A Note on CARO Manufacturing and other Companies(Auditors Report)order,1988(MAUCARO, 1988) is replaced by Companies (Auditors Report)order, 2003(CARO,2003).

CARO,2003 shall apply only in respect of Financial years commencing on or after 01/07/2003. It applies to every Company, including a foreign company EXCEPT:1) a banking company, 2) a Insurance Company 3) a Section 25 Company 4) a Private Company with (i)Paid up Capital and reserves of not more than 50 lakhs (ii) has not accepted any public deposit (iii)and does not have a loan outstanding of Rs.10 lacs or more from any bank or financial Institution (iv) and does not have a turnover exceeding Rs.5 crores. All audit reports signed after 1st July, 2003 should be in the new format introduced by CARO, 2003. However, it should be clearly understood that CARO report is mandatory in an audit report only if the Central Government by a general or special order under Section 227(4A)of the Companies Act, 1956, DIRECT THAT, in the case of companies as may be specified in the order, the auditors report shall also include a statement of such matters as may be specified in the order. A summary of matters to be included in Caro is as follows:(1) Whether the company is maintaining proper records of Fixed Assets. Whether fixed assets are physically Verified by the management at reasonable intervals and if a substantial part of the fixed assets are disposed off in a year, whether it has affected the going concern; any material discrepancy after verification. (2) Whether the company takes physical verification of the inventory at regular intervals, whether proper procedures adopted by management in proportion to the size of the company, whether proper records kept of the inventory and whether any material discrepancy found after verification. (3) Loans to or from related firms, companies or other parties covered in the register maintained under S.301; Section 301 deals with Register to be maintained by a company of contracts, companies and firms in which directors are interested. Number of parties and loans, rate of interest and other terms/conditions whether prejudicial to the company, whether payment of principal and interest are regular; whether reasonable steps taken for recovery if overdue amounts are more than Rupees one lakh. (4) Whether there are adequate internal controls for purchase of inventory and Fixed Assets and for sale of goods; whether there is a continuous failure to correct major weakness in internal control. (5) Whether transactions that need to be entered according to Section 301 are so entered, the transactions are made at a reasonable price in case transaction exceeds Rs. 5 lacs in value in respect of any party in a financial year. (6) Whether deposit from public under S.58A & S.58AA are as per rules. (7) In case of listed companies and or having paid up capital and reserves more than Rs.50lakhs at the commencement of the financial year concerned or having an average annual turnover exceeding Rs. 5 crores for 3 consecutive financial years immediately preceding the Financial Year concerned, whether there is an internal Audit system commensurate with(in proportion to ) the companys size and nature of business. (8)Whether maintenance of cost records is prescribed under Section 209(1)(d)of the companies Act, 1956 and if so whether such records are maintained. (9) Whether undisputed statutory dues are regularly deposited like Provident Fund, Investor Education and protection fund, Employees state insurance, Income Tax, Sales Tax, wealth tax, excise duty, customs duty etc. (10)In case where the income tax, sales tax wealth tax, excise duty etc are disputed, the amount involved and the forum where disputed should be mentioned. (11)In case of Companies which are registered for atleast 5 years, whether accumulated losses at the end of Financial year are not less than 50% of its net worth; whether it has incurred cash losses in such Financial year and in the Financial year preceding such financial year. (12)Any default in the repayment of the dues of the Financial Institutions, banks or debenture holders. (13) Whether adequate records maintained in case of loan against pledge of shares, debentures and other Securities.

(14) In case of loans and advances made by the company, whether adequate documents and records are Maintained. (15) In case of Companies dealing in securities, shares, debentures, whether proper records are maintained of the transactions and contracts and timely entries made therein; whether shares have been held by the company in its own name excepting cases of exemptions under S.49 of the companies Act, 1956. (16) Where the company has given guarantee for loan taken by others from Bank/Financial Institutions, the terms and conditions are not prejudicial to the interest of the company. (17) The Term loans were applied for the purpose for which the loans were obtained. (18)Whether funds raised on short term basis used for long term investment and vice versa and if so the extent. (19)Whether any preferential allotment made by the company to parties and companies covered under the register to be maintained by the company under S.301 and if so the issue price is not prejudicial to the interest of the company. (20) Whether securities are created in respect of the debentures issued. (21) Whether management has disclosed the end use of money raised on public issue and the same has been Verified. (22) Whether fraud on or by the company is noticed or reported during the year and if yes, the nature and the amount involved is to be indicated. When the answer to any of the points mentioned above is UNFAVOURABLE or QUALIFIED, the auditors report shall also state the reasons for such unfavorable or qualified answer. When an Auditor is UNABLE to express any opinion in answer to a particular question, his report shall indicate such fact together with the reasons why it is not possible for him to give answer to such question.