‘CARO’ 2020 | Key analysis & Changes

Companies Auditors Report Order, ‘CARO’ 2020 | Key analysis & Changes

MCA (Ministry of Corporate Affairs), in consultation with the NFRA (National Financial Reporting Authority) and by virtue of Section 143(11) of Companies Act, 2013 (Companies Act), has issued Companies (Auditor’s Report) Order, 2020 (CARO, 2020) on 25th February, 2020 which supersedes Companies (Auditor’s Report) Order, 2016 (CARO, 2016).

The said order is applicable for reporting on financial statements of companies whose financial year commences on or after 1st April 2021.

In its endeavour to combat several corporate scams in the recent times, The reportable paras under CARO 2020 has been enhanced to 21 from earlier requirement of 16 paras to bring more transparency in the auditor’s report.

Applicability

The CARO 2020 is applicable to same companies as the CARO 2016 was applicable to. There is no change in applicability to categories of companies.

Key Updates and points in applicability:-

• Change in definition of Small company as under section 2(85) of the companies act 2013 :-

1. The limit of paid up capital has been increased to two crores from fifty lakhs, and;

2. The limit of turnover has been increased to twenty crores from two crores.

• • Provided that nothing in this clause shall apply to—
  • holding company or a subsidiary company;
  • company registered under section 8; or
  • a company or body corporate governed by any special Act;”

• It may also be noted that in case a company is covered under the definition of small company, it will remain exempted from the applicability of the Order even if it falls under any of the criteria specified for private company.

Matters included in auditor’s report:-

The matters to be included in the auditor’s report are specified in paragraph 3 of the Order. Paragraph 3 has twenty one clauses in all.

Property, Plant & Equipment and Intangible Assets |Paragraph 3(i)|

(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 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 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;

Key Changes and Analysis:-

1. The additional comment has to be made for intangible assets for its maintenance of proper records;

2. Declaration whether all the immovable properties disclosed in the financial statements are held in the name of the reporting entity;

3. Special reporting for revaluation for 10% or more (upward & downward both) and whether revaluation is done by Registered valuer;

4. Revaluation (for reporting purpose) shall not include:-

• Fair Valuation of PPE upon first time adoption of Ind AS;
• Remeasurements ;
• Changes to ROU assets due to lease modifications.

5. Disclosures for benami properties and proceedings initiated or pending against the company.

Inventory |Paragraph 3(ii)|

(ii) (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;

Key Changes and Analysis:-

1. The term ‘Materiality’ has been defined in CARO 2020 i.e. 10% or more, which was left to the auditors judgement in CARO 2016;

2. Also, the auditor is responsible to comment on the appropriateness of coverage and procedure of such verification;

• Checking for deviations in quarterly statements filed by the company with banks and FIs w.r.t Working capital loan if the company has been sanctioned limit in excess of 5 Crores at any point in time. (utilisation of funds is of no relevance)

Loans, Advances, Investments, Guarantee… given by the company |Paragraph 3(iii)|

iii. 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;

Key Changes and Analysis:-

1. The ambit of financial transactions has been widened enough to include loans given to any party which was limited to parties covered under Section 189 register;

2. Renewal, extension or granting of fresh loans to settle the overdues of existing loans are to be reported;

• loans or advances in the nature of loans either repayable on demand or without specifying any terms or period of repayment granted to related parties are to be disclosed along with the aggregate amount and percentage.

Loans to directors and Investment made by the company |Paragraph 3(iv)|

1. 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;

S No.	Non Compliance of Section 186				Remarks (if any)
	Particulars	Name of Company/Party	Amount Involved	Balance as on Balance Sheet Date
1	Investment more than two layers of Investment companies
2	Loan given or guarantee given or security  provided or acquisition of securities exceeding the limits without prior approval by means of a special resolution
3	Loan given at rate of interest lower than prescribed
4	Any other default

*No changes under this paragraph

Deposits and deemed deposits |Paragraph 3(v)|

1. 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;

*No changes under this paragraph.

Cost Records |Paragraph 3(vi)|

1. 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;

*No changes under this paragraph

Payment of Statutory Dues |Paragraph 3(vii)|

vii. (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);

Key Changes and Analysis:-

1. The Goods and Service tax has been added;

2. The auditor is required to report on regularity on payment of statutory dues also, even if the same is not Outstanding for period of more than six months on balance sheet date;

• The non-payment of advance tax would also constitute default ;

Recording of Unrecorded Income |Paragraph 3(viii)|

viii. 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;

Key Changes and Analysis:-

1. It is newly added paragraph;

2. Reporting under this clause shall be applicable only when the transactions not recorded in the books of account have been surrendered or disclosed as income during the year in the income tax assessments. If yes, then the auditor shall also report on proper recording of the same in the books of account during the year.

• Evaluate the applicability of AS 5 and Ind AS 8 as applicable w.r.t. prior period items for proper accounting of unrecorded income;

3. The nature of disclosure shall depend on the nature of undisclosed income and the treatment thereof if the same was duly disclosed and reported in the books of account in the year to which the undisclosed income relates to.

4. The auditor should appropriately modify the audit procedures based on increased risk assessment in accordance with the requirements of SA 315.

