Background
The MCA has issued the Companies (Auditor’s Report) Order, 2020 (CARO 2020), on 25th February 2020. This order has been issued in supersession of the Companies (Auditor’s Report) Order, 2016, and is applicable for reporting on financial statements of companies whose financial year commences on or after 1st April 2019. CARO 2016 was issued by MCA in supersession of CARO 2015.
The MCA has issued the Companies (Auditor’s Report) Order, 2020 (CARO 2020), on 25th February 2020. This order has been issued in supersession of the Companies (Auditor’s Report) Order, 2016, and is applicable for reporting on financial statements of companies whose financial year commences on or after 1st April 2019. CARO 2016 was issued by MCA in supersession of CARO 2015.
Now, the MCA has kept the applicability of CARO 2020
to companies same as CARO 2016. The CARO 2020 will not apply to the auditor’s
report on consolidated financial statements except for clause (xxi) of Clause 3
in regard to any qualifications or adverse remarks by the respective auditors
in the Companies (Auditor's Report) Order (CARO) reports of the companies
included in the consolidated financial statements. If there is any such remark, then the auditor
of CFS, has to indicate the details of the companies and the paragraph numbers
of the CARO report containing the qualifications or adverse remarks. The
exemption to small companies has been removed and instead CARO 2020 has defined
small company itself.
The total number of clauses in the new CARO is 21.
CARO 2020 has enhanced the auditor’s reporting requirements in certain areas,
such as Loans given, application of Short Term fund, Long term Funds etc.
The provisions of the CARO 2020 are furnished below:
CARO 2020 is applicable from FY 2019-20 and the
matters specified therein shall be included in each report made by the auditor
under Section 143 of the Companies Act, 2013 on the account of every company to
which CARO 2020 applies.
Section 143 (11) of the Act stipulates that the
Central Government may order for the inclusion of statement on specified matter
in the auditor’s report for specified class or description of companies.
Accordingly, CARO 2020 is issued in pursuance of Section 143 (11) of Companies
Act 2013 for inclusion of the matters specified therein in auditors’ report.
Hence, CARO 2020 should be complied by the statutory auditor of every company
on which it applies.
CARO 2020 has been issued after consultation with the
National Financial Reporting Authority constituted under section 132 of the
Companies Act, 2013.
Applicability
CARO 2020 is applicable to every company including a
foreign company as defined in clause (42) of Section 2 of the Companies Act
2013, except
i.
a
banking company as defined in clause (c) of section 5 of the Banking Regulation
Act, 1949 (10 of 1949);
ii.
an insurance
company as defined
under the Insurance Act,1938 (4 of 1938);
iii.
a company
licensed to operate under section 8 of the Companies Act;
iv.
a
One Person Company as defined in clause (62) of section 2 of the Companies Act
and a small company as defined in
clause (85) of section 2 of the Companies Act;
and
v.
a private limited company, not being a subsidiary or holding
company of a public company, having a paid up capital and reserves and surplus
not more than one crore rupees as on the balance sheet date and which does not
have total borrowings exceeding one crore rupees from any bank or financial institution at any point of time during the financial year and which does not have a total revenue
as disclosed in Scheduled III to the Companies
Act (including revenue from discontinuing operations) exceeding ten crore
rupees during the financial year as per the financial statements.
Auditor's report to contain matters specified in paragraphs 3
and 4. –
Every report made by the auditor under
section 143 of the Companies
Act on the accounts of every company audited
by him, to which this Order applies,
for the financial
years commencing on or after the 1st April, 2019, shall in addition,
contain the matters specified in paragraphs 3 and 4, as may be applicable:
Provided
this Order shall not apply to the auditor’s report on consolidated financial
statements except clause (xxi) of paragraph 3.
1.
Matters to be included in auditor's report. - The auditor's report
on the accounts of a company to which this Order applies
shall include a statement on the
following matters, namely:-
Property, Plant and Equipment [clause 3
(i)]
i.
