Dear Professional Colleagues and Friends, well in advance of preparing Audit Plan and Audit Programme for Statutory Audit for the F.Y. 2019-20, MCA has come up CARO, 2020. Thus, Auditors and respective stakeholders, take a note of changes brought in by MCA in CARO Reporting and also the Management and those charged with Governance, be prepared with the changes therein for smooth functioning of Statutory Audit of FY 2019-20.
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.
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, in consultation with National Financial Reporting Authority constitution under Section 132, 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 applicable to every company including a foreign company as defined in Section 2(42) of the Companies Act 2013.
The following classes of companies are outside the purview of the CARO, 2020
(a) Banking company as defined under Section 5 (c) of the Banking Regulation Act, 1949.
(b) Insurance company as defined under the Insurance Act 1938.
(c) Company licensed to operate under Section 8 of the Companies Act 2013 (companies registered with charitable object).
(d) 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).
(e) 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:
Paid up share capital of which does not exceed INR 50 lacs or such higher amount as may be prescribed which shall not be more than INR 5 crore, and Turnover of which as per its last profit and loss account does not exceed INR 2 crore or such higher amount as may be prescribed which shall not be more than INR 20 crore.
(2) The following company shall not qualify as a small company:
a. Holding Company or a Subsidiary Company
b. Company registered under Section 8 of the Act
c. Company of Body corporate government by any special Act
(f) 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 INR 1 crore as on the balance sheet date, and
(3) A private company which does not have total borrowing exceeding INR 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 INR 10 crore during the financial year. (Such revenue means revenue as disclosed in scheduled III to the Companies Act, 2013 and includes revenue from discontinuing operation)
A comparative view between CARO 2016 and CARO 2020:
| CARO 2016 | CARO, 2020 | Remarks |
| Fixed Assets | ‘Property, Plant and Equipment’ and ‘Intangible Assets’ | Retained with some changes |
| Inventory | Inventory | Retained with some changes |
| Loan given by Company | Investment made, provided guarantee or security or granted Loans or advances in the nature of Loans by company | Retained with some changes |
| Loan to director and investment by the company | Loan to director and investment by the company | Retained, no changes |
| Deposits | Deposits or Deemed Deposits | Retained with some changes |
| Cost Records | Cost Records | Retained, no changes |
| Statutory Dues | Statutory Dues | Retained, no changes (GST included) |
| – | Unrecorded Income | Inserted |
| Repayment of Loans | Repayment of Loans | Retained with some changes |
| Utilisation of IPO and Further Public Offer | Utilisation of IPO, Further Public Offer, Preferential Issue, Private Placement | Retained, no changes (CARO 2016 clause ix and xiv clubbed in CARO 2020 clause x) |
| Reporting Fraud | Reporting Fraud | Retained with some changes |
| Managerial Remuneration | – | Deleted |
| Nidhi Company | Nidhi Company | Retained with some changes |
| Related Party Transactions | Related Party Transactions | Retained, no changes |
| Preferential Issue, Private Placement | – | (CARO 2016 clause ix and xiv clubbed in CARO 2020 clause x) |
| – | Internal Audit Systems | Inserted |
| Non Cash Transactions | Non Cash Transactions | Retained, no changes |
| Register under RBI Act 1934, (NBFC) | Register under RBI Act, 1934, (NBFC) | Retained with some changes |
| – | Cash Losses | Inserted |
| – | Resignation of Statutory Auditors | Inserted |
| – | Financial Ratios | Inserted |
| – | Transfer of Unspent Fund | Inserted |
| – | Qualification in CARO by Group Auditors of the companies included in the CFS | Inserted |
Matters included in CARO 2020 are discussed below:
Note: Changes in CARO 2020 as compared to CARO 2016 are being underlined herein
[Clause 3(i)] ‘Property, Plant and Equipment’ and ‘Intangible Assets’
(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 recordsshowing 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;
[Clause 3(ii)] Inventory
(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;
[Clause 3(iii)] Investment made, provided guarantee or security or granted Loans or advances in the nature of Loans by company
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;
[Clause 3(iv)] Loan to director and investment by the company
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;
[Clause 3(v)] Deposits or Deemed Deposits
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;
[Clause 3(vi)] Cost Records
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;
[Clause 3(vii)] Statutory Dues
(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);
[Clause 3(viii)] Unrecorded Income
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;
[Clause 3(ix)] Repayment of Loan
(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;
[Clause 3(x)] Utilisation of IPO, Further Public Offer, Private Placement and Preferential issues
(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;
[Clause 3(xi)] Reporting of Fraud
(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;
[Clause 3(xii)] Nidhi Company
(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;
[Clause 3(xiii)] Related Party Transactions
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;
[Clause 3(xiv)] Internal Audit Systems
(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;
[Clause 3(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;
[Clause 3(xvi)] Register under RBI Act 1934
(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;
[Clause 3(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 cash losses;
[Clause 3(xviii)] Resignation of Statutory Auditors
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;
[Clause 3(xix)] Financial Ratios
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 theaudit 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;
[Clause 3(xx)] Transfer of Unspent Fund
(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;
[Clause 3xxi)] Qualification in CARO by Group Auditors of the companies included in the CFS
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.
Reason to be stated in Auditor’s report for unfavourable or qualified answers:
In the Auditor’s report, the answer to any of the clauses in CARO,2020 is unfavourable or qualified, the auditors report shall also state the basis for such unfavourable or qualified answer, as the case may be. Also, in case 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.
Disclaimer: The Contents of the document are solely for information purpose. It does not constitute professional advice or a formal recommendation. Due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Comments on misinterpretation and mistakes are wholeheartedly invited.
Author – CA Chelladurai M., a practicing Chartered Accountant from Thane, Mumbai and can be reached at Email : durai_123@hotmail.com and Phone : 9892697493
CA Chelladurai M., has more than 8 years of professional experience in taxation, auditing, accounting and consulting profession.
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