Ministry of Corporate Affairs (MCA) after consultation with National Financial Reporting Authority (NFRA) notified Companies (Auditor’s Report) Order (“CARO”) 2020 in suppression of CARO 2016. CARO 2020, in comparison of earlier CAROs, emphasis more on Proprietary Elements so that the users of Audit Reports will be well aware of Company’s business and activities.
This article will discuss out in detail the changes made in CARO 2020 and the impact that it will have on Statutory Audits of Financial Year 2019-20 and onwards.
PARAGRAPH 1: SHORT TITTLE, APPLICATIONS AND COMMENCEMENT
There is no change in Applicability or Exemption from applicability of CARO 2020 on Companies. In other words, those companies on which CARO 2016 applies, CARO 2020 will also be applicable.
However there is one change in respect of Audit Report of Consolidated Financial Statements. This change is discussed at the end of this article.
PARAGRAPH 2: AUDITOR’S REPORT TO INCLUDE MATTERS SPECIFIED IN PARA 3 & 4
Auditor’s Report on Financial Statements for the financial years commencing on or after the 1st April, 2019, shall contain the matters specified in paragraphs 3 and 4. In other words, CARO 2020 is applicable on Auditor’s Reports on Financial Statements of Year 2019-20 and subsequent financial years.
PARAGRAPH 3: MATTERS TO BE INCLUDED IN AUDITOR’S REPORT
CLAUSE (i): PROPERTY, PLANT & EQUIPMENT AND INTANGIBLE ASSETS
1. CARO 2016 require the Statutory Auditor (“the Auditor) to comment on whether company is maintaining proper records of Fixed Assets (i.e Property, Plant and Equipment or “PPE”). Now auditor is required to comment whether company is maintaining proper records of Intangible Assets as well.
2. CARO 2016 requires that if deeds of Immovable Properties is not held in the name the company then the Auditor is required to provide the details thereof. CARO 2020 prescribes the following format of providing the details of the same.
| 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 | |||||
3. Revaluation of Assets: CARO 2020 requires that if PPE or Intangible Assets has been Revalued during the year, then-
(a) Whether Revaluation is based on the valuation by a Registered Valuer (i.e. as per section 247 of the Companies Act); and
(b) Specify the amount of change, if the Revalued amount is 10% or more (Upward or Downward) of the net carrying value of each class of asset.
It’s pertinent to note that CARO 2020 does not mandates revaluation of PPE or Intangible Assets. It only requires that the auditor should state whether revaluation is based on valuation by a Registered Valuer and specify amount of change if it the change is more then 10% (upward or downward).
4. CARO 2020 requires that the Auditor should state whether any proceedings have been initiated or are pending against the company for holding any Benami property under the Benami Transactions (Prohibition) Act. If so, this fact has been appropriately disclosed in Notes to Accounts.
CLAUSE (ii): INVENTORY AND WORKING CAPITAL LOAN
1. CARO 2020 requires that the Auditor should state that the Coverage and Procedures of Physical Verification of Inventory is, in his opinion, is appropriate.
2. CARO 2020 requires that the if the discrepancies identified during the physical verification is in excess of 10% or more of each class of inventory, state whether the same has been properly deal with in the books of accounts. CARO 2016 does not specify the threshold limit of 10% and used the word “material discrepancies”.
3. CARO 2020 requires that –
- If Company has sanctioned Working Capital loan, in aggregate, from Banks or FIs in excess of Rs. 5 Crore at any point of time of the year,
- on the basis of security of current assets (like Hypothication of inventory)
- the Auditor will state that the Quarterly Returns / Statements filed by with such banks or FI are in agreement with the Books of accounts.
- If they are not in agreement, provide the details thereof.
It’s pertinent to note that the Rs. 5 crore threshold is in respect of all the working capital loans. For instance, if XYZ Ltd. had sanctioned Rs. 2.5 crore WC Loan from Bank A and Rs. 3.7 crore WC Loan from Bank B during the Financial Year 2019-20. Then in that case, the statutory auditor will ensure that the Quarterly Returns / Statements filed by with such banks or FI are in agreement with the Books of accounts. And if not, he will provide the details of the same.