(a) (A) whether the
company is maintaining proper records showing full particulars, including
quantitative details and situation of Property, Plant and Equipment;
(B)
whether the company is maintaining proper records showing full particulars of
intangible assets;
(b)
whether these
Property, Plant and Equipment have been physically verified by the management
at reasonable intervals; whether any material discrepancies were noticed on such verification and if so, whether the same
have been properly dealt with in the books of
account;
(c)
whether the title
deeds of all the immovable properties (other than properties where the company
is the lessee and the lease agreements are duly executed in favour of the
lessee) disclosed in the financial statements are held in the name of the
company, if not, provide the details thereof in the format below:-
Description of property
|
Gross carrying value
|
Held in
name of
|
Whether promoter,
director or their relative
or employee
|
Period held
– indicate
range, where
appropriate
|
Reason for not being held in name
of
company*
|
--
|
-
|
-
|
-
|
*also
indicate
if in dispute
|
(d)
whether the company
has revalued its Property, Plant and Equipment (including Right of Use assets)
or intangible assets or both during the year and, if so, whether
the revaluation is based on the valuation
by a Registered Valuer; specify the amount of change, if change is 10% or more in the aggregate of the net carrying value of each
class of Property, Plant and Equipment or intangible assets;
(e)
whether any
proceedings have been initiated or are pending against the company for holding
any benami property under the Benami Transactions (Prohibition) Act, 1988 (45
of 1988) and rules made thereunder, if so, whether the company has appropriately disclosed the details in its financial statements;
Comments
The
auditor have to comment on Intangible assets also under this clause. It was not
required in CARO 2016
The
auditor has to disclose, if there has been any revaluation, whether the revaluation
has been done by registered valuer and if the change in net value of the asset
is more than 10%, then the amount of change has to be informed here.
A
new reporting on benami cases has also been added.
Inventory [Clause 3 (ii)]
ii.
(a) whether physical verification of inventory
has been conducted at reasonable intervals by the management and whether, in the opinion
of the auditor, the coverage and procedure of such verification by the management is appropriate; whether any
discrepancies of 10% or more in the aggregate for each class of inventory were
noticed and if so, whether they have been properly dealt with in the books of account;
(b)
whether during any
point of time of the year, the company has been sanctioned working
capital limits in excess of five crore
rupees, in aggregate, from banks or financial
institutions on the basis of security of current assets; whether 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;
Comments
CARO
2016 used to ask reporting for material discrepancies, but CARO 2020 has
defined materiality to be 10% for each class of inventory.
Secondly
a new reporting of compliance with working capital is required for company having
sanctioned limit in excess of Rs five crore form banks or financial institutions.
The auditor is required to report about the quarterly disclosure made by
company to bank. This adds to extra reporting by auditors who can be held liable
if there is a gap.
Loan given by Company [Clause 3 (iii)]
iii.
whether during the
year the company has made investments in, provided any guarantee or security or
granted any loans or advances in the nature of loans, secured or unsecured, to
companies, firms, Limited Liability Partnerships or any other parties, if so,-
(a)
whether during the
year the company has provided loans or provided advances in the nature
of loans, or stood guarantee, or provided security
to any other entity [not applicable to companies whose principal
business is to give loans], if so, indicate-
(A) the
aggregate amount during the year, and balance outstanding at the balance sheet
date with respect to such loans or advances and guarantees or security to
subsidiaries, joint ventures and associates;
(B) the
aggregate amount during the year, and balance outstanding at the balance sheet
date with respect to such loans or advances and guarantees or security to
parties other than subsidiaries, joint ventures
and associates;
(b) whether
the investments made, guarantees provided, security given and the terms and conditions of the grant
of all loans and advances in the nature of loans and guarantees provided are
not prejudicial to the company’s interest;
(c)
in
respect of loans and advances in the nature of loans, whether the schedule of
repayment of principal and payment of interest has been stipulated and whether
the repayments or receipts are regular;
(d)
if the
amount is overdue, state the total amount overdue for more than ninety days,
and whether reasonable steps have been taken by the company for recovery of the principal and interest;
(e)
whether
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
overdues of existing loans given to the same parties, if so, 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 [not
applicable to companies whose principal business is to give loans];
(f)
whether
the company has granted any loans or advances in the nature of loans either
repayable on demand or without specifying any terms or period of repayment, if so, specify
the aggregate amount,
percentage thereof to the total loans granted, aggregate amount of loans granted to Promoters,
related parties as defined in clause (76) of
section 2 of the Companies Act, 2013;
Comments
This paragraph is a major change in CARO 2020, earlier the
reporting was only of loan given to parties covered in Section 189 of Companies
Act, 2013, but the clause under CARO 2020 covers all loan granted by the
company.
