Introduction to Companies Auditor’s Report Order CARO 2020

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

CARO 2020 Applicability

There is no change in the applicability of CARO 2020 as compared to the CARO 2016. CARO 2020 shall be applicable to all those companies on which CARO, 2016 was applicable.  CARO 2020 is not applicable on consolidated financial statements like CARO 2016 except new clause (xxi).  As per the new clause (xxi), any qualification or adverse remark mentioned by the respective auditors in CARO, indicate the details of the companies and the paragraph numbers of the CARO report containing the 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 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

(I) Reporting on Property, Plant and Equipment’s (PPE) and Intangible Assets [Clause-1]

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 few additional requirements to be reported:

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

• Whether the company has revalued its Plant, Property and Equipment (including Right to use assets) or Intangible Assets during the year and if revalued, is based on the valuation by registered valuer.  If the change is 10% or more of the net carrying value then the details of each class of Plant, Property and Equipment to be separately disclosed.
• In case, any proceeding has initiated or pending against the company for holding any Benami Property under the Benami Transactions Act, then whether company has appropriately disclosed the details in the financial statements.

(II) Reporting on Inventory [Clause-2]

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.

(III) Reporting on Loans, Investments, Guarantees, Securities and Advances in nature of Loan [Clause-3]

In CARO 2016, grant of any loans whether secured or unsecured is required be reported and this clause is applicable to parties registered and covered in section 189 of the Companies Act, 2013. In Caro 2020, reporting of Investments in, provided any guarantee or security or granted any loans or advances in the nature of loan 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 requirement required to be reported:

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

(IV) Reporting on Deposits [Clause-5]

In CARO 2016, whether the company has accepted deposits in accordance with the directions issued by the RBI, or the provisions of section 73 to section 76 or any other relevant provisions of the Companies Act, 2013. In CARO 2020, Deposits which are not such by virtue of definition but substantively having the character of deposits called as Deemed deposits are also required to be reported along with Deposits.

(V) Reporting on Unrecorded Income [Clause-8 – New Clause inserted ]*

In CARO 2020, followings are required to be reported (i) Transactions not recorded in books but disclosed in the income tax assessment; (ii) Whether previously unrecorded transactions have been recorded in books during the year.

(VI) Reporting on default in repayment and usage of Borrowings [Clause-9]

In CARO 2016, only default on repayment of borrowings or interest towards banks, Public Financial Institutions, Government or Debenture holders   is required to be reported.  In CARO 2020, the repayment of loan or borrowings or payment of interest towards any lender in specific format is also required to be reported, In addition, CARO 2020 has also inserted following additional reporting :

• Details of Funds borrowed by 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 the securities held in its group entities  and defaults in its repayment
• whether the company is a declared willful defaulter, diversion of loan taken for some other purpose.

(VII) Reporting on use of money raised through issue of own shares [Clause-10]

In CARO 2016, checking of compliance of Sec 42 is required to report in clause 14.  In CARO 2020, under clause 10 reporting and checking is to be done on preferential allotment or private allotment of share and all the requirement of Section 42 and Section 62 of the Companies Act, 2013.

In CARO 2016, report on any amount raised from IPO, FPO or debt instrument and term loan should be applied for the same under the clause 9. Provision of IPO, FPO and debt instruments to be done under clause 10 in CARO 2020,

(VIII) Reporting on Fraud [Clause-11]

In CARO 2016, only the fraud by the company or any fraud on the Company by its officers or employees is required to be reported. In CARO 2020, Reporting of all frauds on the company is required (whether or not done by its employees or officers) apart from the above changes, CARO 2020 has inserted additional requirement required to be reported:

• any reporting made by auditor to central government u/s 143(12) in form ADT-4.
• consideration of whistle-blower complaints received by the Company

(IX) Reporting on Nidhi Company [Clause-12]

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

(X) Reporting on Internal Audit [Clause-14]

A new clause is inserted which requires auditors to report whether 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.

(XI) Reporting on Registration u/s 45-IA of RBI Act  [Clause-16]

In CARO 2020, apart from the registration requirement to report which is also required in CARO 2016, following additional reporting have been inserted and are required:

• whether the company has conducted any non-banking finance or housing finance activity without taking certificate of registration from RBI.
• whether the company is a Core Investment Company (CIC) as defined in the regulations made by the Reserve Bank of India, if so, whether it continues to fulfil the criteria of a CIC, and 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 company belongs.

(XII) Reporting on Cash Losses [Clause-17]

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

(XIII) Reporting on Auditor’s resignation [Clause-18]

A new clause is inserted which requires reporting on resignation of the statutory auditors during the year, if any and

whether the incoming statutory auditor has taken into consideration the issues, objections or concerns raised by the outgoing auditors.

(XIV) Reporting on Financial Position [Clause-19]

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.

(XV) Reporting on CSR Compliance [Clause-20]

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.

(XVI) Deleted Clause : In CAR0 2016, reporting on whether managerial remuneration has been paid or provided in accordance with the requisite approvals mandated by the provisions of section 197 read with Schedule V to the Companies Act. The clause is omitted from CARO 2020 as the same is already covered under main audit Report.

Conclusion:-

The change in reporting requirements clearly shows that regulator’s expectations from the auditors are increasing significantly. More emphasis is added on utilization of funds, financial stability of the company and regulatory compliances. Auditors need to be more conscious, skeptical and accurate while discharging his/her duties.

This article is contributed by:

Ankit Ahuja

Manager - Auditing & Assurance

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