CLAUSE (iii): LOANS, INVESTMENTS, GUARANTEES AND SECURITY
CARO 2020 extended the Scope and Reporting criteria of this clause. The auditor is required to report the information as discussed in succeeding paragraphs if 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.
Hence if Investment / Loan / Guarantee / Security has been provided to Any Party by the company during the year, reporting under this clause is necessary. This clause will significantly increase the work and reporting of the auditor.
The reporting under this clause if as follows-
1. The auditor shall state 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 statement is affirmative then the Auditor will report-
A. Loans or Advances and Guarantees or Security to subsidiaries, joint ventures and associates
| Aggregate Amount during the Year | Balance Outstanding at the Balance Sheet Date | |
| A. | ||
| B. | ||
| C. |
B. Loans or advances and guarantees or security to Other Parties
| Aggregate Amount during the Year | Balance Outstanding at the Balance Sheet Date | |
| A. | ||
| B. | ||
| C. |
2. The Auditor shall state 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.
3. The Auditor shall state 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.
4. If the amount is overdue, the Auditor shall state–
- The total amount overdue for more than 90 days, and
- Whether reasonable steps have been taken by the company for recovery of the principal and interest.
5. The auditor shall state 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 the statement is affirmative, the Auditor shall 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.
This clause is not applicable to such company whose principle business is to give loans.
6. Loan Repayable on Demand: The auditor shall state 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 such has been granted by the company, specify-
- The aggregate amount,
- Percentage thereof to the total loans granted,
- Aggregate amount of loans granted to Promoters, related parties as defined in section 2(76)
CLAUSE (iv): LOANS, INVESTMENT, GUARANTEES AND SECURITY TO RELATED PARTIES
CARO 2020 does not make any change in this clause.
CLAUSE (V): DEPOSITS BY COMPANIES
CARO 2020 does not make any change in the reporting requirements of this clause. However CARO 2020 altered its scope. Clause 3(v) of CARO 2016 reads as “In case, the company has accepted deposits, whether the……..or not?” Clause 3(v) of CARO 2020 reads as “In respect of deposits accepted by the company or amounts which are deemed to be deposits, whether the……… or not”.
Hence CARO 2020 extended the reporting under this clause to include Deemed Deposits as well. Section 2(31) read with Rule 2 of Companies (Acceptance of Deposits) Rules 2014 provides the definition of Deposits and also prescribes Deemed Deposits. The auditor is required to report in respect of Deemed Deposits as well in the same way he reports in respect of Deposits.
CLAUSE (vi): COST ACCOUNTING RECORDS
CARO 2020 does not make any change in this clause.
CLAUSE (vii): STATUTORY DUES
CARO 2020 does not make any change Sub-clause (a) of this clause. Further, CARO 2020 does not make any change in the reporting requirements of sub-clause (b). However CARO 2020 altered its scope.
Sub-clause (b) of CARO 2016 covers only Disputed Tax Dues (i.e. Dues of Income tax or Sales Tax or Service Tax or Customs or Excise dury or VAT). Sub-clause (b) of CARO 2020 covers ALL Statutory Dues. Hence now the Auditor is required to report in respect of Other Than Disputed Tax Dues as well.
CLAUSE (viii): PREVIOUSLY UNDISCLOSED INCOME
CARO 2020 requires that –
- Where any transactions is not recorded in the Books of Accounts,
- and the same have been surrendered or disclosed as income during the year in the Income Tax Assessments,
- then state whether the previously unrecorded income has been properly recorded in the Books during the year.
Usually Assesses doesn’t recognise Undisclosed Income in its Books of Accounts though the same has been offered to tax in Income Tax Assessment. This clause requires that the Auditor will state whether the Company had been recognised Undisclosed Income in its Books of accounts if the same has been disclosed in any Income Tax Assessment during the year. Hence users of Auditor’s Report will be aware of Undisclosed Incomes of the company.
