Companies (Auditor’s Report) Order, 2020(CARO,2020)

Overview

The Ministry of Corporate Affairs (MCA) has announced a new format of statutory audits of companies. The MCA has notified Companies (Auditor’s Report) Order, 2020 on 25 February 2020 (CARO 2020). The order (CARO 2020) replaces the earlier order under Companies (Auditor’s Report) Order, 2016. CARO 2020 is a new format for issue of audit reports in case of statutory audits of companies under Companies Act, 2013. CARO 2020 has included additional reporting requirements after consultations with the National Financial Reporting Authority (NFRA). NFRA is an independent regulatory body for regulating the audit and accounting profession in India. The aim of CARO 2020 is to enhance the overall quality of reporting by the company auditors.

Applicability of CARO 2020

The following classes of companies are outside the purview of the CARO 2020:

1. Banking company as defined under Section 5 (c) of the Banking Regulation Act, 1949.
2. Insurance company as defined under the Insurance Act 1938.
3. Company licensed to operate under Section 8 of the Companies Act 2013 (companies registered with charitable object).
4. A one-person company (OPC) as defined under clause (62) of Section 2 of Companies Act 2013 (OPC means a company which has only one person as a member).
5. A small company under Section 2 (85) of the Companies Act, 2013.
   1. As per sec 2(85) of Companies Act 2013 small company means a company, other than a public company:
      1. Paid up share capital(PUSC) of which does not exceed ` 50 lacs or such higher amount as may be prescribed which shall not be more than ` 5 crore, and
      2. Turnover of which as per its last profit and loss account does not exceed ` 2 crore or such higher amount as may be prescribed which shall not be more than ` 20 crore.
   2. The following company shall not qualify as a small company:
      1. A holding company or a subsidiary company.
      2. A company registered under Section 8 of the Act.
6. A company or body corporate governed by any special act.
7. The auditor of following type of Private Companies are not required to comment on the matter prescribed under CARO 2020:
   1. A private company which is not holding or subsidiary company of a public company, and
   2. A private company having a paid up capital and reserve and surplus not more than Rs. 1 crore as on the balance sheet date, and
   3. A private company which does not have total borrowing exceeding Rs. 1 crore from any bank and financial institution at any point of time during the financial year, and
   4. A private company which does not have total revenue exceeding Rs. 10 crore during the financial year.

Note: Such revenue means revenue as disclosed in scheduled III to the Companies Act, 2013 and includes revenue from discontinuing operations.

Detailed Reporting under each clause of CARO,2020

Para 3(i): Details of Tangible and Intangible assets

• Whether the records maintained by the company display the complete particulars on the details, quantity and situation of Property, Plant and Equipment and intangible assets.
• Whether the management has carried out physical verification of the Property, Plant and Equipment at different intervals reasonable with the size of the company.
• Whether the material discrepancies, if any noticed on physical verification have been accounted for in the books of accounts.
• Whether the title deeds pertaining to the immovable properties (except properties which are leased by the company with duly executed lease agreements in the company’s favour) disclosed in the financial statements are held in the name of the company.
• If the title deeds are not held in the name of the company, these details should be provided.

Description  of a property

Gross carrying value

Held in the name of

Whether promoter, director or their relative or employee

Period held: indicate a range, where appropriate

Reason for not being held in the name of company

• Whether a revaluation has been done by the company of its property, plant and equipment (including the 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.
• In case of a change in values upon revaluation, specify the amount of change, if the change is 10% or more in the 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 (45 of 1988) and rules made thereunder. If yes, whether the company has appropriately disclosed the details in its financial statements.

Para 3(ii): Details of Inventory and Working Capital

• Whether the management has carried out physical verification of inventory at reasonable intervals, 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 in the aggregate for each class of inventory were noticed and if so, whether they have been properly dealt with in the books of accounts.
• Has the company, during any point of time of the year, 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.
• Are the quarterly returns or statements filed by the company with financial institutions or banks in agreement with the books of account of the Company. In case of non-agreement, it is to provide details of such non-agreement.

Para 3(iii): Details of Investments, any guarantee or security or advances or loans given

If the company has during the year made any investments in, given any guarantee or security or granted any loans or advances which are characterised as loans, unsecured or secured, to LLPs, firms or companies or any other parties, if so –

• whether during the year the company has provided advances or provided loans which are characterised as loans, or given guarantee, or given security to any other entity (other than a company carrying on a business of providing loans), the below information should be furnished:
  • The aggregate amount given during the year, and the balances due as at the balance sheet date with respect to such loans or advances and guarantees or security to subsidiaries, joint ventures and associates.
  • The aggregate amount during the year, and the balance due on the balance sheet date of such loans or advances and guarantees or security to parties other than associates, subsidiaries and joint ventures.
• In the case of investments made, guarantee or security provided, loans or advances granted (as mentioned above), the report should indicate:
• 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.
• 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.
• 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.
• In case any loan or advance in the nature of a loan is given which was due for repayment during the year and has been renewed or extended or fresh loans granted to settle the overdue of existing loans given to the same parties. If yes, specify the total amount of such dues renewed or extended or settled by fresh loans and the percentage (proportion) of the total to the total loans or advances granted during the year (other than companies whose principal business is to grant loans).
• In case the company has given any loans or advances in the nature of loans either repayable on demand or without specification of any terms or period of repayment. If so, to specify the total amount, percentage thereof to the total loans granted, the total amount of loans granted to promoters, related parties as defined section 2(76) of the Companies Act, 2013.

