Companies (Auditor's Report) Order, 2015 [CARO] [Effective from a date to be published in the Gazette of India Extraordinary, Part II, Section 3, Sub-Section (ii) .] By CA Mohit Bhuteria

Applicability of CARO CARO shall apply to every company including a foreign company as defined in clause (42) of section 2 of the Companies Act, 2013, except – a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949; an insurance company as defined under the Insurance Act,1938: a company licensed to operate under section 8 of the Companies Act; 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

Applicability of CARO a private limited company with a paid up capital and reserves not more than rupees fifty lakh and which does not have loan outstanding exceeding rupees twenty five lakh from any bank or financial institution and does not have a turnover exceeding rupees five crore at any point of time during the financial year.

Clauses of CARO (i) (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; (ii)(a) whether physical veriflcation of inventory has been conducted at reasonable intervals by the management; (b) are the procedures of physical verification oI 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;

Clauses of CARO (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; (iii) 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;

Clauses of CARO (iv) 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. (v) 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? II 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?

Clauses of CARO (vi) where maintenance of cost records Government under sub-section (l) of section been specified by the Central of the Companies Act, whether such accounts and records have been made and maintained; (vii) (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.

Clauses of CARO (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 and rules made thereunder has been transferred to such fund within time.

Clauses of CARO (viii) 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; (ix) 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; (x) 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;

Clauses of CARO (xi) whether term loans were applied for the purpose for which the loans were obtained; (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.

Matters to be included in Auditors Report u/S 143(3) read with Companies (Audit and Auditors) Rules, 2014 Section 143(3) (a) whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements; (b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him;

Matters to be included in Auditors Report u/S 143(3) read with Companies (Audit and Auditors) Rules, 2014 (c) whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the company’s auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report; (d) whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns; (e) whether, in his opinion, the financial statements comply with the accounting standards;

Matters to be included in Auditors Report u/S 143(3) read with Companies (Audit and Auditors) Rules, 2014 (f) the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company; (g) whether any director is disqualified from being appointed as a director under sub-section (2) of section 164; (h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith; (i) whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls;

Matters to be included in Auditors Report u/S 143(3) read with Companies (Audit and Auditors) Rules, 2014 For the purpose of clause (j) of sub-section (3) of section 143, the Auditor’s report shall also include their views and comments on the following matters: (a) Whether the company has disclosed the effect, if any, of pending litigations on its financial position in its financial statement; (b) Whether the company has made provision for foreseeable losses, if any, on long term contracts including derivative contracts; (c) Whether there has been delay in depositing money into the Investor Education and Protection Fund by the company

Illustrative matters forming basis for qualified opinion in the auditor’s report and requiring reporting under section 143(3)(f) and/or section 143(3)(h) of the Companies Act, 2013 Basis for Qualified Opinion The Company’s inventories are carried in the Balance Sheet at Rs. XXX (As at 31st March 20YY: Rs. YYY). The Management has not stated the inventories at the lower of cost and net realisable value but has stated them solely at cost, which constitutes a departure from the Accounting Standard – 2 “Valuation of Inventories”. The Company’s records indicate that had the Management stated the inventories at the lower of cost and net realisable value, an amount of Rs. XXX (As at 31st March 20YY: Rs. YYY) would have been required to write the inventories down to their net realisable value.

Illustrative matters forming basis for qualified opinion in the auditor’s report and requiring reporting under section 143(3)(f) and/or section 143(3)(h) of the Companies Act, 2013 Accordingly, cost of sales would have been increased by Rs. XXX (Previous year ended 31st March, 20YY: Rs.YYY), and income tax, profit for the year and shareholders’ funds would have been reduced by Rs. X, Rs. XX and Rs. XXX, respectively (Previous year ended 31st March, 20YY: Rs.Y, Rs.YY and Rs.YYY, respectively). This matter was also qualified in our report/ the report of the predecessor auditors on the financial statements for the year ended 31st March 20YY.

