1. Companies (Auditors’ Report) Order 2015-
CARO 2015
Issues in Companies (Auditor’s Report) Order, 2003

2. CARO 2015 Presentation Road Map Agenda for discussion Other issues
Questions

3. Agenda for discussion Applicability of CARO 2015
Companies Covered
Reporting Requirements carried forward/ modified
New Reporting Requirements
Reporting Requirements not carried forward

4. Applicability Section 227 (4A) of Companies Act 1956
Section 143 (11) of the Companies Act 2013 (2013 Act)
MCA after consultation with ICAI has issued ‘CARO 2015’ on April 10, 2015 prescribing reporting requirements.
Applicable for every report made by the Auditor under Section 143 of the 2013 Act for financial year commencing on or after April 1, 2014.
Applies to all Companies including foreign company as defined under Section 2 (42) of 2013 Act.
143 (11) The Central Government may, in consultation with the National Financial Reporting Authority, by general or special order, direct, in respect of such class or description of companies, as may be specified in the order, that the auditor’s report shall also include a statement on such matters as may be specified therein.

5. Companies Covered
Applies to every Company (except Companies that are excluded) including foreign Company as defined under section 2(42) of Act.
Companies excluded
Banking Company as defined under Section 5 (c) of the Banking Regulation Act 1949.
Insurance Company defined under Insurance Act 1938
Charitable objects
Private Company (paid up capital and reserves < Rs. 50 lacs, loans < Rs. 25 lacs, turnover < Rs. 5 crores),
One Person Company as defined under Section 2(62) of the 2013 Act
Small Company as defined under Section 2 (85)
A Private Company in order to exempt from the Applicability of the order must satisfy all the conditions cumulative. In other words, even if one of the conditions is not satisfied , Private Company’s auditor has to report on the matters specified in the order.
Both Capital and Revenue Reserves have to be considered

6. Reporting Requirement carried forward from CARO 2003
Matters to be reported
Reporting requirement under the CARO 2015 have been reduced considerably (i.e. from 21 Clauses to 12 Clauses)
Area
Reporting Requirement carried forward from CARO 2003
Fixed Assets
Proper records of fixed assets
Physical verification of fixed assets
Inventories
Physical verification of inventories
Procedures for verification
Records of inventory and discrepancies
Granting Loans
Loans to Parties covered u/s 189- Receipt Principal and interest and action taken for overdue amounts
Internal Control System
Commensurate with size of Company and nature of its business for purchase of inventory and fixed assets and for the sale of goods and services.
Whether there is continuing failure.
Acceptance of Deposits
Compliance with RBI Directives and any order passed by CLB /Tribunal

7. Reporting Requirement carried forward from CARO 2003
Matters to be reported
Area
Reporting Requirement carried forward from CARO 2003
Maintenance of Cost records
Whether Cost records have been made and maintained Sec 148 (1) of 2013 Act.
Deposit of Statutory dues
Undisputed tax dues - extent of arrears
Disputed tax dues not paid
Accumulated losses and cash losses
Whether accumulated losses are not less than 50% of its net worth and whether company has suffered cash losses
Default in payment of dues
Due to banks and debenture holders
Guarantee for loans taken by others from banks or financial institutions
Terms and conditions whereof are prejudicial to the interest of the Company
Application of term loans
Purpose for which these were obtained
Fraud reporting
On or by the Company has been noticed or reported
Clause vii (a) requires Auditors to Report

8. Matters to be reported Reporting Illustrations
Clause (i) (a) – Fixed Assets
Except for non recording of [mention details] in respect of [certain/all] assets with gross block and net block aggregating to Rs. [*] and Rs. [*] respectively, the Company is maintaining proper records showing full particulars including quantitative details and situation of fixed assets. OR
Except for certain fixed assets with gross block and net block aggregating to Rs. [*] and Rs. [*] respectively, the Company is maintaining proper records showing full particulars, including quantitative details and situation, of fixed assets.
Clause (i) (b) – Fixed Assets
The fixed assets are physically verified by the Management according to a phased programme designed to cover all the items over a period of [*] years which, in our opinion, is reasonable having regard to the size of the Company and the nature of its assets. Pursuant to the programme, a portion of the fixed assets has been physically verified by the Management during the year and material discrepancies have been noticed on such verification, which have not been properly dealt with in the books of account.
Clause vii (a) requires Auditors to Report