Para 3(iv): Compliance in respect of a loan to directors

If the company has given any loans to directors or any other person in whom the director is interested, or made any investments, whether the company has made compliance with the provisions governing such loans, investments and guarantees, i.e. Section 185 and Section 186 of the Companies Act, 2013.

Para 3(v): Compliance in respect of Deposits Accepted

In case the company has accepted deposits or deemed deposits, whether the company has followed the directives of the RBI as under:

• Compliance with the provisions prescribed for accepting deposits under section 73 to 76 of the Companies Act, 2013.
• The nature of contraventions, if the above provisions are not followed.
• Compliance with any order passed by Company Law Board or National Company Law Tribunal or Reserve Bank of India or any other court or tribunal.

Para 3(vi): Maintenance of Costing Records

In case the company is required to maintain cost records, as specified by CG under section 148(1) of Companies Act, whether the accounts and records have been maintained during the year and non-compliance if any.

Para 3(vii): Deposit of Statutory Liabilities

Whether the company has:

• Regularly deposited undisputed statutory dues, including GST, EPF, ESI, etc to the appropriate authorities.
• Are any such statutory dues pending for a period more than 6 months as on the balance sheet date, if yes, the extent of such arrears should be indicated.
• In case of any disputed statutory dues, the amount of such dues, and the forum before whom the dues are litigated shall be stated. (a mere representation to the concerned Department shall not be treated as a dispute)

Para 3(viii): Unrecorded Income

• Whether any transactions which are not recorded in the accounts have been surrendered or disclosed as income during the year in tax assessments under the Income Tax Act, 1961 . The details of such income tax assessments should be disclosed.
• Whether such undisclosed income has been recorded in the accounts during the year.

Para 3(ix): Default in Repayment of Borrowings

• In case the company has made any default in the repayment of loans or other borrowings or in the payment of interest thereon to banks, government, debenture-holders, etc. then the amount and period of default is to be reported as follows

Nature of borrowing including debt securities

Name of lender

Amount unpaid on the due date

Whether interest or principal

Number of days of delay or unpaid

Auditor’s remarks, if any

• Has the company been declared a wilful defaulter by any bank or financial institution or any other lender.
• Have term loans been used for the object for which they were obtained; in case they have not been, the amount of loan funds diverted and disclosure of the end use of such loans.
• Has the company used funds raised for a short term basis for long term purposes. The nature and the amount of such funds to be indicated.
• Has the company raised any money from any person or entity on the account of or to meet the obligations of its associates, subsidiaries or joint ventures. The details of the money raised with the description/nature of the transactions and the amounts in each case.
• Has the company raised any loans during the year by pledging securities held in their subsidiaries, joint ventures or associate companies. The details of such loans and also the default in the repayment of such loans.

Para 3(x): Funds raised and Utilisation

• 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;
• Has the company made any private placement or preferential allotment of shares or convertible debentures (fully, partially or optionally convertible) during the year, whether the same is in accordance with section 42 and section 62 of the Companies Act, 2013.
• Whether the funds raised, have been used for the purposes they were raised, if not, provide details of amount involved and the nature of non-compliance, if any.

Para 3(xi): Fraud and Whistle-blower Complaints

• 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
• 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
• In case of receipt of whistle-blower complaints, whether the complaints have been considered by the auditor.

Para 3(xii): Reporting on Nidhi Company

• 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

Para 3(xiii): Compliance on transactions with Related Parties

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

Para 3(xiv): Internal Audit System

• whether the company has an internal audit system commensurate with the size and nature of its business
• whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor

Para 3(xv): Non-cash transactions

In case the company has undertaken non-cash transactions with their directors or other persons connected to the directors, whether the provisions as laid down under secttion 192 are complied with.

Para 3(xvi): Registration under Section 45-IA of RBI Act, 1934

• Is the company required to be registered under the RBI Act and whether the company has obtained registration.
• Whether the company has carried on any Non-Banking Financial or Housing Finance activities (NBFC or HFC) without having a valid registration certificate from RBI.
• Is the company a Core Investment Company (CIC) under the RBI regulations and does it continue to fulfil the criteria of a CIC. In case the company is an exempted or unregistered CIC, does the company continue to fulfil the criteria for exemption.
• Does the group to which the company belongs have more than one CIC as part of it, then indicate the number of CICs which are in the group.

Para 3(xvii): Cash losses

Has the company incurred any cash losses in the financial year and the immediately preceding financial year, the amount of cash losses incurred should stated.

Para 3(xviii): Reporting on Auditor’s Resignation

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.

Para 3(xix): Material Uncertainty

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

Para 3(xx): Transfer to fund specified under Schedule VII of Companies Act, 2013

• With respect to obligations under Corporate Social Responsibility, whether the company has transferred the unspent amount to a Fund specified in Schedule VII to the Companies Act within a period of 6 months from the expiry of the financial year, in compliance with second proviso to sub-section (5) of section 135 of the said Act.
• Whether any amount which remains unspent has been transferred to a special account in compliance with the provision of sub­section (6) of section 135 of the said Act

Para 3(xxi): Qualifications or adverse auditor remarks in other group companies

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.

All the above-stated clauses are mandatory to be reported on. Also, the disclosures are to be given appropriately.