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

CARO 2015

Slide 2

CARO 2015

Presentation Road Map

Agenda for discussion

Other issues

Questions

Slide 3

Agenda for discussion

• Applicability of CARO 2015

• Companies Covered

• Reporting Requirements carried forward/ modified

• New Reporting Requirements

• Reporting Requirements not carried forward

Slide 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.

Slide 5

Companies Covered

Applies to every Company (except Companies that are excluded) including foreign Company as defined under section 2(42) of 2013 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)

Slide 6

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

Slide 7

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

Slide 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.

Slide 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.]

Slide 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.

Slide 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

Slide 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

Slide 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

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'

Slide 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'

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'

Slide 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 XXX XXX

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 XXX XXX

Slide 17

Issues- Disputed Dues

Clause (vii) (b) (contd.)Disclosures (contd.)

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 XXX XXX

DELOITTE HASKINS & SELLS

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 XXX XXX

Slide 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

1. What is fraud?

2. Would materiality be considered for reporting under this clause?

3. Can multiple frauds be aggregated or can they be reported separately?

4. Companies Act 2013 – Section 447 (2)

Would theft be covered in fraud?

Would window dressing, creative accounting tantamount to fraud?

(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;

Slide 19

Issues- Fraud

DisclosureAlfa 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

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 .

Clause (xii) (Contd.)

Slide 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?

3. 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?

4. 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.

Slide 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.

Slide 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

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?

THANK YOU