Comparative summary of CARO 2016 vs CARO 2020

Clause No.

(b) whether these fixed assets 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 immovable properties are held in the name of the company. If not, provide the details thereof;

(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 specified format

(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

2. A format has been specified in the order for reporting of immovable properties for which the title deeds are not held in the name of the Company. Earlier no format was specified.

3. In case of revaluation of PP&E (including ROU asset as per Ind AS 116) or intangible asset, the auditor has to verify:

a. whether the revaluation is based on the valuation provided by registered valuer and also whether the provisions of section 247 of the Companies Act, 2013 including the corresponding rules thereto relating to valuation by registered valuers have been duly complied with; and

b. if the amount of change is 10% or more of the total net carrying value of each class of PP&E or intangible asset, the amount of change needs to be specified.

This is a new subclause.

4. With respect to benami properties, the auditor has to verify whether any proceedings have been initiated against the Company by appropriate authority under the Benami Property Act and/ or any proceedings are pending with the appropriate authorities as on the balance sheet date for holding any benami property.

The reporting is not applicable where the notice is received by the Company as a beneficial owner.

For the purpose of reporting, appropriate disclosures in the financial statements would include nature of property, carrying value of the property in the books of accounts, status of proceedings before the relevant authority, consequential impact on the financial statements and/ or the liability that may arise in case the proceedings are decided against the company.

This is a new subclause.

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

Furthermore, the auditor has to report whether a discrepancy of 10% or more arises in the value for any class of inventory and also whether the difference has been appropriately accounted for in the books of accounts. It is pertinent to note that the materiality threshold is not relevant here and as such a discrepancy of 10% or more in the value of any class of inventory would be reported, even if it is immaterial. Lastly, 10% should be applied on net basis i.e. after adjusting for excesses and shortfall within the class.

2. In case the Company has been sanctioned working capital limits (sanction includes new sanctions during the year as well as limits renewed or due for renewal during the year) exceeding Rs. 5 crores on the security of current assets (thus all unsecured facilities and those sanctioned on the basis of security of other assets are not covered here), then auditor has to verify the quarterly returns submitted by the Company to the bank (for e.g., stock statement, book debt statement, ageing analysis of debtors, etc) and ensure that the same agree to the books of accounts. Any discrepancies in the same are to be appropriately reported. It is pertinent to note here that the limits are to be determined in reference to the sanction letter and would include both fund based and non-fund-based credit facilities.

Moreover, this subclause will be applicable even though the outstanding balance is less than Rs. 5 crores as at the balance sheet date (as the clause mentions sanctioned limit).

This is a new subclause.

(a) whether the terms and conditions of the grant of such loans are not prejudicial to the company’s interest;

(b) whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular;

(c) 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

(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

Moreover, in CARO 2016, loans and advances granted only to related parties were covered, however, CARO 2020 covers loans and advances granted to, investments made in and guarantees and securities provided to any enterprise as such, regardless whether it is a related party or not.

2. Further, CARO 2020 requires the auditor to report the following details separately for Company’s subsidiaries, joint ventures and associates and for other parties-total amount of loans and advances granted and guarantees or securities provided during the year (loans and advances squared off during the year are also to be reported) and outstanding amount of the same as on the balance sheet date.

It is pertinent to note here that clause 3(iii)(a) is not applicable to Companies whose principal business is to give loans i.e. NBFCs, financial institutions, etc.

3. Clause 3(iii)(e) requires the auditor to identify and report instances of evergreening of loans and advances and is applicable to all companies, except for companies whose principal business is to give loans, for e.g., NBFCs, financial institutions, etc. The auditor has to report aggregate amount of loans renewed or extended or settled by grant of fresh loans and the %age thereof to the total amount of loans and advances in the nature of loans (what is advance in the nature of loans is dependent on the circumstances of each case) granted during the year. Reporting under this clause would also cover loans falling due as on the balance sheet date and which were renewed/ extended/ settled post the balance sheet date and before the date of audit report.

This is a new subclause.

4. CARO 2020 has introduced another new subclause which requires disclosure of gross amount of loans or advances in the nature of loans which are either repayable on demand or do not specify any terms or period of repayment in the auditor’s report.

If a company has granted such loans, then specific disclosures would need to be provided for aggregate amount of such loans granted, %age thereof to total loans granted and loans granted to promoters and related parties as defined under relevant provisions of the Companies Act, 2013. For the purpose of reporting, related party relationship is to be evaluated for the entire year and not just as on the balance sheet date.

This is a new subclause.

Reference may be drawn to section 2(31) of the Act to identify amounts deemed to be deposits.

(b) where dues of income tax or sales tax or service tax or duty of customs or duty of excise or value added tax 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).

(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)

This is a new clause.

(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

2. CARO 2020 introduces a new reporting requirement relating to whether the company has been declared as a wilful defaulter by any bank, financial institution or other lender during the year under audit till the date of auditor’s report. The term ‘wilful defaulter’ has to be understood with reference to the RBI circular thereon.

This is a new subclause.

3. Another new reporting requirement under CARO 2020 pertains to whether the terms loans obtained by the company from bank, financial institution or any other person/ entity have been used for the purpose for which they were sanctioned. If the proceeds have been diverted, then the auditor has to report the amount of funds diverted and the purpose for which they were used. Diversion of funds is to be understood with reference to the RBI circular on wilful defaulters.

This is a new subclause.

