Introduction to Companies Auditor’s Report Order (CARO 2020)

The Ministry of Corporate Affairs (MCA) on 25 February 2020, after consultation with the National Financial Reporting Authority (NFRA), notified the Companies (Auditor’s Report) Order, 2020 (CARO 2020), thereby repealing CARO 2016. Section 143(11) of the Companies Act, 2013 empowers the Central Government to notify special matters for inclusion in the auditor’s report for a specified class or description of companies. Based on recommendations of the committee set up by MCA, CARO 2020 has been issued with significantly enhanced disclosures by auditors in the statutory audit report.

CARO 2020 Applicability

There is no change in the applicability of CARO 2020 as compared to CARO 2016. CARO 2020 applies to all those companies on which CARO 2016 was applicable. CARO 2020 is not applicable to consolidated financial statements, similar to CARO 2016, except new clause (xxi).

As per clause (xxi), where any qualification or adverse remark is mentioned by respective auditors in CARO, the report should indicate details of the companies and the paragraph numbers of the CARO report containing such qualifications or adverse remarks.

Effective date of CARO 2020 applicability

CARO 2020 is applicable to every report issued by the statutory auditors under Section 143 of the Companies Act, 2013 (the Act) on accounts of every company audited for the financial years commencing on or after the 1st of April 2021. MCA has deferred the applicability of CARO 2020 from the financial year commencing from 01st April 2021 instead of 01st April 2020 vide its notification dated 17th December 2020. This step has been taken to ease the burden on companies and their auditors for the year 2020-21 amid coronavirus disease (Covid-19)

Key Changes in CARO 2020 vs CARO 2016 Comparison

(Clause 1) Report Property, Plant and Equipment and Intangible Assets 

In CARO 2016, companies are required to report on the maintenance of particulars including quantitative details of PPE, physical verification of PPE at reasonable intervals and title of immovable properties are held in the name of the company. In CARO 2020, the requirement to the disclosure of immovable properties in case of assets on lease is specifically excluded.

CARO 2020 has inserted additional reporting requirements:

  To maintain proper records showing full particulars of all Intangible Assets.

• Maintain proper records showing full particulars of all intangible assets.
• Whether the company has revalued its Property, Plant and Equipment (including right-of-use assets) or intangible assets during the year and, if revalued, whether it is based on valuation by a registered valuer. If the change is 10% or more of the net carrying value, then disclose details of each class of Property, Plant and Equipment separately under CARO 2020.
• In case any proceeding has been initiated or is pending against the company for holding any benami property under the Benami Transactions Act, whether the company has appropriately disclosed the details in the financial statements.

(Clause 2) Report Inventory

In CARO 2016, auditor is required to report whether management has physically verified the inventory or not and if any material discrepancies is there, then it shall be required to report.  In CARO 2020, Auditor is also required to give his opinion on the coverage and procedure of physical verification of inventories alongwith the reporting of discrepancy of 10% or more in aggregate for each class of inventory and have been properly dealt with in the books of account.

In case of working capital loan in excess of five crore rupees in aggregate at any point of time during the year from banks or financial institutions on the basis of security of current assets, the quarterly returns or statements filed by the company with such banks or financial institutions are in agreement with the books of account of the Company, if not, give details.

(Clause 3) Report Loans, Investments, Guarantees, Securities and Advances in the nature of loan 

In CARO 2016, grant of any loans, whether secured or unsecured, was required to be reported and the clause applied to parties registered and covered in Section 189 of the Companies Act, 2013. In CARO 2020, reporting now covers investments made, guarantees or securities provided, or loans/advances in the nature of loans granted to subsidiaries, joint ventures, associates, and also to parties other than subsidiaries, joint ventures, and associates, along with the amount outstanding as at the balance sheet date.

CARO 2020 has inserted additional requirements:

• Where any loan or advance in the nature of loan granted has fallen due during the year and has been renewed or extended, or fresh loans granted to settle the overdue of existing loans to the same parties, specify the aggregate amount of such dues renewed/extended/settled and the percentage of the aggregate to total loans or advances in the nature of loans granted during the year.
• Where loans and advances are repayable on demand without any terms or period of payment, specify the amount of such loans or advances given to promoters and related parties.

(Clause 5) Report Deposits and Deemed Deposits

In CARO 2016, the auditor reported whether the company accepted deposits in accordance with RBI directions or the provisions of Sections 73 to 76 or other relevant provisions of the Companies Act, 2013. In CARO 2020, deposits which are not deposits by definition but substantively have the character of deposits (deemed deposits) are also required to be reported along with deposits.