Default in repayment of Loans |Paragraph 3(ix)|

ix. (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.

whether the company is a declared wilful defaulter by any bank or financial institution or other lender;

(b) 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;

(c) whether funds raised on short term basis have been utilised for long term purposes, if yes, the nature and amount to be indicated;

(d) 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;

(e) 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;

Key Changes and Analysis:-

1. Default of loan taken from any lenders has been covered instead of just those specifically mentioned in CARO 2016;

2. Declaration of Wilful Defaulters by any lender. If the company has not been declared a wilful defaulter but has received a show-cause notice in accordance with the RBI Circular, the auditor may consider disclosing this fact in his report under this clause;

3. Case of Utilisation of Short term funds for long term to be reported;

4. Case of loan taken for meeting obligations of S/A/JVs is covered;

5. Cases of funds obtained on the pledge of securities of S/A/JVs.

Sample Reporting:-

According to the information and explanations given to us and on the basis of our audit procedures, we report that the company has not been declared wilful defaulter by any bank or financial institution or government or any government authority.

Or

According to the information and explanations given to us and on the basis of our audit procedures, we report that the company has been declared wilful defaulter by ABCD (Lender name) on (date of declaration).

IPO and FPO money utilisation |Paragraph 3(x)|

x. (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;

*No changes as such in this paragraph.

Reporting of Fraud |Clause 3 (xi)|

xi. (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;

Key Changes and Analysis:-

1. Consideration of Form ADT-4 and Complaints raised by the whistle blower have been newly added;

2. Section 177(9) of the Act requires the following class of companies to establish a vigil mechanism for their directors and employees to report their genuine concerns or grievances:

• Every listed company.
• Companies which accept deposits from the public.
• Companies which have borrowed money from banks and public financial institutions in excess of fifty crore rupees.

For Nidhi Company |Clause 3 (xii)|

xii. (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 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;

*No changes as such under this paragraph.

Related Party Transaction |Clause 3 (xiii)|

xiii. 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;

*No changes as such under this paragraph.

Comment on Internal Audit |Clause 3 (xiv)|

xiv. (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;

Key Changes and Analysis:-

xv. This is newly inserted paragraph;

Auditor need to assess the applicability of Internal Audit, its quality and comment upon the consideration of the internal audit reports.

Non Cash Transaction|Clause 3 (xv)|

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;

*No changes under this paragraph.

 Register under RBI Act 1934 |Clause 3 (xvi)|

xvi. (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;

Key Changes and Analysis:-

1. Reporting relating to applicability of criteria of CIC and number of CICs has to be made;

2. Conduct of Financial activities without valid CoR is to be reported.

Cash Losses |Clause 3 (xvii)|

xvii. 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;

Key Changes and Analysis:-

1. This is newly added paragraph;

2. Cash Losses is calculated by adjusting non cash items from Profit/Loss after Tax (after restatements under Ind AS 8). It includes depreciation, amortization, Impairment etc.

• Reporting for both current and preceding year is required.

Resignation of Auditors |Clause 3 (xviii)|

xviii. 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;

Key Changes and Analysis:-

1. This is newly inserted paragraph;

2. The point is a normal practice covered under SA 210 and professional ethics but from now, it will be disclosed in Auditor report also.

Material Uncertainty |Clause 3 (xix)|

xix. 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;

Key Changes and Analysis:-

1. This is newly inserted paragraph;

2. The liabilities to be examined for payment should exist at the date of balance sheet which fall due within a period of one year from the balance sheet date;

• It should be noted that “liabilities falling due within a period of one year” and “current liabilities” should not be construed as same.

Sample Reporting:-

“According to the information and explanations given to us and on the basis of the financial ratios, ageing and expected dates of realization of financial assets and payment of financial liabilities, other information accompanying the financial statements, our knowledge of the Board of Directors and management plans and based on our examination of the evidence supporting the assumptions, nothing has come to our attention, which causes us to believe that any material uncertainty exists as on the date of the audit report that company is not 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.

We, however, state that this is not an assurance as to the future viability of the company. We further state that our reporting is based on the facts up to the date of the audit report and we neither give any guarantee nor any assurance that all liabilities falling due within a period of one year from the balance sheet date, will get discharged by the company as and when they fall due.”

Corporate Social Reporting |Clause 3 (xx)|

(xx) (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 sub­section (6) of section 135 of the said Act;

Relevant Financial Year	Amount identified For spending on Corporate Social Responsibility activities “other than Ongoing Projects”	Unspent amount of (b)	Amount transferred to Fund	Due date of transfer	Actual date of transfer	Number of days of delay (If any)
(a)	(b)	(c)	(d)	(e)	(f)	(g)

(*For Current year and for the previous year/(s) for which the amount remains unspent)

 Key Changes and Analysis:-

1. This is newly inserted paragraph which requires reporting for transfer of unspent amount as per required provisions.

Related to CFS |Clause 3 (xxi)|

(xxi) 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.

Sl. No.	Name of Company (Components)	CIN	Relationship(Holding/ Subsidiary/ Associate/Joint Venture)	Clause number of the CARO report which is qualified or adverse

Key Changes and Analysis:-

1. Reporting under this clause is only required for those entities included in the consolidated financial statements to whom CARO 2020 is applicable.

2. The term qualification/adverse remark used in this clause refers to those relating to the negative remarks related to CARO 2020 clauses and should not be confused with qualified and adverse opinion as per SA 705.

• In case the component is not yet audited, the principal auditor has to report the name of such component along with the fact that the audit report has not been issued yet.

3. the auditor is not required to revaluate the materiality from a consolidation perspective;

4. every qualification/adverse remark made by every individual component including the parent should be included while reporting under clause 3(xxi).

Reasons to be stated for unfavourable or qualified answers (Para 4).-

(1) 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.

(2) 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.