9. Matters to be reported Reporting Illustrations
Clause (ii) (a) – Inventory
Except for inventory lying with third parties, the other inventory has been physically verified by the Management during the year. In our opinion, except for inventory lying with third parties, the frequency of verification is reasonable.
Clause (ii) (b) – Inventory
In our opinion, the procedures followed by the Management for physical verification of inventory [including inventory lying with third parties] are not reasonable and adequate in relation to the size of the Company and the nature of its business because [specify reasons].
Clause (ii) (c) – Inventory
On the basis of our examination of the inventory records, in our opinion, the Company is maintaining proper records of inventory. Discrepancies amounting to Rs. [*], noticed on physical verification of inventory by Management, as compared to book records were [not] material [and have [not]been appropriately dealt with in the books of accounts.]
Clause vii (a) requires Auditors to Report

10. New Reporting Requirements
Companies (Audit and Auditors) Rules 2014
whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statement;
whether the company has made provision, as required under any law or accounting standards, for material foreseeable losses, if any, on long term contracts including derivative contracts;
whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the company.
i The Company has disclosed the impact, if any, of pending litigations as at [month, date, year] . on its financial position in its standalone financial statements – Refer Note [or] The Company does not have any pending litigations as at [month, date, year] which would impact its financial position.
ii. The Company has made provision as at [month, date, year] , as required under the applicable law or accounting standards, for material foreseeable losses, if any, on long-term contracts including derivative contracts – Refer Note [*];
[or]
The Company has long-term contracts including derivative contracts as at [month, date, year] for which there were no material foreseeable losses.]
The Company did not have any long-term contracts including derivative contracts as at [month, date, year]
iii. here has been no delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the Company during the year ended [month, date, year]
The instances of delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the Company, during the year ended [month, date, year] are as follows:
…..
There were no amounts which were required to be transferred to the Investor Education and Protection Fund by the Company during the year ended [month, date, year] Where the options given herein do not cover the specific facts and circumstances, engagement teams should consult.

11. Reporting requirement not carried forward
Area
Reporting Requirement not carried forward from CARO 2003
Fixed Assets
Substantial part of fixed assets disposed affecting going concern
Granting of loans to certain parties
Loans to companies, firms or other parties covered in Reg. maintained under section 301 of 1956 Act.
Contracts / arrangements with certain parties
Transactions entered in Register maintained pursuant to Section 301 of 1956 of Act and reasonableness of prices
Internal Audit System
Whether commensurate with size of the Company and nature of its business
Maintenance of documents and records for grant of loans and advances
When the loans are granted on the basis of security by of pledge of shares, debentures and other securities
Requirements specific to chit fund /nidhi/mutual benefit fund /societies
Whether provisions of any special statute applicable to chit fund have been complied with

12. Reporting requirement not carried forward
Area
Reporting Requirement not carried forward from CARO 2003
Companies dealing / trading in securities
Records for transactions and contracts and whether timely entries have been made therein; whether shares/securities have been held by the Company in its own name
Short term fund used for long term investment
Whether funds raised on short term basis have been applied for long term investment
Preferential allotment of shares in certain cases
Whether preferential allotment has been made to parties covered under section 301 of 1956 Act and whether prices at which the shares are issued are prejudicial to the interest of the Company.
Creation of security /charge on the issue of debentures
Whether security or charge has been created in respect of debentures
Disclosure of end use of money raised by public issues
Whether Management has disclosed end use of money raised by public issue