(Clause 8) Report Unrecorded Income 

Under CARO 2020, the following are required to be reported:

• Transactions not recorded in the books but disclosed in income tax assessments.
• Whether previously unrecorded transactions have been recorded in the books during the year.

(Clause 9) Report Defaults and Usage of Borrowings 

In CARO 2016, only default on repayment of borrowings or interest to banks, public financial institutions, Government, or debenture holders was required to be reported. In CARO 2020, repayment of loans or borrowings or payment of interest to any lender in a specific format is required. In addition, CARO 2020 has inserted:

• Details of funds borrowed by the holding company for the purpose of discharging obligations of group entities.
• Usage of long-term and short-term funds, details of funds borrowed by pledging securities held in group entities, and defaults in repayment.
• Whether the company is a declared willful defaulter and whether there is diversion of loans taken for another purpose.

(Clause 10) Report Use of Money Raised Through Share Issues

In CARO 2016, compliance with Section 42 was reported under clause 14. In CARO 2020, under clause 10, reporting and checking are to be done on preferential allotment or private placement of shares and all the requirements of Section 42 and Section 62 of the Companies Act, 2013.

In CARO 2016, amounts raised from IPO, FPO, or debt instruments and whether term loans were applied for the same purpose were reported under clause 9. Under CARO 2020, provisions related to IPO, FPO, and debt instruments are reported under clause 10.

(Clause 11) Report Fraud 

In CARO 2016, only fraud by the company or fraud on the company by its officers or employees was required to be reported. In CARO 2020, reporting of all frauds on the company is required (whether or not by employees or officers). Additional requirements include:

• Any reporting made by the auditor to the Central Government under Section 143(12) in Form ADT-4.
• Consideration of whistle-blower complaints received by the company.

(Clause 12) Report Nidhi Company Compliance 

In CARO 2016, there was no provision for reporting default in payment of deposits and interest by a Nidhi Company. In CARO 2020, reporting on default in payment of deposits and interest thereon by the Nidhi Company is required.

(Clause 14) Report Internal Audit

A new clause requires auditors to report whether the company has an internal audit system commensurate with the size and nature of its business and whether the reports of the internal auditors were considered by the statutory auditor. This requirement has been reinstated from CARO 2003.

(Clause 16) Report Registration under Section 45-IA of the RBI Act 

In CARO 2020, apart from registration requirements (also required in CARO 2016), the following additional reporting is required:

• Whether the company conducted any non-banking finance or housing finance activity without a certificate of registration from RBI.
• Whether the company is a Core Investment Company (CIC) as defined by RBI regulations and, if so, whether it continues to fulfil CIC criteria. In case the company is an exempted or unregistered CIC, whether it continues to fulfil such criteria.
• Number of CICs in the group to which the company belongs.

(Clause 17) Report Cash Losses

A new clause requires reporting the amount of cash loss (aggregate of operating, investing, and financing cash losses) incurred by the company in the current as well as the previous year.

(Clause 18) Report Auditor’s Resignation 

A new clause requires reporting any resignation of statutory auditors during the year and whether the incoming statutory auditor has taken into consideration the issues, objections, or concerns raised by the outgoing auditors.

(Clause 19) Report Financial Position and Liability Settlement

A new clause is inserted which requires auditors to report on company’s ability to pay off existing liabilities over a period of next one year as and when they fall due.

(Clause 20) Report CSR Compliance 

A new clause is inserted which requires auditors to report whether unspent amount of CSR in case of ongoing project  has been transferred to a special designated bank account within 30 days  from the end of the financial year and shall be used within 3 financial year or shall be transferred to specified fund.  In case other than outgoing project reporting should be done by auditor whether company has transferred unspent CSR money to specific funds within 6 months from end of the year.

In CARO 2016, reporting on whether managerial remuneration was paid or provided in accordance with Section 197 read with Schedule V to the Companies Act was required. This clause is omitted from CARO 2020 as it is covered in the main audit report.

Conclusion on enhanced reporting under CARO 2020

The change in reporting requirements clearly shows that regulator expectations from auditors are increasing significantly under CARO 2020. More emphasis is placed on utilization of funds, financial stability of the company, and regulatory compliances. Auditors need to be more conscious, skeptical, and accurate while discharging their duties.

Contributor & Resources

This article is contributed by: Ankit Ahuja, Manager – Financial Reporting & Assurance.
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