If the loan has been granted, the aggregate amount during the year
has to be reported along with balances at balance sheet date, moreover, the loan
given to Subsidiary, Associates and joint ventures has to be reported separately
and to other separately.
The auditor is also required to report that if any new loan has
been given to settle old loan or there has been extension in existing loan, the
amount and % age of such loan to total loan has to be reported. This clause
will be an issue to many corporates and detailed reporting will be seen in
upcoming audit reports.
If there any is any loan repayable on demand or without any
terms and condition, then same should be disclosed separately with aggregate
amount.
Loan to director and investment by the company [Clause 3 (iv)]
iv.
in
respect of loans, investments, guarantees, and security, whether provisions of
sections 185 and 186 of the Companies Act have been complied with, if not,
provide the details thereof;
Comments
This clause is same as CARO 2016
Deposits [Clause 3 (v)]
v.
in
respect of deposits accepted by the company or amounts which are deemed to be
deposits, whether the directives issued by the Reserve Bank of India and the
provisions of sections 73 to 76 or any other relevant provisions of the
Companies Act and the rules made thereunder, where applicable, have been
complied with, if not, the nature of such
contraventions be stated; if an order has been passed by Company Law Board or
National Company Law Tribunal or Reserve Bank of India or any court or any
other tribunal, whether the same has been complied with or not;
Comments
This clause is same as CARO 2016
Cost Records [Clause 3 (vi)]
vi.
whether maintenance
of cost records has been specified by the Central Government under sub-section (1) of section
148 of the Companies Act and
whether such accounts and records have been so made and maintained;
Comments
This clause is same as CARO 2016
Statutory Dues [Clause 3 (vii)]
vii.
(a) whether
the company is regular in depositing undisputed statutory dues
including Goods and Services Tax, provident
fund, employees' state insurance, income-tax, sales-tax, service tax, duty of customs,
duty of excise, value added tax, cess and any other statutory dues to the
appropriate authorities and if not, the extent of the arrears of outstanding
statutory dues as on the last day of the financial year concerned for a period of more than six months from the
date they became payable, shall be indicated;
(b) where statutory dues referred to in sub-clause (a) have not
been deposited on account of any dispute, then the amounts involved and the
forum where dispute is pending shall be mentioned (a mere representation to the
concerned Department shall not be treated as a dispute);
Comments
This clause is same as CARO 2016 except the goods and services
tax has been added.
Disclosure under Income Tax [Clause 3
(viii)]
viii.
whether
any transactions not recorded in the books of account have been surrendered or
disclosed as income during the year in the tax
assessments under the Income Tax
Act, 1961 (43 of 1961), if so, whether the previously unrecorded income has
been properly recorded in the books of account during the year;
Comments
This is a new clause for reporting in various scheme like
Voluntary Disclosure Scheme, Viwad Se Viswas etc. The accounting of disclosures
made has to be reported.
Repayment of Loan [Clause 3 (ix)]
ix.
(a)
whether the company has defaulted in repayment of loans or other borrowings or
in the payment of interest thereon to any lender, if yes, the period and the
amount of default to be reported as per the format below:-
Nature of borrowing,
including debt
securities
|
Name of
lender*
|
Amount not paid on due date
|
Whether principal or interest
|
No. of days delay or unpaid
|
Remarks, if any
|
*lender wise details to be provided in case
of
defaults to
|
banks,
financial
institutions
and Government.
