The Ministry of Corporate Affairs on February 25, 2020, introduced a new set of Companies (Auditor’s Report) Order 2020. The CARO 2020, demands more disclosures and information. The said Order is issued in supersession of the Companies (Auditor’s Report) Order 2016 and shall be applicable to the financial years commencing on or after April 01, 2021.
Applicability of CARO 2020
It shall apply to every company including a foreign company as defined under Section 2(42) of the Companies Act, 2013, except:
A Banking Company as defined in clause (c) of Section 5 of the Banking Regulations Act, 1949
An Insurance company as defined under the Insurance Act, 1938
Section 8 company
One Person Company
Small Company as defined under clause (85) of Section 2 of Companies Act, 2013
A private limited company not being holding or subsidiary of a public company
Having a paid-up share capital and reserves not more than Rs. 1 crore as on the date of the Balance sheet; and
Whose total borrowings from any bank or financial institution does not exceed Rs. 1 crore at any point during the financial year; and
Which does not have total revenue exceeding Rs. 10 crores during the financial year as per the financial statement. (revenue includes revenue from a discontinued operation)
So far applicability is concerned, there is no change in the applicability criteria. The CARO 2020 is not applicable to the auditor’s report on consolidated financial statements except clause (xxi) of paragraph 3, which states that:
“Whether there have been any qualifications or adverse remarks by the respective auditors in the 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.”
The CARO 2020 makes mandatory to the principal auditor to report qualifications or adverse remarks if any, raised by the auditors of the companies whose financial statements are considered while consolidation. The principal auditor should include in his report, details of such entities and paragraph number of CARO report containing such qualifications or adverse remarks.
What matters are included in CARO 2020?
The MCA order on CARO 2020 species details on matters to be included in the report, to view click here
Paragraph (i) - Reporting on Property, Plant and Equipment and Intangible Assets
Under CARO 2020, reporting on properties of the company is elaborative. The assets are categorised as Plant, Machinery, Equipment and other Intangible Assets. The Statutory Auditor is required to verify
- Whether the company is maintaining proper records, including quantitative details and the situation of the Plant, Machinery and Equipment.
- Whether the company is maintaining proper records of intangible assets of the company.
- Whether physical verification of plant, machinery and equipment is been done by the management, if yes, did any material discrepancies were noticed while such verifications, and whether books of accounts show accurate details on the property.
- Whether title deeds of all the immovable properties disclosed in the financial statements of the company are held in the name of the company. If not, then details on such property should be provided as under:
- Whether the company has revalued Property, plant and equipment or intangible assets during the year. If yes, then in the report, the Auditor is required to specify the following details:
a. Whether such revaluation is based on the valuation done by the Registered Valuer
b. Specify the amount of change, if such change is 10% or more in aggregate of the net carrying value of each class of Property, Plant and Equipment or intangible assets.
- whether any proceedings have been initiated or are pending against the company for holding any benami property under the Benami Transactions (Prohibition) Act, 1988, if yes, then verify whether the company has appropriately disclosed the details in its financial statements.
Overall reporting on properties and assets is very vast and time-consuming. One must plan well in advance regarding the time required to identify and verify abovementioned details. The detailed list of company assets, properties held by the company in its own name and in the name of any other person, proceedings for holding benami properties, if any etc must be checked thoroughly. Preparation of checklist on abovementioned matters will be an added bonus.
Paragraph (ii) - Report on matters related to inventory and working capital limits, if applicable.
Paragraph (ii) is divided into two parts i.e. (a) Report on Inventory and (b) Report on working capital facilities availed by the company if any.
Report on Inventory: the report should state,
- whether the physical verification of the inventory is conducted by the management at regular intervals;
- if yes then in the opinion of the auditor, the coverage and the procedure followed for such verification is appropriate;
- any discrepancies of 10% or more in the aggregate for each class of inventory were noticed, then whether they have been properly dealt in the books of accounts.
Report on working capital facilities availed by the company if any: under this paragraph, the auditor is required to state:
- whether during the year at any point of time, the company has been sanctioned working capital limits, which in the aggregate are in excess of five crore rupees, accepted 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, then details must be given.
