Companies Auditor’s Report Order 2020 (CARO 2020)

Companies Auditor’s Report Order 2020 (CARO 2020)

  • 07 Oct 2021
  • Posted By arkca

CARO 2020

Companies Auditor’s Report Order 2020 (CARO 2020) introduced by Ministry of Corporate Affairs has been brought forward to reinstate CARO 2016. CARO 2020 was introduced on 25th February 2020. CARO 2020 has been introduced by MCA in consultation with National Financial Reporting Authority (NFRA).  Under CARO 2020, there are 21 main clauses alongwith 37 sub-clauses.

 

BRIEF INTRODUCTION ABOUT CARO

The Ministry of Corporate Affairs (MCA) was of the view that there are certain specified matters of key importance that are required to be reported in the auditor’s report. Hence CARO was brought into force

 

APPLICABILITY DATE OF CARO 2020

CARO 2020 had been introduced in the Financial Year 2019-20 but it was subsequently deferred from F.Y. 19-20 to F.Y. 20-21. Further the Central Government in exercise of the powers conferred upon it by sub-section (11) of section 143 of the Companies Act, 2013 (CA, 2013), had issued an order “ Companies (Auditor’s Report) Second Amendment Order, 2020” dated 17th December 2020, in order to amend the Companies (Auditor’s Report) Order, 2020 (CARO, 2020), and ascertain the applicability date of CARO, 2020.

Ministry of Corporate Affairs has further changed the applicability of CARO 2020 from F.Y. 2020-21, to Financial Year 2021-22 via such amendment. Such crucial step had been taken to reduce the burden on companies as well as their auditors amidst global pandemic that had risen during the F.Y. 2020-21.

Under the apparatus of CARO 2020 there are various such details which are required to be reported / certified by an auditor which was not required to be reported so far. While the goal of CARO remains same i.e. enhancement of overall quality of reporting by auditors.

 

COMPANIES TO WHICH CARO 2020 WILL BE APPLICABLE

From the applicability point of view CARO 2020 is equivalent to CARO 2016. Thus CARO 2020 is applicable on all companies including a foreign company as defined in clause (42) of Section 2 of the Companies Act, 2013 except the following-

    • Small companies (Companies having paid up capital less than/equal to Rs 50 lakh and turnover which is less than/equal to Rs 2 crore for the last F.Y.)
    • One Person Companies as defined in clause (62) of section 2 of the Companies Act;
    • Banking Companies as defined in clause (c) of section 5 of the Banking Regulation Act, 1949;
    • Insurance Companies as defined under the Insurance Act 1938;
    • Companies registered under Section 8 of Companies Act, 2013; and
    • Such Private Limited Companies –
      • Not having paid up share capital more than Rs. 1 Crore as on balance sheet date;
      • Not having total borrowings exceeding an amount of Rs. 1 crore from any bank or financial institution at any given point of time during the financial year;
      • Not having total revenue exceeding Rs. 10 crore as per the financial statement at any point of time during the financial year;
      • Which is not a subsidiary or holding company of a public company.

 

SIGNIFICANT CHANGES IN CARO 2020

CLAUSE I: Details of tangible assets and intangible assets

  • CARO 2020 requires auditors to report whether the company is maintaining proper records showing full particulars as regards to details, quantity and situation of intangible assets along with tangible assets.
  • Further it requires auditors to report whether title deeds of all the immovable properties (other than such properties where the company is the acts as lessee and the deeds are executed in the favour of lessee) disclosed in the financial statements are witholded in the name of the company.
  • Auditors are also required to report if the company has conducted the revaluation of its Property, Plant and Equipment (including Right of Use assets) or intangible assets or both during the year and, if so, whether such revaluation is totally based upon the value determined by a registered valuer;
  • Clause i(e) requires auditors to report if any litigation has been initiated or is pending against the company for holding any enami property under the Benami Transactions (Prohibition) Act, 1988 and rules made there under;

 

CLAUSE II: Details of inventory and working capital

  • It requires auditors to not only report whether physical verification of inventory has been conducted at appropriate intervals by the management but also whether in the opinion of the auditor, the coverage and procedure of such verification by the management is appropriate; if any discrepancies of 10% or more for each class of inventory has been noticed in the aggregate.
  • In case of working capital loan disbursed to the company is 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, then auditors are required to report whether the quarterly returns or statements filed by the company with such banks or financial institutions are unanimous with the books of account of the Company.

