Applicability OF CARO (Companies Auditor Report Order)
The Order applies to all companies except certain categories of companies specifically exempted from the application of the order. The order also applies to foreign companies as defined in section 591 of the act the order is also applicable to the audits of branch(es) of a company under the act.
Companies not covered by the order
The order provides that it shall not apply to:
1. A banking company
2. An insurance company
3. A company licensed to operate under section 25 of the companies act 1956
4. The order also exempts from its application a private limited company which fulfills all the following conditions:
· Its paid-up capital and reserves are rupees fifty lakhs or less;
· It has no outstanding loan exceeding rupees twenty five lakhs from any or financial institution; and
· Its turnover does not exceed rupees five crores at any point of time during the financial year.
A private limited company, in order to be exempt from the applicability of the order, must satisfy all the conditions mentioned above cumulatively. In other words, even if one of the conditions is not satisfied, a private limited company`s auditor has to report on the matters specified in the order.
Paid-up capital and reserves:-paid-up share capital would include both equity share capital as well as the preference share capital. While calculating the paid-up capital, mount of calls unpaid should be deducted from and the amount paid-up on forfeited shares should be added to the figure of paid up capital. Share of application money received should not be considered as part of the paid up capital. For determining the applicability of the order to a private limited company, both capital as well as revenue reserves should be taken into consideration while computing the limit of rupees fifty lakhs prescribed for paid up capital and reserves. Revaluation reserve, if any, should also be taken into consideration while determining the figure of reserve for the limited purpose of determining the applicability of the order. The credit balance in the profit & loss account is available for general purposes like declaration of dividend. The debit balance of the profit & loss account, if any, should be reduced from the figure of revenue reserves. However, miscellaneous expenditure to the extent not written off should not be deducted from the figure of reserves for the purpose of computing the above limit.
Loan Outstanding:- Loans from banks or financial institutions are normally in the form of term loans, demand loans, export credits, working capital limits, cash credits, overdraft facilities, bills purchased or discounted. Outstanding balance s of such loans should be considered as loan outstanding for the purpose of computing the limit of rupees twenty fife lakhs. In case of term loans, interest accrued and due is considered as loan whereas interest accrued but not due is not considered as a loan. It is clarified that since the words used by the order are ‘any bank or financial institution’ , the limit of exceeding twenty five lakh rupees applies in the aggregate to all loans and not with reference to each bank or financial institution For example, if a private limited company has three outstanding loans of rupees ten lakhs each from two banks and financial institution, the order would be applicable to such a private limited company irrespective of the fulfillment of the other conditions laid down for exemption from the applicability of the order.
Turnover:- As the aggregate amount for which sales are effected by the company. It may be noted that the “sales effected” would include sale of goods as well as service rendered by the company.
a) Sales tax collected or excise duties collected should not be taken into account if they are credited separately to sales tax account or excise duty account.
b) Trade discount should be deducted from the figure of turnover.
c) Commission allowed to third parties should not be deducted from the figure of turnover.
d) Sales returns should be deducted from the figure of turnover even if the returns are from the sales made in the earlier years.
Prepared by Narendra Kumawat