Salient Features of the Guidance Note on CARO 2016. The Guidance Note supersedes the Statement on CARO 2003 issued by ICAI for audits of financial statements for the periods beginning on or after April 1, 2015. The Guidance Note contains detailed guidance on the requirements of each of the 16 Clauses covered by CARO 2016 and the various issues and intricacies involved therein. Guidance on each Clause of CARO 2016 has been covered by a separate paragraph in the Guidance Note for easy reference. Guidance on each Clause of CARO 2016 has been divided into two distinct parts namely (1) Relevant Provisions and (2) Audit Procedures and Reporting, for better readability and understanding. The “Relevant Provisions” part covers the requirements of particular clause and explains what is expected from the auditor under the clause.
The “Audit Procedures and Reporting” part covers the audit guidance e.g. audit considerations, relevant audit procedures to be performed by the auditors. This part also provides the suggested reporting format, wherever applicable. The Guidance Note includes Illustrative Checklist on all the clauses of CARO 2016. The relevant provisions of the Companies Act, 2013 and the Rules thereunder, as also the text of the Sections of other Acts referred in CARO 2016, have been given in the Appendices of the Guidance Note to make the Guidance Note self contained reference document for the members.
Salient Features of the Guidance Note on CARO 2016
The Guidance Note has taken into account the various pronouncements of ICAI e.g. Standards on Auditing, Accounting Standards, Indian Accounting Standards (Ind AS), Guidance Notes on Accounting as well as Auditing Aspects etc. and the relevant guidance covered in these ICAI’s pronouncements has been included in the Guidance Note at appropriate places. There are a number of terms used in CARO 2016 which have not been defined or explained in the Companies Act, 2013 and the Rules thereunder e.g. immovable properties, title deeds, prejudicial to the company’ interest, Government, non-cash transactions, persons connected with director etc. For better understanding of the requirements of the Order, efforts have been made to explain/clarify those terms by taking appropriate references from the ICAI’s pronouncements, Other laws, dictionary meaning etc.
Aspects Covered By the Guidance Note on CARO 2016
The contents of the Guidance Note can be divided into the following four Sections:
- Section 1– Opening Guidance (Paragraphs 1 to 32 of the Guidance Note).
- Section 2– Matters to be included in the Auditor’s Report (Paragraphs 33 to 52 of the Guidance Note).
- Section 3– Form of Report and Board’s Report (Paragraphs 53 to 67 of the Guidance Note).
- Section 4– Appendices.
The paragraphs below provide a brief description of the aspects covered by these Sections:
Section 1: Opening Guidance
This Section covers the aspects regarding issuance of CARO 2016, purpose of the Guidance Note, Status and relationship of the Order vis-à-vis main audit report under Section 143 of the Act, Applicability of the Order, Companies covered by the Order, Companies not covered by the Order, Guidance/ Clarification on various terms for ascertaining applicability of the Order (e.g. Private limited company, Paid up capital and reserves and surplus, Borrowings, Financial institution, Revenue), Period of Compliance, Nature of reporting under the Order, Interaction with management, Applicability of Standards on Auditing issued by ICAI, Concept of audit materiality while reporting under the Order, Concept of professional judgement, Documentation requirements etc.
Section 2: Matters to Be Included In the Auditor’s Report
This Section provides detailed guidance on the following reporting requirements of CARO 2016:
- Fixed Assets
- Loans granted to Parties covered in the register maintained under Section 189.
- Compliance with Sections 185 and 186 in case of Loans, Investments, Guarantees and Security.
- Acceptance of Deposits.
- Maintenance of Cost Records.
- Regularity in depositing Statutory Dues.
- Defaults in repayment of loans/borrowings/ dues to Financial Institution, Bank, Government or Debenture holders.
- End use of moneys raised through IPO/ FPO/ term loans.
- Frauds by the company or on the company by its officers/employees.
- Payment of Managerial Remuneration in accordance with applicable provisions of the Act and Rules.
- Nidhi Company– compliance with Net Owned Funds to Deposits requirements.
- Compliance with Sections 177 and 188 in case of transactions with Related Parties.
- Preferential allotment or private placement of shares/ debentures– compliance with Section 42 and end use of funds raised.
- In case of Non-cash transactions with directors or persons connected with directors Compliance with Section 192.
- Requirement to obtain registration under Section 45-IA of RBI Act, 1934
Section 3: Form Of Report and Board’s Report
This Section contains detailed guidance on various aspects of reporting by auditors under CARO 2016. It covers the aspects regarding Manner of reporting on clauses, Inclusion of management’s explanations in reporting, Reporting in case of unfavourable/adverse comments, Impact of unfavourable comments under CARO on the main audit report under Section 143 of the Act, Impact of unfavourable comments both under the CARO as well as under the main audit report under Section 143 of the Act, reporting in situations where the auditor’s answer to questions is unfavourable or qualified, reporting in situations where the auditor is unable to express any opinion on any specified matter.
Section 4: Appendices
This Section covers the following aspects:
- Text of CARO 2016.
- Comparison of requirements of CARO 2016 vis-à-vis CARO 2015.
- Illustrative Checklist on all the clauses of CARO 2016.
- Text of various Sections of the Companies Act, 2013 and Related Rules which are referred in CARO 2016.
- Text of Sections of Other Acts referred in CARO 2016.