The Companies (Auditor’s Report) Order, 2020

Background:

Company Auditor Report Order (CARO) is an order which lists the matters on which it is necessary to report to an auditor as per section 143(11) of the Companies Act, 2013. Thus, the auditors of the entities to which CARO is applicable are required to report on certain clauses prescribed in the order.

Earlier it was CARO 2016 which has 16 sections but on 25.02.2020 notify MCA CARO 2020 which has 21 sections. CARO 2020 is applicable for audits for the financial years commencing on or after 1st April 2021.

Institute of Chartered Accountants of India has issued Guidance Note on CARO 2020 Which provides guidance on the application of CARO 2020. CARO 2020 aims Increased overall quality of reporting by company auditors advanced reporting disclosure,

Applicability:

The Act applies to all companies including a foreign company as defined in section 2(42) of the Companies Act 2013, except:

1. banking company, insurance company, section 8 company, one person company, small company and
2. Private limited company, not being a subsidiary or holding of a public company, having paid-up capital and reserves and surplus does not exceed Rs. 1 crore as on the date of the Balance Sheet and whose total borrowings do not exceed Rs. 1 crore at any time during the financial year and whose total revenue does not exceed Rs. 10 crore during the financial year as per the financial statements.
3. This order also applies to the audit of branches of a company.
4. The Order specifically provides that it shall not apply to the auditor’s report on the consolidated financial statements except in clause (xxi).

Reporting Points for Auditors:

1. amended clause
   1. Clause (i) – Property, Plant and Equipment (PPE) and Intangible Assets
      1. • New reporting on maintenance of proper records showing full details of intangible assets.
         • Disclosure regarding title deeds of immovable property (other than properties where the company is lessee) as per the specified format is now required.
         • Additional disclosure and reporting requirements for revaluation of PPE (including right of use assets) and intangible assets made during the year. Specific reporting on the revaluation of assets by a registered valuer and whether such revaluation exceeds 10% of the total net carrying value of each class of asset.
         • Whether proceedings initiated or pending for possession of any benami property are properly disclosed in the financial statements.
   2. Clause (ii) – Inventory
      1. • The auditor is required to report the frequency of physical verifications carried out at reasonable intervals to determine whether the coverage and process of physical verification of inventory is adequate
         • Disclosure about discrepancies of 10% or more in aggregate in each class of inventory at the time of physical verification of inventory and whether they have been properly settled in the books of accounts.
         • Whether the company has been sanctioned working capital limit of more than Rs. 5 crore and whether the quarterly returns filed by the company with banks or financial institutions are in agreement with the books of accounts.
   3. Clause (iii) – Investments, Guarantees, Securities, Loans and Advances
      1. • Reporting has been expanded to include advances as well. In respect of loans and advances in the nature of loans, reporting whether the schedule of repayment of principal and payment of interest has been prescribed and whether repayment or receivables are regular. If the amount of loans and advances is overdue, the total amount outstanding for more than 90 days has to be disclosed. In addition, it is important to report whether appropriate steps have been taken by the company for recovery of principal and interest.
         • The scope of financial transactions to be reported under this section has been expanded to include loans to any person other than the parties covered under section 189 of the Companies Act, 2013.
         • Disclosure in respect of whether the terms and conditions of investment made, guarantees granted, security granted and loans granted and grant of all loans and advances in the nature of guarantees prejudicial to the interest of the Company.
         • Disclosure in respect of loans or advances granted, renewed or extended or new loans against overdues of existing loans have been settled.
         • Disclosure regarding loans or advances made to promoters or related parties as defined under section 2(76) of the Companies Act, 2013 which are repayable on demand.
   4. Clause (v) – Deposits
      1. • This section has been amended and requires the auditor to further report amounts that are considered deposits.
   5. Clause (vii) – Statutory Dues
      1. • Clarification on payment of undisputed Goods and Services Tax due to introduction of Goods and Services Tax in India.
         • Increased reporting requirement in respect of all disputed statutory dues. Earlier reporting was limited in respect of disputed income tax, sales tax or service tax or customs duty, excise duty or value added tax.
   6. Clause (ix) – Repayment of loans or other borrowings
      1. • This section has been amended to include default in repayment of loan/borrowings or payment of interest to any lender
         • It also requires the auditor to report whether the company has been declared a willful defaulter by any bank or financial institution or other lender.
         • Also need to report whether the term loan was applied for the purpose for which it was availed
         • Whether funds raised on short term basis have been used for long term purposes.
         • Reporting requirements include whether the company has taken money to meet the obligations of its subsidiaries, affiliates or joint ventures.
         • whether loans were taken by way of pledge of securities held in its subsidiaries, associates or joint ventures during the year; Details to be reported and if the company has defaulted in repayment of such loans raised.
   7. Clause (xi) – Fraud
      1. • The amended clause requires reporting on any fraud by the company or any fraud on the company, i.e. reporting on fraud is not limited to fraud committed by the officers or employees of the company while reporting under this section.
         • Whether the auditor has reported under Section 143(12) of the Companies Act, 2013 by filing Form ADT-4 with the Central Government.
         • Additional disclosure in respect of whether the whistleblower complaints received during the year have been considered by the company.
   8. Clause (xii) – Nidhi Company
      1. • This clause requires the auditor to report a default in payment of interest on deposits or repayment thereof for any period.
   9. Clause (xvi) – Registration Requirements under Section 45-IA of the Reserve Bank of India Act, 1934
      1. • This clause is amended and further requires the auditor to report whether the company has conducted any non-banking financial or housing finance activities without a valid certificate of registration from RBI and whether the company is a CIC or Is exempted or unregistered CIC and continues to fulfill the same. CIC norms
         • If the company has more than one CIC as part of the group, it needs to report the total number of CICs.
2. Deleted segments / merged segments
   1. Clause (xi) – Managerial Remuneration
      1. • This clause requiring reporting on managerial remuneration paid or provided in accordance with the provisions of section 197 has been omitted.
   2. Clause (xiv) – Preferential allotment, private placement of shares as per CARO 2016
      1. • This clause which requires reporting on compliance of section 42 of the Companies Act 2013 on preferential allotment, private placement of shares or fully or partially convertible debentures made, has been merged with clause (x) of CARO 2020.
3. newly inserted section
   1. Clause (viii) – Unwritten Income
      1. • This clause has been inserted which requires the auditor to report on the transactions surrendered or disclosed as income during the year in assessment under the Income-tax Act, 1961 and whether it has been properly entered in the books of accounts during the year. Has been recorded.
   2. Clause (xiv) – Internal Audit
      1. • New clause inserted that requires the auditor to report whether the company has a Internal Audit The system is tailored to the size and nature of its business.
         • Whether the internal audit report has been considered by the statutory auditor.
   3. Clause (xvii) – Cash Loss
      1. • A new clause has been inserted which requires the auditor to report whether the company has incurred cash loss in the financial year and in the immediately preceding financial year.
   4. Clause (xviii) – Resignation of Statutory Auditors
      1. • A new clause has been inserted which requires the auditor to report whether there have been any resignations of the auditors during the year and whether issues, objections or concerns have been considered by the outgoing auditor.
   5. Clause (xix) – Material uncertainty on meeting liabilities
      1. • The auditor is required to analyze financial ratios, aging and recovery of financial assets and expected dates of payment of financial liabilities, among other information, with the financial statements, the auditor’s knowledge of the board of directors and management plans, and reporting. for whether the auditor is of the opinion that no material uncertainty exists as on the date of the audit report and the company is capable of meeting its liability within a period of 1 year from the date of the balance sheet.
   6. Clause (xx) – Transfer to a fund specified under Schedule VII
      1. • This clause has been inserted which requires the auditor to report whether, in respect of ongoing projects, the unspent amount of CSR activities has been transferred to a specially designated bank account and in case of projects other than The unspent amount has been transferred to the specified fund. in Schedule VII within six months from the end of the financial year.
   7. Clause (xxi) – Qualification or adverse auditor’s note of group companies
      1. • This section is inserted which requires the auditor to report on qualifying or adverse comments made by the respective auditors in the CARO report of companies included in the consolidated financial statements along with paragraph number of the CARO report containing qualifying or adverse comments .

Source

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Disclaimer:

The information contained herein is in abridged form of MCA Order and Guidance Note issued by MCA and ICAI respectively based on information available in public domain. While the information is believed to be accurate to the best of our knowledge, we make no representations or warranties, express or implied, as to the accuracy or completeness of this information. Readers should conduct and trust their own examination and analysis and are advised to seek their own professional advice. This note is not an offer, invitation, advice or solicitation of any kind. We accept no responsibility for any error contained herein, whether due to negligence or otherwise or for any damages, whether caused or sustained by a person dependent on it.