 

CLAUSE III: Reporting on Loans granted, Investments made, Guarantees, Securities and Advances in nature of Loan

Reporting in respect of Investments made, guarantee or security provided or granting any loans or advances which is 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 is also required under CARO 2020.

Additional requirements of Reporting under CARO 2020:

  • If loan or advance granted which has fallen due during the year, has been renewed or extended or fresh loans has been granted to settle the dues of existing loans given to the same parties, then 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 granted during the year should be specified.
  • If there are loan and advances in the nature of repayable on demand, without any terms or period of payments then the amount of loans or advances given to promoters and related parties should be specified.

 

CLAUSE –IV: Reporting on Deemed Deposits

In CARO 2020, Auditors are required to report on such guidelines and policies that have been issued by the Resesrve Bank of India with respect to such deemed deposits.

CLAUSE- V: Statutory Dues

Earlier companies were required to report against only specific disputed statutory dues now it has been extended to include all statutory dues.

CLAUSE-VI: Appraisal of income revealed during Income Tax proceedings

Now auditors are required to check the accounting procedures and norms followed with respect to income disclosed during the income tax assessment proceedings.

 

Clause-VIII: Reporting on Unrecorded Income

In CARO 2020, these are required to be reported

  • Transactions which are not recorded in books but are disclosed in the income tax assessment;
  • Whether transactions that had not been recorded previously have been recorded in books during the year.

 

Clause-IX: Reporting on default in repayment and usage of Borrowings

Under this head auditors are required to report in specific format the repayment of loan or borrowings or payment of interest towards any lender.

Additionally, CARO 2020 has inserted the following additional reporting:

  • If the company is a declared willful defaulter, diversion of loan taken for some other purpose.
  • Details of Funds that are borrowed by holding company for the purpose of discharging obligations of group entities.
  • Usage of long term and short term funds.
  • Details of Funds that are borrowed by pledging the securities held in its group entities and defaults in its repayment.

Clause-X: Reporting on use of money hoisted through issue of own shares

In CARO 2020, it necessitates auditors to check and report the preferential allotment or private allotment of share and all the requirement of Section 42 and Section 62 of the Companies Act, 2013.

 

Clause-XI: Reporting on Fraud scope extended

Unlike CARO 2016 where only the fraud by the company or any fraud on the Company by its officers or employees was required to be reported, CARO 2020, makes it mandatory to report  all frauds on the company  (whether or not done by its employees or officers)

CARO 2020 has further specified the following points to be reported additionally:

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

 

 Clause-XII: Reporting on Nidhi Company

In CARO 2020, auditors are required to report on default made in payment of deposits and interest borne thereon by the Nidhi Company.

 

Clause-XIV: Reporting on Internal Audit

A new clause is inserted which necessitates auditors to report whether company’s  internal audit system  is commensurate with the size and nature of its business and whether the reports of the Internal Auditors have been considered by the statutory auditor.

 

Clause-XVI: Reporting on Registration u/s 45-IA of RBI Act 

In CARO 2020, apart from the registration requirement to be reported in CARO 2016, following additional reporting have been inserted and are required:

  • Whether any non-banking finance or housing finance activity has been conducted by the company without taking certificate of registration from RBI.
  • Whether the company is subject to the definition of “Core Investment Company” (CIC) as defined in the regulations made by the Reserve Bank of India, and if so, whether it continues to satisfying the criteria of a CIC, and if the company is an exempted or unregistered CIC, whether it continues to fulfil such criteria.
  • Number of CICs in the Group to which such company adheres to.

 

Clause-XVII: Reporting on Cash Losses

Auditor is required to report on the aggregate amount of cash lost (operational, investing and financial loss is cash) incurred by the company in the current and previous year.

 

Clause-XVIII: Reporting on Auditor’s resignation

A new clause has been inserted which requires auditors to report on the resignation of the statutory auditors during the year, if any; and whether the incoming statutory auditor has taken into consideration the issues and concerns of the outgoing auditors.

 

Clause-XIX: Reporting on Financial Position

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

 

Clause-XX: Reporting on CSR Compliance

This is a new clause inserted whereby it is required by the auditors to report such amount of CSR which has not been spent in case of ongoing project and whether such amount has been transferred to a special bank account designated for such purpose within 30 days from the end of the financial year and shall be used within 3 financial year or shall be transferred to specific fund.

 

Hence we can understand from the above points that have been put up that CARO 2020 is playing a major role in changing the overall quality of reporting and keen emphasis has been placed on regulatory compliances and the auditors are required to be vigilant in the reports prepared by them.

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