4. Similar to clause 3(ix)(c), clause 3(ix)(d) requires the auditor to verify whether the short-term loans obtained by the company from banks, financial institution or any other person/ entity have been used for long term purposes or not. If yes, then the amount of diversion along with the purpose for which they were used needs to be reported.

This is a new subclause.

5. CARO 2020 further requires the auditor to verify whether the company has obtained any funds (long term or short term) from any entity/ person during the year and thereafter granted the same as loans or advance in the nature of loans or invested the same in its subsidiaries, associates or joint ventures. If yes, then the auditor is required to provide the details along with the nature of such transactions and the amount in each case. Details are to be provided even if the funds have been repaid before the year end date.

This is a new subclause.

6.Under CARO 2020, an auditor is required to report whether the company has raised any loan from any lender during the year on specific pledge (and not general or residual charge) of the investment of the company in its subsidiaries, associates or joint ventures. If yes, then the auditor has to report the details of such loans and whether the company has defaulted in repayment of such loans or not. It is pertinent to note here that only new loans taken during the year are covered under this clause (even if repaid during the year). Thus, loans taken in earlier years and outstanding as on the balance sheet date would not be covered.

This is a new subclause.

If not, the details together with delays or default and subsequent rectification, if any, as may be applicable, be reported.

whether the company has made any preferential allotment or private placement of shares or fully or partly convertible debentures during the year under review and if so, as to whether the requirement of section 42 of the Companies Act, 2013 have been complied with and the amount raised have been used for the purposes for which the funds were raised. If not, provide the details in respect of the amount involved and nature of non-compliance

(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

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

Earlier, reporting on fraud on the Company was restricted to fraud by its “officers or employees”, however, the revised clause has removed this restriction and now fraud on the company by any person would be reported.

2. CARO 2020 additionally requires to auditor to state whether any report under section 143(12) of the Companies Act, 2013 (w.r.t. reporting of fraud committed in the Company by its officers or employees involving an amount of Rs. 1 crore or more to Central Government) has been filed by auditor (statutory auditor, cost auditor or secretarial auditor) during the year up to the date of audit report.

This is a new subclause.

3. CARO 2020 has introduced a new reporting requirement which requires an auditor to consider whistle-blower complaints, if any received during the year under audit. The auditor should also check the compliance w.r.t. vigil mechanism under section 177 of the Companies Act, 2013 and SEBI Regulations, as may be applicable. It is pertinent to note here that the whistle-blower complaints pertaining to earlier years are not to be considered for the purpose of reporting under this clause.

This is a new subclause.

(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

1. Nature of default;

2. Amount of default;

3. Period of default;

4. Number of persons to whom there was default in payments and

5. Any other detail, if necessary.

This is a new subclause.

(b) whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor

Furthermore, an auditor has to obtain and verify the reports of such internal audit for the period under audit and has to independently evaluate the impact of the observation on the financial statements.

This is a new clause.

(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

Unlike CARO 2016, CARO 2020 requires an auditor to report:

a. Whether the company is required to be registered as NBFC/ HFC/CIC?

b. Whether the company has conducted any NBF or HF activity without a valid CoR from RBI?

c. In case the company is not registered as CIC/ not required to register as CIC, whether the company continues to fulfil the criteria for unregistered/ exempted CICs?

d. In case of companies in a group (for e.g., holding-subsidiary, joint venture, associate, related parties) whether there are more than 1 CIC in the group?

In order to evaluate the above, the auditor would examine the activities carried on by the company and the RBI circulars and directions relating to NBFCs, HFCs and CICs. The auditor would also verify the financial statements of the company to determine the various threshold limits specified in the RBI circulars for registration as NBFC, HFC, CIC (viz, financial assets, income there from, investments, net owned funds, etc).

Any discrepancy is to be appropriately reported by the auditor under this clause.

Additionally, the auditor may report any non-compliance w.r.t. any of the applicable provisions by NBFC, HFC, CIC to RBI in the form of an exception report in terms of NBFCs Auditor’s Report (Reserve Bank) Directions, 2016.

This is a new clause.

2016

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

An auditor is also required to check compliance with the relevant provisions of Companies Act, 2013 and that under any other Act/prescribed by any other Authority, as may be applicable (for e.g., LODR by SEBI for listed companies). It is pertinent to note here that reporting under this clause is not applicable in case of change of auditor(s) on account of mandatory rotation as prescribed under the Companies Act, 2013.

This is a new clause.

It is to be noted here that, ‘liabilities falling due within a period of one year’ and ‘current liabilities’ are not the same. The auditor has to apply the test of material uncertainty w.r.t. settlement of liabilities (existing as on the balance sheet date) as on the date of audit report, thus any material development post the balance sheet date but before the date of audit report is also to be considered.

This is a new clause.

(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

a. For on-going CSR projects:

whether the company has transferred the unspent CSR amount to a special account within a period of 30 days from the end of financial year as per section 135(6) of the Companies Act, 2013;

b. For other than on-going CSR projects: whether the company has transferred the unspent CSR amount to a fund specified in Schedule VII to the Companies Act, 2013 within a period of six months from the end of financial year in compliance with the provisions of section 135(5) of the Companies Act, 2013.

The auditor has to check the compliance with the provisions of section 135 of the Companies Act, 2013 (for transfer of funds and utilisation thereof) and discrepancy, if any (for current or for previous financial years), is to be reported in the audit report.

This is a new clause.

It is important to note here that reporting requirements of CARO 2020 are not applicable to auditor’s report on CFS, except reporting on qualifications for those entities included in CFS to whom CARO 2020 is applicable.

This is a new clause.