CARO

1. Applicability of the CARO 2015

Every report made by the auditor under section 143 of the 2013 Act for financial
year commencing on or after 1 April 2014 should include CARO 2015.
2. Companies covered under the CARO 2015
Applies to every company (except companies that are excluded, see below),
including a foreign company as defined under section 2(42) of the 2013 Act i.e.
any company or body corporate incorporated outside India which:

has a place of business in India whether by itself or through an agent,

physically or through an electronic mode, and

conducts any business activity in India in any other manner.

Class of companies which are excluded from CARO 2015 application

Banking company as defined under section 5(c) of the Banking Regulation

Act, 1949

Insurance company as defined under the Insurance Act,1938.

Companies incorporated with charitable objects, etc. i.e. companies

licensed to operate under section 8 of 2013 Act

Private company:
o

with a paid-up capital and reserves not more than INR50 lakhs

does not have outstanding loan exceeding INR25 lakhs from any
bank or financial institution, and

does not have a turnover exceeding INR5 crore at any point of time
during the financial year

One person company as defined under the 2013 Act i.e. a company which
has only one person as a member

Small company as defined under the 2013 Act

Where

an auditors response to any of the reporting matters is

unfavourable/qualified, the auditor should state the reason for such
response

an auditor is unable to express any opinion in response to a particular

question, the audit report should indicate such fact together with the
reasons why it was not possible to provide a response to such a question.

Matters to be reported in the CARO 2015 (12 Clauses)

1. Fixed assets

Whether the company is maintaining proper records showing full

particulars, including quantitative details and situation of fixed assets?

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?

2. Inventories

Whether physical verification of inventory has been conducted at

reasonable intervals by the management?

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.

Whether the company is :

maintaining proper records of inventory,
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?

3. Granting of loans to certain parties

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 2013 Act. If so:

whether receipt of the principal amount and interest are also regular, and

if overdue amount is more than INR1 lakh, whether reasonable steps have
been taken by the company for recovery of the principal and interest?

4. 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?

5. Acceptance of deposits
In case the company has accepted deposits1, 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 2013 Act and the Rules framed thereunder, where
applicable, have been complied with? If not, the nature of contraventions should
be stated.
If an order has been passed by the Company Law Board or the National Company
Law Tribunal or the Reserve Bank of India or any Court or any other Tribunal,
whether the same has been complied with or not?
6. Maintenance of cost records
Where maintenance of cost records has been specified by the Central
Government under section 148(1) of the 2013 Act, whether such accounts and
records have been made and maintained?
7. Deposit of statutory dues
Is the company regular in depositing undisputed statutory dues including:
provident fund income-tax wealth tax duty of customs value added tax
employees state insurance sales-tax service tax duty of excise cess
and any other statutory due 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?
In case dues of:

 income tax wealth tax duty of customs value added tax sales tax service
tax duty of excise 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.)
8. Accumulated losses and incurrence of cash 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 50 per cent of its net worth and whether it has incurred cash losses in such
financial year and in the immediately preceding financial year?
9. 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.
10. Guarantee for loans taken by others from banks or financial
institutions
Whether the company has given any guarantee for loans taken by others from
banks or financial institutions, the terms and conditions whereof are prejudicial
to the interest of the company?
11. Application of term loans
Whether term loans were applied for the purpose for which the loans were
obtained?
12. Fraud reporting
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.
Section 143 of Companies Act 2013
AUDITORS DUTY AS TO INQUIRE / IMPLIED ASSUMPTIONS OF AN
AUDIT
Whether loans and advances made by the company on the basis of security
have been properly secured and whether the terms on which they have
been made are not prejudicial to the interests of the company or its
members.