13. Issues – Disputed Dues Clause (vii) (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.
Issues
What is a dispute
The Oxford Dictionary defines dispute as a ‘difference of opinion’
The draft of AASB of ICAI on CARO defines disputed dues as “The amounts involved in cases where there exists a difference of opinion between the relevant department and the company should be considered as “disputed dues” .
Clause 61( c) of the Statement on CARO states that ‘ it is necessary that there should be an appeal before an appellate authority for it to be called a dispute.
Give an example of consumer goods industry-sales tax accounting
Ask the audience : Does a show-cause notice issued by the department constitute dispute
Ans: The statement on CARO has clarified in clause 61(d) that issuance of show cause notice by the concerned department should not be construed as dispute because it is not a due payable by the Company.
2. Does every dispute b/w the dept and assessee constitute disputed dues for CARO purposes
Give a chart explaining levels of appeals and consequences on whether it is a dispute or not.
What about disputed dues which are stayed and disputed dues which are referred back for reassessment
If there is a stay, then the due is still disputed, hence it should be disclosed along with the fact that there is a stay.
However, matters which are set aside or referred back for reassessment are not disputed dues and hence should not be disclosed.
3. Is materiality a consideration for reporting under this clause
Note that it appears that CARO is applicable only to material items, which can be inferred from Para 36 of CARO which states that ‘ Where a requirement of the order is not complied with, but the auditor decides not to make an adverse comment, he should record in his working papers, the reasons for not doing so, for eg, the immateriality of the item‘
However the document on issues in CARO, prepared by AASB of ICAI states that this clause is applicable to all disputed dues, irrespective of the materiality. It appears that since it pertains to statutory amounts, an exception to the general rule of CARO has been made.
4. Are disputed dues which are deposited required to be disclosed
The statement on CARO requires reporting of only those disputed dues which have not been deposited. Hence, if the amounts have been deposited, the same are not required to be reported on. If part payment is made the amount to be disclosed would be the amount net off what has been paid. Hence in cases of amounts paid in appeal against disputes, these would have to be deducted from the amounts in dispute for the purpose of disclosure.
In a situation where a Company has deposited the dues but has made a provision for these disputed dues in its books of accounts, it should report under this close
4 Are all statutory dues covered or only specific statutory dues to be reported on
The draft of the ICAI mentions that only specific statutory dues need to be reported on.
However this could be a grey area since as per para 61 (a) of the statement on CARO, the reference is made to statutory dues. Hence, if the ICAI intended to include only specific dues, it would have not used the words statutory dues, since this would encompass everything. Also, clause (a) pertains to all statutory dues..hence there is no logical reason why clause (b) would cover only specific statutory dues.
6. Are all contingent liabilities ‘disputed dues‘.
No because contingent liabilities include all disputes whether disputed by department or by the Company, whereas CARO requires only those which are disputed by the Company.
As per the definition given in the law dictionary the definition of cess would be:
LAWThe word cess means a tax and is generally used when the levy is for some special administrative expense which the name indicates (Eg. Health cess, Education cess, road cess)
OXFORD DICTIONARY Cess means a tax, a levy.
1. What are disputed dues?
2. Does every dispute between the dept and the assessee constitute disputed dues for CARO?
3. Is materiality a consideration in reporting under this clause?
4. Are disputed dues which are deposited required to be disclosed ?
5. Are all statutory dues covered or only specific statutory dues to be reported on?
6. Are all contingent liabilities 'disputed dues'

14. Issues- Disputed Dues 1 2 3 Asst.Order passed by AO Unfavorable to
Company
Favorable to
Company
1 and 2 represents a dispute and would have to be disclosed under CARO
3 represents a dispute but would not have to be disclosed under CARO. However it would be required to be shown under contingent liability.
Ends
Company files appeal
with CIT(A)and
CIT(A) passes an order 1
Favorable to
Company
Unfavorable to
Company
Dept. files
appeal
with ITAT
Company
files appeal
with ITAT 2 3

15. Issues- Disputed Dues Clause (vii) (b) (contd.) Issues
7. If the appeal is not filed till the year end but there is an intention to file one, would it be required to be reported
Biocon Limited (SRB)
The Company disclosed the following under the heading of forum:
'In process of application against demand notice'
7. If the appeal is not filed till the year end but there is an intention to file, would it be required to be reported
As the Company has an intention to file the appeal, it needs to be reported under this clause. Also the fact that the appeal has not been filed by the Company needs to be brought out in the report.
General:
For the purpose of this clause a representation from the mgt becomes very important
Wipro Limited (N.M. Raiji)
The disclosure has been made in similar lines like Biocon Energy except they have inserted the words ‘As informed to us'