Paragraph (iii) - Details on Investment by company, guarantees and security provided or loans and advances granted to other companies, firms, related parties etc.
The paragraph (iii) has 6 sections. importantly, the auditor under this point is required to report whether:
- The company has made investments in any other company;
- Provided any guarantee or security or has granted any loans or advances in the nature of loans, secured or unsecured, to companies, firms, Limited Liability Partnerships or any other parties
In case the answer to the abovementioned point is yes, then enumerate whether the company has provided loans or has provided advances in the nature of loans, or stood guarantee, or provided security to any other entity. (paragraph (iii)(a)) [not applicable to companies whose principal business is to give loans]
The aggregate amount during the financial year and balance outstanding as at balance sheet date with respect to such loans or advances and guarantees or security to subsidiaries, joint ventures and associates should be provided in paragraph (iii)(a)(A) and to parties other than subsidiaries, joint ventures and associates is required to be provided in paragraph (iii)(a)(B).
The nature and impact of investments made, guarantees provided, loans granted are analysed and reported in point (b) to (f) of paragraph (iii) of CARO report, the details include:
- Whether such transactions are prejudicial to the interest of the company;
- In case loans and advances, whether the repayment schedule for payment of principal and interest is provided, and whether such payments are regular;
- 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;
- 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
- 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, the aggregate amount of loans granted to Promoters, related parties as defined in clause (76) of section 2 of the Companies Act, 2013 [not applicable to companies whose principal business is to give loans]
Paragraph (iv): Compliance under Section 185 and Section 186 of the Companies Act, 2013
Whether the company has complied with the provisions of section 185 and 186 of the Companies Act, 2013 in respect of loans, investments, guarantees, and security. If not then details of such non-compliance should be mentioned under this paragraph.
Paragraph (v): Compliance under Sections 73 to 76 and any other applicable provisions of the Companies Act, 2013 with respect to Deposits
If the company has accepted deposits or the amounts which are deemed to be the deposits, then whether the company has complied with 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.
If the company has not complied with the abovementioned provisions, then specify nature of such contraventions and if any order is passed by Company Law Board or National Company Law Tribunal or Reserve Bank of India or any other court or Tribunal in this regard, then specify details of such order passed and whether the company has complied with the order.
Paragraph (vi): Maintenance of Cost Records as required under Section 148 (1) of the Companies Act, 2013
The paragraph requires reporting whether Section 148(1) of the Companies Act, 2013 is applicable to the company, if so, whether the company is maintaining proper accounts and records as required under Section 148 (1).
Paragraph (vii): Compliances related to Statutory dues
Under paragraph (vii)(a) report whether the company is regular in the deposit of statutory dues, including Goods and Services Tax, provident fund, employees’ state insurance, income-tax, sales-tax, service tax, the duty of customs, the duty of excise, value-added tax, cess and any other statutory dues to the appropriate authorities. If the company is not regular in the deposit of statutory dues, 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.
If the pending statutory dues as mentioned in (a) above are not deposited due to any dispute, then the amounts involved and the forum where the dispute is pending shall be mentioned. It is important to note that mere representation to the concerned Department shall not be treated as a dispute) - Paragraph (vii)(b).
Paragraph (viii): Income disclosed under Income Tax return but not recorded in the Books of Accounts
The Auditor under this paragraph is required to mention details of transactions if any, not recorded in the books of account but 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.
Paragraph (ix): Default in repayment of loans or other borrowings or interest thereon
Paragraph (ix) requires to report the following:
- 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
*lender wise details to be provided in case of defaults to banks, financial institutions and Government.
- whether the company is a declared wilful defaulter by any bank or financial institution or other lenders;
- 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;
- whether funds raised on short term basis have been utilised for long term purposes, if yes, nature and amount to be indicated;
- 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;
- 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;
Paragraph (x): Money raised via IPO, preferential allotment, private placement and the purpose for which such amount utilised
Part (a) of paragraph (x) deals with the Initial Public offer made by the company during the year if any including debt securities. Whether money raised during the year via IPO are utilised for the purpose for which those are raised. If not, then the details together with delays or default and subsequent rectification, if any, as may be applicable, should be reported.