|
(b)
whether
the company is a declared
wilful defaulter by any bank or financial institution or other lender;
(c)
whether
term loans were applied for the purpose for which the loans were obtained; if
not, the amount of loan so diverted and the purpose for which it is used may be reported;
(d)
whether funds raised on
short term basis have been utilised for long term
purposes, if yes, the nature and amount to be
indicated;
(e) whether
the company has taken any funds from any entity or person on account of or to
meet the obligations of its subsidiaries, associates or joint ventures, if so,
details thereof with nature of such transactions and the amount in each case;
(f) whether
the company has raised loans during the year on the pledge of securities held in its subsidiaries,
joint ventures or associate companies, if so, give details thereof and also
report if the company has defaulted in repayment of such loans raised;
Comments
This is again detailed reporting required in CARO 2020. In CARO 2016 it was limited to default in
repayment of loans and borrowing to a financial institution, banks, government
or dues to debenture holders but in CARO 2020 the reporting is about default in
payment of loan or interest to any lenders and the reporting has to be done
lender wise in given format.
The Auditor have to Report whether all loans has been used for
the purpose for which it was taken, term loan and Short-Term Loan, it brings
back earlier CARO paragraphs
The Auditor also has to make additional reporting of loan taken to
meet obligation of subsidiaries, associates and joint ventures, as well as loan
taken by pledge of shares of Subsidiary, associates or joint venture.
Utilisation of IPO and further public
offer [Clause 3 (x)]
x.
(a) whether moneys
raised by way of initial public offer or further public offer (including debt
instruments) during the year were applied for the purposes for which those are raised,
if not, the details together
with delays or default and
subsequent rectification, if any, as
may be applicable, be reported;
(b) whether the company has made any preferential allotment or
private placement of shares or convertible debentures (fully, partially or optionally
convertible) during the year and if so, whether the requirements of section
42 and section 62 of the Companies Act, 2013 have been complied with and the funds raised
have been used for the purposes for which the funds
were raised, if not, provide details in respect of amount involved and nature
of non-compliance;
Comments
This clause is same as CARO 2016 and preferential allotment
clause (xiv)of CARO 2016 has been added here.
Reporting of Fraud
[Clause 3 (xi)]
xi.
(a)
whether any fraud by the company or any fraud on the company has been noticed
or reported during
the year, if yes, the nature
and the amount involved is to be indicated;
(b)
whether any report
under sub-section (12) of section 143 of the Companies Act has been filed by the auditors
in Form ADT-4 as prescribed under rule 13 of Companies
(Audit and Auditors) Rules, 2014 with the Central Government;
(c) whether
the auditor has considered whistle-blower complaints, if any, received during
the year by the company;
Comments
This clause is same as CARO 2016 only para b and c are
additional, these are for compliance of Sec 143 and additional responsibility of
whistle blower complaints
Nidhi Company [Clause 3 (xii)]
xii.
(a) whether
the Nidhi Company
has complied with the Net Owned Funds to
Deposits in the ratio of 1: 20 to meet out the
liability;
(b) whether the Nidhi Company
is maintaining ten per cent. unencumbered
term deposits as specified in the Nidhi Rules, 2014 to meet out the liability;
(c) whether
there has been any default in payment of interest on deposits or repayment
thereof for any period and if so, the details
thereof;
This clause is
same as CARO 2016 only para C is additional
Related Party Transaction [Clause 3
(xiii)]
xiii.
whether all
transactions with the related parties are in compliance with sections 177 and
188 of Companies Act where applicable and the details have been disclosed in
the financial statements, etc., as required by the applicable accounting standards;
Comments
This clause is same as CARO 2016
Internal Audit [Clause 3
(xiv)]
xiv.
(a) whether the company has an internal audit
system commensurate with the size and nature of its business;
(b)
whether the reports of the Internal Auditors for the period under audit were
considered by the statutory auditor;
Comments
This clause has made a comeback, it was not there in CARO 2016. The
para b of the clause is new, it derives itself from Standards on Auditing where
using the work of Internal Auditors is discussed.
Non Cash Transaction
[Clause 3 (xv)]
xv.
whether the company
has entered into any non-cash transactions with directors or persons connected
with him and if so, whether the provisions of section 192 of Companies Act have
been complied with;
Comments
This
clause is same as CARO 2016 only para C is additional
Register under RBI Act 1934 [Clause 3
(xvi)]
xvi.