16. Issues- Disputed Dues Clause (vii) (b) (contd.)
Disclosure by different firms
Price Waterhouse
Name of the statute
Nature of dues
Amount
(Rs.)
Period to which the amount relates
Forum where the dispute is pending
Gujarat Value Added Tax
Disallowance of C Forms
XXX
Inconsistency in disclosures by different firms
As per the Statement on CARO the disclosures would consists of Nature of the statute, Nature of the dues, amount, Period to which the amount relates,
Forum where dispute is pending
Would it be necessary to give the entire list in the report itself or a reference can be made to the contingent liability schedule in the clients notes to accounts section. Is this option available to the client.
B S R & Co. LLP
Name of the statute
Nature of dues
Amount
(Rs.)
Forum where the dispute is pending
Period to which the amount relates
Gujarat Value Added Tax
Disallowance of C Forms
XXX

17. Issues- Disputed Dues Clause (vii) (b) (contd.) Disclosures (contd.)
DELOITTE HASKINS & SELLS
Nature of the Statute
Nature of dues
Amount
(Rs.)
Period to which the amount relates to
Forum where pending
Gujarat Value Added Tax
Disallowance of C Forms
XXX
Inconsistency in disclosures by different firms
As per the Statement on CARO the disclosures would consists of Nature of the statute, Nature of the dues, amount, Period to which the amount relates,
Forum where dispute is pending
B.K. Khare & Co.
Name of the Statute
Nature of dues
Amount
(Rs.)
Financial Years to which is pertains
Forum where dispute is pending
Gujarat Value Added Tax
Disallowance of C Forms
XXX

18. Issues- Fraud
Clause (xii)
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.
Issues
What is fraud?
Fraud is an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Further two types of intentional misstatements are relevant to the auditor’s consideration of fraud – misstatements resulting from fraudulent financial reporting and misstatements resulting from misappropriation of assets.
Misappropriation of assets includes theft – even temporary use of enterprise assets for personal advantage – such as teeming and lading.
Question – Managing director’s expenses beyond board sanction & not ratified subsequently – would it be fraud?
The concept of materiality is fundamental to auditing. Therefore even in reporting on frauds under the order, materiality should be given due consideration. It may however be mentioned that whether a fraud is material enough to be reported or not should not be judged on basis of amount alone. Fraud committed by management or those charged with governance could be indicative of much larger issues – even if the amount is not large.
3. Frauds of a similar nature can be combined – e.g. embezzlement, falsification of books of account leading to overstatement, misappropriation of assets.
(i) “fraud” in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any
person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its
shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;
Would theft be covered in fraud?
Would window dressing, creative accounting tantamount to fraud?
2. Would materiality be considered for reporting under this clause?
Can multiple frauds be aggregated or can they be reported separately?
Companies Act 2013 – Section 447 (2)
(i) “fraud” in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;

19. Issues- Fraud Clause (xii) (Contd.) Disclosure
Alfa Laval (S. R. Batliboi)
Based upon the audit procedures performed and information and explanations given by the management, we report that no fraud on or by the Company has been noticed or reported during the course of our audit except that there had been reported a fraud concerning 3079 equity shares of the Company. Out of this, the Company has been able to resolve the fraud in respect of 1134 equity shares and for the balance equity shares necessary police investigation is in progress. The Company as informed, does not expect any significant loss arising out of the above forged transaction
In the case of Reliance Energy reporting for fraud has been made. But in case of Tata Power which is in the same business there has been no reporting on fraud
Reliance Energy (Joint auditors-PW, Haribhakti, Chaturvedi & Shah)
As per the information and explanation given to us and on the basis of examination of records, no material fraud on or by the Company was noticed or reported during the year except in case of theft of electricity reported by the vigilance department of the Company the amount for which is not ascertainable.
HDFC Limited (SBB & Co.)
According to the information and explanations given to us, no fraud by the Corporation and no material fraud on the Corporation was noticed or reported during the year, although there have been few instances of loans becoming doubtful of recovery consequent upon fraudulent misrepresentation by borrowers, the amount whereof are not material in the context of the size of the Corporation and nature of its business and which have been provided for .

