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-
SIGNIFICANT CHANGES IN CARO 2020
CLAUSE I: Details of tangible assets and intangible assets
CLAUSE II: Details of inventory and working capital
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:
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
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:
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:
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:
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.