(a)
whether the company is required to be registered under section 45-IA of the Reserve Bank of India Act,
1934 (2 of 1934) and if so, whether the registration has been obtained;
(b) whether
the company has conducted any Non-Banking Financial or Housing Finance
activities without a valid Certificate of Registration (CoR) from the Reserve Bank of India as per the Reserve
Bank of India Act, 1934;
(c) 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;
(d) whether the Group has more than one CIC as part of the Group, if yes,
indicate the number of CICs which are part of the Group;
Comments
The
para a of this clause is same as CARO 2016. The para b to d are new. The auditor
is required to report on activities carried by the company of NBFC, HFC without
valid certificates. The Company is a CIC or the number of CIC in group. This
has been asked to be reported after recent issues in NBFC,
Cash Losses [Clause 3 (xvii)]
xvii. whether the company
has incurred cash losses in the financial year and in the immediately preceding financial year, if so, state the amount of cash losses;
Comments
This is new reporting
requirements of CARO 2020, calculation of cash losses to be done. This is
visible from Cash Flow but now separate reporting is also required.
Resignation of Auditors [Clause 3 (xviii)]
xviii.
whether there has
been any resignation of the statutory auditors during the year, if so, whether
the auditor has taken into consideration the issues, objections or concerns
raised by the outgoing auditors;
Comments
CARO 2020 takes auditor
resignation more seriously and after recent increase in numbers of resignation
and their timings it’s a welcome move, how the auditor has taken care of issues
of earlier auditor.
Capable to Meet
Liabilities [Clause 3 (xix)]
xix.
on the basis of the financial ratios, ageing and expected dates
of realisation of financial
assets and payment of financial liabilities, other information accompanying the
financial statements, the auditor’s knowledge of the Board of Directors and
management plans, whether the auditor is of the opinion that no material
uncertainty exists as on the date of the audit report that company is capable of meeting its liabilities existing
at the date of balance sheet as and when they fall due within a period
of one year from the balance sheet date;
Comments
CARO 2020 brings additional clause
on capability of company to meet its liability, its again in line with going
concern reporting which was made stringent by SA 570 lately, the above clause
give more clarity of cash flows and will give some tension to new companies and
its fund management. The auditors should take detail justification for above
and do a walkthrough.
Corporate Social Reporting [Clause 3 (xviii)]
xx.
(a) whether, in
respect of other than ongoing projects, the company has transferred unspent
amount to a Fund specified in Schedule VII to the Companies Act within a period
of six months of the expiry of the financial year in compliance with second
proviso to sub-section (5) of section 135 of the said Act;
(b) whether
any amount remaining unspent under sub-section (5) of section 135 of the
Companies Act, pursuant to any ongoing project, has been transferred to special
account in compliance with the provision of sub- section (6) of section 135 of
the said Act;
Comments
The
Reporting about CSR was missing and now its brought in by CARO 2020. This clause
is again an issue as some companies were not taking CSR in true sense and added
responsibility has been given to auditor.
Justification [Clause 3 (xviii)]
xxi. whether there have
been any qualifications or adverse remarks by the respective auditors in the Companies (Auditor's Report) Order (CARO) reports of the companies included in the consolidated financial
statements, if yes, indicate the details of the companies and the
paragraph numbers of the CARO report containing the qualifications or adverse remarks.
Comments
The
auditor have to give proper reasoning for qualification or adverse remarks in
audit report. A new paragraph introduced
by CARO 2020
Reasons to be stated
for unfavourable or qualified answers.-
(1)
Where,
in the auditor's report, the answer to any of the questions referred to in
paragraph 3 is unfavourable or qualified, the auditor's report
shall also state the basis for such unfavourable or qualified answer, as
the case may be.
(2)
Where the auditor is unable
to express any opinion on any specified matter, his report shall indicate such
fact together with reasons as to why it is not possible for him to give his opinion
on same
Comments
The
above two para again increase the responsibility of the auditor in respect to
cases where auditor is not able to express any opinion on any matter or has to
give detail reason for unfavourable or qualified comments on any of the para
stated above.