20. Other issues
Issues:
1. The net worth of the Company has eroded by 40%. The auditors report of the Company is qualified.
The aggregation of the financial impact on the qualification would result in to further erosion of the net worth of the Company by 20%.
Would the auditor need to qualify on clause 4(x) with respect to erosion of the Company’s net worth by more than 50%?
2. Is the order applicable to a liaison office of a foreign Company?
Would the Order be applicable to Pvt. Co. which has paid up capital of Rs. 20 lacs, revaluation reserves of Rs. 40 lacs and debit balance of Rs. 15 lacs in the profit and loss account?
Would the order be applicable to Pvt. Co. having paid up capital and reserves of Rs. 40 lacs, turnover of Rs. 100 lacs and enjoying CC facility of Rs. 27 lacs.
1. The net worth of the Company has eroded by 40%. The auditors report of the Company is qualified.
The aggregation of the financial impact on the qualification would result in to further erosion of the networth of the Company by 20%. Would the auditor need to qualify on clause 4(x) with respect to erosion of the Company’s net worth by more than 50%.
The auditor would have to report
2. Is the order applicable to a liaison office of a foreign Company
Paragraph 2 of the Order states that it “shall apply to every company including a foreign company as defined in section 591 of the Act, except the following ”
Since a Liaison Office of a foreign body corporate is a foreign company under section 591 of the Companies Act, CARO would apply to it. However, it is recognised that a number of clauses of the Order would not be applicable to such companies and this fact should be stated in the CARO report.
3. Any debit balance in the Statement of Profit and Loss will be disclosed under the head “Reserves and surplus.” Earlier, any debit balance in Profit and Loss Account
carried forward after deduction from uncommitted reserves. Issues on CARO?
was required to be shown as the last item on the Assets side of the Balance
Sheet.

21. Questions
1. A Company has qualified its SOX report for weakness on significant internal controls. Would this imply that the CARO would need to be qualified too?
In practical situations, it would be possible that the previous year's auditors report is not qualified for internal control weakness, then what is the way out?
2. Company has received a show cause cum demand notice from the excise department. However at the year end, the amount is outstanding for more than 6 months.
Would this have to be disclosed under clause (ix)(a) of CARO on payment of undisputed statutory dues?
3. What are the reporting responsibilities of the auditor in case the company has not paid the service tax to a transporter for the transportation services availed from
The liability is of the transporter and not of the Co. So no reporting is necessary
3. What are the reporting responsibilities of the auditor in case the company has not paid the service tax to a transporter for the transportation services availed.

22. Questions
4. What is the reporting responsibility of the auditor, if the Company had 5 years back imported material and had placed them under bond and till the current FY has not removed the goods.
Further, interest and rent liability thereon is being provided by the Company each year.
5. Are the following statutory dues or not?
Bonus payable under the Payment of Bonus Act, 1965
Gratuity liability under the Payment of Gratuity Act not funded by the Company
Electricity bills
License fees payable to licensing authority in respect of business carried on under license granted by an authority, say a cinema hall
4. What is the reporting responsibility of the auditor, if the Company had 5 years back imported material and had placed them under bond and till the current FY has not removed the goods. Further, interest and rent liability thereon is being provided by the Company each year.
Since the payt of custom duty is not due, the question of regularity does not arise
However, it may be noticed that the interest and rent that is required to be incurred under section 61 of the Customs Act, 1962 would come under other statutory dues and the auditor would have to excuse and comment upon the regularity of the company in depositing such interest and rent.
5. Are the following statutory dues or not?
Bonus No
Gratuity liability No
Electricity bills Depends
License fees Yes
6. Would the main auditors report on maintenance of proper books of accounts have to be qualified, if the CARO clauses on maintenance of fixed asset records is qualified?

23. THANK YOU