Under Part (b) of paragraph (x) whether the company has made any preferential allotment or private placement of shares or convertible debentures (fully, partially or optionally convertible) during the year. If yes, then compliances and non-compliances under Section 42 and Section 62 and other rules and regulations as are applicable under the Companies Act, 2013 must be reported. Whether funds raised via preferential allotment or private placement are utilised for the purpose they were raised, if not then details in respect of the amount involved and nature of non-compliance should be reported.
Paragraph (xi): Frauds, actions on whistle-blower by the auditor and further reporting to Central Government
- whether any fraud by the company or any fraud on the company has been noticed or reported during the year, if yes, nature and the amount involved is to be indicated;
- 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;
- whether the auditor has considered whistle-blower complaints, if any, received during the year by the company;
Paragraph (xi): Compliances with respect to Nidhi Companies
- whether the Nidhi Company has complied with the Net Owned Funds to Deposits in the ratio of 1: 20 to meet out the liability;
- whether the Nidhi Company is maintaining ten per cent. unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability;
- whether there has been any default in payment of interest on deposits or repayment thereof for any period and if so, the details thereof.
Paragraph (xiii**): Related Party Transactions and related compliances**
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.
The Auditor is required to check the resolutions passed by the Board and Members for sanctioning the limits under Section 188 and the transaction amount is within such limits sanctioned.
Paragraph (xiv): Internal Audit System
Whether the company has an internal audit system commensurate with the size and nature of its business and whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor.
Paragraph (xv): Non-cash Transactions
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.
Paragraph (xvi): Section 45-IA of the Reserve Bank of India Act, 1934 , CIC
- 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;
- 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;
- 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;
- 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
Paragraph (xvii): Cash Losses
Whether the company has incurred cash losses in the financial year and in the immediately preceding financial year, if so, state the amount of such cash losses
Paragraph (xviii): Resignation of Statutory Auditors and related matters
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.
Paragraph (xix): Material uncertainty
Under this paragraph, the auditor is required to present his opinion that no material uncertainty exists on the date of the report and the company is capable of meeting its liabilities existing at the date of the balance sheet as and when they fall due within a period of one year from the balance sheet date. Such opinion shall be based on the following information:
- 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.
Paragraph (xx): Corporate Social Responsibility and Funds transferred if any to Fund established under Chapter VII of the Companies Act, 2013
- Whether the company has transferred the unspent amount in respect any projects other than ongoing projects, 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 the second proviso to sub-section (5) of section 135 of the said Act;
- 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 a special account in compliance with the provision of sub-section (6) of section 135 of the said Act;
Fund established under Schedule VII means, contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women.
Paragraph (xi): Adverse remarks or qualifications in the Companies (Auditor’s Report) Order (CARO) reports of the companies, included in the consolidated financial statements
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.
If consolidation is applicable to the company, then the auditor is required to check the CARO reports of entities included while consolidation, and if their CARO report has any adverse remarks or qualifications, then details of such entities and paragraph numbers of the CARO report containing the qualifications or adverse remarks shall be indicated in the report.
Reasons for unfavourable or qualified answers should be stated:
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
Where the auditor is unable to express any opinion on any specified matter, his report shall indicate such fact together with the reasons as to why it is not possible for him to give his opinion on the same.
Separate generation of UDIN for CARO Report?
CARO is part of Auditor’s Report and generation of separate UDIN is not required. The UDIN number generated for the main Auditor’s Report should be mentioned for CARO Report.
CARO 2020 comes with vast reporting requirements, covering report on every aspect of the company and casts an enormous responsibility on the Auditors. Auditors need to be more cautious, sceptical and accurate while discharging his/her duties.
Amendment to the applicability of CARO 2020
Ministry of Corporate Affairs vide Order dated 17th December 2020 has extended the applicability provisions of CARO 2020 to the companies from 01 April 2020 to 01 April 2021.
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