CLAUSE (ix): LOANS AND BORROWINGS BY COMPANY
1. Sub-Clause (a): Default in Repayment
- The Auditor shall state whether the company has defaulted in repayment of loans or other borrowings or in the payment of interest thereon to any lender.
- If default made than report the period and the amount of default 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.
It’s pertinent to note that default of repayment of principle or interest amount to ANY lender is required to be reported by the Auditor.
2. Sub-clause (b): Wilful Defaulter: The Auditor shall state whether the company is a declared wilful defaulter by any bank or financial institution or other lender.
3. Sub-clause (c): Use of Terms Loans
- The Auditor shall state whether term loans were applied for the purpose for which the loans were obtained.
- If not applied for requisite purpose, the auditor shall report the amount of loan so diverted and the purpose for which it is used.
4. Sub-clause (d): Short Term Fund
- The Auditor shall state whether funds raised on short term basis have been utilised for long term purposes.
- If short term funds used for long term purposes, the auditor shall report the nature and amount to be indicated.
For instance, if Working Capital loan is used to purchase Fixed Assets then the Auditor is required to report that funds used for Fixed Assets and also report the Purchase price & other expenses incurred to purchase such fixed assets.
5. Sub-clause (e): Funds raised for Subsidiaries, Associates or Joint Ventures
- The auditor shall state 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 company had raised such funds, then auditor shall report the details thereof with nature of such transactions and the amount in each case.
For instance, If XYZ Ltd (the Holding Company) had taken of Rs. 5 crore to meet the Capex of its subsidiary, ABC Ltd. and give the amount as a loan to ABC Ltd. then the auditor of XYZ Ltd. will report this transaction in its CARO Report.
6. Sub-Clause (f): Funds raised on the Pledge of Securities held in its Subsidiaries, Joint Ventures or Associate
- The auditor shall state 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(X): MONEYS RAISED
CARO 2020 merges two clauses of CARO 2020 into one clause. CARO 2020 does not make any change while merging two clauses into one except one. The Auditor is require to report the same matters in respect of Convertible Debentures (fully, partially or optionally convertible) issues during the year as he required to report in respect of Preferential Allotment and Private Placement.
CLAUSE (XI): FRAUD
CARO 2020 inserts two sub-clauses in this clause. Sub-clause (a), as provided in CARO 2016 as well, requires that the Auditor should state whether any fraud by the company or any fraud on the company has been noticed or reported during the year. If notices, then report (a) The nature and (b) The amount involved in the fraud.
1. Sub-clause (b) requires that the Auditor should state whether any report under Section 143(12) has been filed by the Auditor in Form ADT-4 with the Central Government.
2. Sub-clause (c) requires that the auditor should state that whether he has considered whistle-blower complaints (if any) received during the year by the company.
It’s pertinent to note that Section 177 and SEBI (LODR) Regulations mandates Specified Companies to establish Vigil Mechanism to entertain complaints of Whistle Blowers. However Section 177 and SEBI (LODR) Regulations does not require that the Auditor consider complaints of Whistle Blowers. Now CARO 2020 mandates the Auditor to consider such complaints.
CLAUSE (xii): NIDHI COMPANY
CARO 2020 requires that the Auditor of the Nidhi Company should state whether there has been any default in payment of interest on deposits or repayment thereof for any period. If such default took place then the Auditor is required to provide details thereof.
CLAUSE (xiii): RELATED PARTIES TRANSACTIONS
CARO 2020 does not make any change in this clause.
CLAUSE (xiv): INTERNAL AUDIT SYSTEM
1. CARO 2020 requires the Auditor to state that whether the Company has an Internal Audit System commensurate with the size and nature of its business. Section 138 requires specified companies to appoint Internal Audit. Internal Audit system can be In-House or Outsourced.
2. Further the Auditor should state whether the reports of the Internal Auditors for the period under audit were considered by him.
CLAUSE (xv): BARTER TRANSACTION WITH DIRECTOR
CARO 2020 does not make any change in this clause.