 This clause applies to loans and advances given by the company

during the financial year under audit, whether they are outstanding on
the date of the Balance Sheet or not.
Distinction is obviously intended to be made between loans and
advances and deposits.
Security for this purpose would include any movable or immovable
property, whether belonging to the borrower or not, of which either
physical possession or over which a legally effective charge is given to
lender.
Applies to all loans and advances made on the basis of security / charge,
whether movable or immovable, whether or not belonging to the borrower.
Companys right to enforce such right shall be examined in detail.
Type of Security
Shares and debentures

Documents to be verified
Duly transferred in the name of the
Company

Government securities, and other

securities, documents of title which
are transferable by endorsement and
delivery, e.g. Bills of Lading, and
Railway Receipts

Duly endorsed

Immovable property

Registered mortgage deed

Or
Equitable mortgage ( as appropriate)

Life Insurance Policy

Assignment in favor of lender, duly

registered
with
the
Insurance
company

Pledge

Appropriate record of goods held

Hypothecation of goods

Deed of hypothecation

Where the loan or advance is made to a company, any charge on the

assets of such a company should have been registered under Section
125 of the Act in order to constitute an effective security.
If the loan has been given for business considerations, e.g., loans to
staff for purchase of cars, houses, etc., loans to suppliers of raw
materials or other goods, there may be justification for interest being
charged at a rate lower than the market rate, or even, in appropriate
circumstances, no interest being charged at all.
However, when a loan is given only with a view to earning interest,
the interest charged would be at the commercial rate.

 In the case of partly secured loans or advances, it would be advisable

to show them separately in the Balance Sheet as partly secured,
indicating the extent to which they are secured.
Particular attention should be paid to loans or advances to concerns in
which the directors of the company or their associates are interested.
The reference to members should therefore be construed as a
reference to the members of a company as a class, in their capacity as
members.
The question whether the loan or advance is properly secured would
have to be considered at the end of each accounting year. However, the
question whether a loan is prejudicial to the interests of the company
or its members would have to be considered only at the time when
the loan is given, or renewed.
Whether transactions of the company which are represented merely by
book entries are not prejudicial to the interests of the company.
Intended to cover transactions of the company for which the only evidence,
or the principal evidence, is the entry regarding the transactions in the books
of account.
In such cases, the auditor should inquire whether such transactions have in
fact taken place and, if so, whether they are prejudicial to the interests of the
company.

Where the company is not an investment company or a banking company,

whether so much of the assets of the company as consist of shares,
debentures and other securities have been sold at a price less than that at
which they were purchased by the company.
Inquire in all cases where shares, debentures or other securities have been
sold at a price less than their cost.
If, as a result of his inquiries, the auditor is satisfied that the sale is bona fide
and the price realized is reasonable, having regard to the circumstances of the
cases, he has no further duty to report on the matter.
Applies to a company whose principal business is dealing in shares, stocks,
debentures or other securities.
Bonus Shares:
o The question of treatment of bonus shares would also arise.
o When bonus shares are received, the number of shares in the portfolio
would be increased by the bonus shares while the cost of the total
portfolio would remain the same as before.
o The result would be that the average cost per unit of the total holding
would come down proportionately.
The usual accounting practice for apportioning the cost of a part of the total
holding on the sale thereof is to take it at its average cost.

Whether loans and advances made by the company have been shown as
deposits.
It should be noted that the inquiry to be made is whether loans and
advances have been shown as deposits, and not vice versa.
Whether personal expenses have been charged to revenue account. {May
1997, May 2001, May 2003- CA Final}
The charging to revenue of such personal expenses, either on the basis of the
companys contractual obligations, or in accordance with accepted business
practice, is perfectly normal and legitimate or does not call for any special
comment by the auditor.
Where, however, personal expenses not covered by contractual obligations or
by accepted business practice are incurred by the company and charged to
revenue account, it would be the duty of the auditor to report thereon.

Where it is stated in the books and papers of the company that any shares
have been allotted for cash, whether cash has actually been so received in
respect of such allotment, and if no cash has actually been so received,
whether the position as stated in the account books and the balance sheet is
correct, regular and not misleading.
Papers would presumably refer to the Return of Allotment filed by the
company under Section 75 of the Act.
Where the consideration for the issue of shares is an adjustment against a bona fide
debt payable in money on demand by the company, the shares are deemed to have
been subscribed in cash (Shares issued to settle loan payable) In such cases, no
comment is required by the auditor in the auditors report.