Illustrative matters forming basis for qualified opinion in the auditor’s report and requiring reporting under section 143(3)(f) and/or section 143(3)(h) of the Companies Act, 2013 Qualified Opinion In our opinion and to the best of our information and according to the explanations given to us, except for the effects of the matter described in the Basis for Qualified Opinion paragraph above, the aforesaid standalone financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India, of the state of affairs of the Company as at 31st March, 20XX, and its profit/loss and its cash flows for the year ended on that date.

Illustrative matters forming basis for qualified opinion in the auditor’s report and requiring reporting under section 143(3)(f) and/or section 143(3)(h) of the Companies Act, 2013 Report on Other Legal and Regulatory Requirements As required by Section 143 (3) of the Act, we report that: (a) We have sought and obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit; ……………………………………………. (f) The matter described in the Basis for Qualified Opinion paragraph above, in our opinion, may have an adverse effect on the functioning of the Company. …………………………… (h) The qualification relating to the maintenance of accounts and other matters connected therewith are as stated in the Basis for Qualified Opinion paragraph above.”

Illustrative matters forming basis Emphasis of Matter Paragraph in the auditor’s report and requiring reporting under section 143(3)(f) and/or section 143(3)(h) of the Companies Act, 2013 Opinion In our opinion and to the best of our information and according to the explanations given to us, the aforesaid standalone financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India, of the state of affairs of the Company as at 31st March, 20XX, and its profit/loss and its cash flows for the year ended on that date.

Illustrative matters forming basis Emphasis of Matter Paragraph in the auditor’s report and requiring reporting under section 143(3)(f) and/or section 143(3)(h) of the Companies Act, 2013 Emphasis of Matters We draw attention to the following matters in the Notes to the financial statements: a) Note X to the financial statements which, describes the uncertainty related to the outcome of the lawsuit filed against the Company by XYZ Company. b) Note Y in the financial statements which indicates that the Company has accumulated losses and its net worth has been fully / substantially eroded, the Company has incurred a net loss/net cash loss during the current and previous year(s) and, the Company’s current liabilities exceeded its current assets as at the balance sheet date.

Illustrative matters forming basis Emphasis of Matter Paragraph in the auditor’s report and requiring reporting under section 143(3)(f) and/or section 143(3)(h) of the Companies Act, 2013 These conditions, along with other matters set forth in Note Y, indicate the existence of a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern. However, the financial statements of the Company have been prepared on a going concern basis for the reasons stated in the said Note. Our opinion is not modified in respect of these matters.

Illustrative matters forming basis Emphasis of Matter Paragraph in the auditor’s report and requiring reporting under section 143(3)(f) and/or section 143(3)(h) of the Companies Act, 2013 Report on Other Legal and Regulatory Requirements As required by Section 143 (3) of the Act, we report that: ……… (f) The going concern matter described in sub-paragraph (b) under the Emphasis of Matters paragraph above, in our opinion, may have an adverse effect on the functioning of the Company. #  (In this case there is nothing reportable under sec 143(3)(h))

Illustrative matters forming basis for qualified opinion in the auditor’s report and requiring reporting under section 143(3)(f) and/or section 143(3)(h) of the Companies Act, 2013 Basis for Qualified Opinion ABC Company Limited’s investment in XYZ Company, a foreign associate whose net worth has been fully/substantially eroded, is carried at Rs. XXX in the Balance Sheet as at March 31, 20XX. We were unable to obtain sufficient appropriate audit evidence about the carrying amount of ABC Company Limited’s investment in XYZ Company as at March 31, 20XX because we were denied access to the financial information, management, and the auditors of XYZ Company. Consequently, we were unable to determine whether any adjustments to these amounts were necessary.

Illustrative matters forming basis for qualified opinion in the auditor’s report and requiring reporting under section 143(3)(f) and/or section 143(3)(h) of the Companies Act, 2013 Qualified Opinion In our opinion and to the best of our information and according to the explanations given to us, except for the possible effects5 of the matter described in the Basis for Qualified Opinion paragraph, the aforesaid standalone financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India of the state of affairs of the Company as at 31st March 20XX, and its profit/loss and its cash flows for the year ended on that date.