CLAUSE (xvi): NON-BANKING FINANCE COMPANY
CARO 2016 require only that the auditor shall state whether the company is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934and if so, whether the registration has been obtained. CARO 2020 inserted 3 sub-clauses which provides as under-
1. Sub-clause (b): The Auditor will state 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.
2. Sub-clause (c): The auditor shall state whether the company is a Core Investment Company (CIC) as defined in the regulations made by the Reserve Bank of India.
If company is a CIC, 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.
3. Sub-Clause (d): The auditor shall state whether the Group has more than one CIC as part of the Group. If there is more than 1 CIC, the Auditor will report the number of CICs which are part of the Group.
CLAUSE (xvii): CASH LOSSES
CARO 2020 requires that the Auditor should state whether the company has incurred Cash Losses in the-
- Financial year and
- Immediately preceding financial year.
If Cash Losses has been incurred in the FY or preceding FY, the Auditor shall state the amount of cash losses.
Here Cash Looses means Negative Cash Flow in the Cash Flow Statement.
CLAUSE (xviii): RESIGNATION BY PREVIOUS AUDITOR
CARO 2020 requires that if there has been any resignation of the Statutory Auditors during the year, the Auditor should state whether he has taken into consideration the issues, objections or concerns raised by the outgoing auditors.
CLAUSE (xix): GOING CONCERN
CARO 2020 requires that –
- The Auditor, 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 he 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 1 year from the balance sheet date.
Auditor, under SA-570 “Going Concern”, is required to report whether material uncertainty exist and whether management’s going concern assumption is appropriate in the Auditor’s Report under a separate paragraph captioned “Going Concern”. CARO 2020 requires that, in addition to the Auditor’s report, the Auditor shall also comment on material uncertainty and going concern in the CARO report as well.
CLAUSE (xx): CORPORATE SOCIAL RESPONSIBILITIES
1. Other than Ongoing Projects: Sub-Clause (a) of this clause requires the Auditor to state 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 6 months of the expiry of the financial year in compliance with second proviso to section 135(5) of the said Act.
2. Ongoing Projects: Sub-Clause (b) of this clause requires the Auditor to state whether any amount remaining unspent under section 135(5) of the Companies Act, pursuant to any ongoing project, has been transferred to special account in compliance with the provision of section 135(6) of the said Act.
Companies (Amendment) Act 2019 amended the Companies Act and requires that-
- For an Projects Undertaken for CSR Activity and Amount is Unspent at the End of FY: Transfer the unspent amount within 30 days from the end of the FY to a special account in any scheduled bank to be called the Unspent Corporate Social Responsibility Account, and such amount shall be spent by the company for CSR activities within 3 FYs from the date of such transfer.
- Amount is Unspent for other than Ongoing Projects: Transfer such unspent amount to a Fund specified in Schedule VII, within a period of 6 months of the expiry of the FY.
These above discussed provisions are not yet notified by the MCA hence after the enactment of these provisions, reporting under clause (xx) is required to be made by the Auditor.
CLAUSE (xxi): CONSOLIDATED FINANCIAL STATEMENTS
CARO requires that-
- The Auditor of Consolidated financial Statements shall state 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 such remark exist, than indicate the details of the companies and the paragraph numbers of the CARO report containing the qualifications or adverse remarks.
Earlier CAROs are not applicable in respect of Auditor’s Report on Consolidated Financial Statements (“CFS”). CARO 2020 requires that if any of the Subsidiaries’ Auditor given any Qualified / Adverse remarks in its own CARO report then the Auditor of CFS consolidating such Subsidiaries’ Financial Statements is require to include such Qualified / Adverse remarks in the CARO Report to such CFS.
Hence now the CARO report to the CFS will contain only above one clause stating whether Qualified / Adverse remarks made in the CARO reports of the companies included in the CFS. If such remarks has been made, then such CARO report will indicate the details of the companies and the paragraph numbers of the CARO report containing the qualifications or adverse remarks.
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