act, 1934
For NBFC companies covered under RBI Act 1934, the auditor should report on whether they hold a valid certificate of registration from RBI or not.
Responsibility for CARO Compliance
While conducting a statutory audit, the auditor is responsible for ensuring compliance with applicable CARO clauses based on the company’s activities. Any reporting required under CARO has to be included in the auditor’s report.
Non-compliance can attract regulatory action under the Companies Act, 2013 against the auditor. Auditors need to stay updated on periodic amendments in CARO clauses.
By mandating compliance with CARO, company audits are required to cover specific areas of reporting in addition to true and fair view opinions. Proper understanding and adherence to CARO strengthens audit reporting and enhances stakeholder confidence.
CARO compliance necessitates a checklist approach during company audits by auditors. Fulfilling extended reporting requirements through CARO allows auditors to effectively discharge their legal duties and obligations.