Illustrative matters forming basis for qualified opinion in the auditor’s report and requiring reporting under section 143(3)(f) and/or section 143(3)(h) of the Companies Act, 2013 Report on Other Legal and Regulatory Requirements As required by section 143 (3) of the Act, we report that: ………………………………. (f) The matter described in the Basis for Qualified Opinion paragraph above, in our opinion, may have an adverse effect on the functioning of the Company. …………………….. (h) The qualification relating to the maintenance of accounts and other matters connected therewith are as stated in the Basis for Qualified Opinion paragraph above.

Illustrative matters forming basis for adverse opinion in the auditor’s report and requiring reporting under section 143(3)(f) and/or section 143(3)(h) of the Companies Act, 2013 Basis for Adverse Opinion The Company’s financing arrangements expired and the amount outstanding was payable on March 31, 20XX. The Company has been unable to re-negotiate or obtain replacement financing and is considering filing for bankruptcy. These events indicate a material uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern and, therefore, it may be unable to realise its assets and discharge its liabilities in the normal course of business. The financial statements (and notes thereto) do not disclose this fact.

Illustrative matters forming basis for adverse opinion in the auditor’s report and requiring reporting under section 143(3)(f) and/or section 143(3)(h) of the Companies Act, 2013 Adverse Opinion In our opinion, because of the omission of the information mentioned in the Basis for Adverse Opinion paragraph, the financial statements do not give the information required by the Companies Act, 2013 in the manner so required and also do not give a true and fair view in conformity with the accounting principles generally accepted in India of the state of affairs of the Company as at 31st March, 20XX, and its profit/loss and its cash flows for the year ended on that date. …………………………

Illustrative matters forming basis for adverse opinion in the auditor’s report and requiring reporting under section 143(3)(f) and/or section 143(3)(h) of the Companies Act, 2013 Report on Other Legal and Regulatory Requirements As required by section 143 (3) of the Act, we report that: …………………. (f) The matter described in the Basis for Adverse Opinion paragraph above, in our opinion, may have an adverse effect on the functioning of the Company. ……………… (h) The adverse remarks relating to the maintenance of accounts and other matters connected therewith areas stated in the Basis for Adverse Opinion paragraph above.

Illustrative matters forming basis for disclaimer of opinion in the auditor’s report and requiring reporting under section 143(3)(f) and/or section 143(3)(h) of the Companies Act, 2013 Basis for Disclaimer of Opinion We were appointed as auditors of the Company after March 31, 20X1 and thus could not observe the counting of physical inventories at the beginning and end of the year. Accordingly, we were unable to satisfy ourselves by alternative means concerning the inventory quantities held at March 31, 20X0 and March 31, 20X1 which are stated in the Balance Sheet at Rs. XXX and Rs. XXX, respectively. In addition, the introduction of a new computerised accounts receivable system in September 20X0 resulted in numerous errors in accounts receivable. As of the date of our audit report,

Illustrative matters forming basis for disclaimer of opinion in the auditor’s report and requiring reporting under section 143(3)(f) and/or section 143(3)(h) of the Companies Act, 2013 Management was still in the process of rectifying the system deficiencies and correcting the errors. We were unable to confirm or verify by alternative means accounts receivable included in the Balance Sheet at a total amount of Rs. XXX as at March 31, 20X1. As a result of these matters, we were unable to determine whether any adjustments might have been found necessary in respect of recorded or unrecorded inventories and accounts receivable in the Balance Sheet, and the corresponding elements making up the Statement of Profit and Loss and Cash Flow Statement.

Illustrative matters forming basis for disclaimer of opinion in the auditor’s report and requiring reporting under section 143(3)(f) and/or section 143(3)(h) of the Companies Act, 2013 Opinion Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the financial statements. Report on Other Legal and Regulatory Requirements As required by section 143 (3) of the Act, we report that: …………………………. (f) The matter described in the Basis for Disclaimer of Opinion paragraph above, in our opinion, may have an adverse effect on the functioning of the Company.

Illustrative matters forming basis for disclaimer of opinion in the auditor’s report and requiring reporting under section 143(3)(f) and/or section 143(3)(h) of the Companies Act, 2013 ……………………… (h) The reservation relating to the maintenance of accounts and other matters connected therewith are as stated in the Basis for Disclaimer of Opinion paragraph above.

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