CARO 2020 – A Student’s Exam Wise Approach

This article is specifically written for the students who have to appear for the professional examinations in the coming years. Immediately, after the announcement of inclusion of this topic by professional bodies i.e. ICAI/ICSI/ICMAI in their syllabus, a particular section of students (those who prefer self-study) will start searching for the summarized notes online.

Let me tell you one thing first that CARO itself is a short topic. Even in the official gazette there are only 9 pages. But, still from the exam point of view, I am making it easy for you.

So, in total there are 21 clauses which you have to learn in the same order. A key term for each clause has been written for memorizing the clauses,

Let’s begin….

Applicability:

Companies (Auditor’s Report) Order, 2020 i.e. CARO is applicable to: Every company including a foreign company and the following types of private companies:

• Which are the subsidiaries of public companies.
• Which have paid up capital and reserves and surplus of more than Rs. 1 crore as on the balance sheet date.
• Which have total borrowings exceeding Rs. 1 crore from any bank or financial institution at any point of time during the financial year.
• Whose total revenue is more than Rs. 10 crores as per the balance sheet.

Non Applicability:

It is not applicable to the following:

• A Banking Company
• An Insurance Company
• Section 8 Company (NPO)
• One Person Company (OPC)
• Other Private Companies whose limits are less than from those mentioned in applicability point.

Matters To Be Included (Caluse Wise Followed by Key Terms to Memorise):

Clause (i):  Fixed Assets:

• Whether the company is maintaining proper records showing full particulars, including quantitative details and situation of Property, Plant and Equipment.
• Whether the company is maintaining proper records showing full particulars of intangible assets.
• Whether these Property, Plant and Equipment have been physically verified by the management at reasonable intervals;
• Whether the title deeds of all the immovable properties disclosed in the financial statements are held in the name of the company, if not, provide the details thereof.
• Whether the company has revalued its Property, Plant and Equipment 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;
• Whether any proceedings have been initiated or are pending against the company for holding any benami property under the Benami Transactions (Prohibition) Act, 1988.

Clause (ii): Inventory:

• Whether physical verification of inventory has been conducted at reasonable intervals by the management.
• Whether any discrepancies of 10% or more in the aggregate for each class of inventory were noticed.
• Whether during any point of time of the year, the company has been sanctioned working capital limits in excess of Rs. 5 crores in aggregate.
• 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.

Clause (iii): Loan to Companies:

• 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 yes, then give aggregate amount during the year and balance outstanding at the end of the year.
• Whether 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.
• Whether the repayments or receipts are regular.
• If the amount is overdue for more than 90 days: Mention the amount and steps taken for recovery.
• Whether the loans has been renewed or extended or fresh loans granted to settle the overdues of existing loans given to the same parties. (not applicable to companies whose principal business is to give loans)
• Whether any loans were granted without specifying any terms or period of repayment.

Clause (iv): Section 185:

In respect of loans, investments, guarantees, and security, whether provisions of sections 185 and 186 of the Companies Act have been complied with.

Clause (v): Deposits:

In respect of deposits accepted by the company, whether the directives issued by the Reserve Bank of India & Provisions of sections 73 to 76 has been followed. Or if any 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 or not.

Clause (vi): Cost Records:

Whether accounts and records as specified under Section 148 have been so made and maintained.

Clause (vii): Statutory Dues:

• Whether the company is regular in depositing undisputed statutory dues (Income Tax, GST, PF etc) 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.
• If the pending amount is on account of dispute, mention the amount & the forum.

Clause (viii): Tax Assessment:

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. If so, whether that income has been properly recorded in the books of account during the year.

Clause (ix): Default:

• Whether the company has defaulted in repayment of loans or other borrowings or in the payment of interest thereon to any lender. State the amount and period of default.
• Whether the company is a declared wilful defaulter by any bank or financial institution or other lender.
• Whether term loans were applied for the purpose for which the loans were obtained; if not, state the amount.
• Whether funds raised on short term basis have been utilised for long term purposes, if yes, the nature and amount to be indicated.
• 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, give details.
• 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):IPO/FPO:

• 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, give details.
• Whether the company has made any preferential allotment or private placement of shares or convertible debentures 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 (xi): Fraud:

• 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 fraud has been reported under Section 143(12) by the auditor.
• Whether the auditor has considered whistle-blower complaints, if any, received during the year by the company.

Clause (xii):Nidhi Companies:

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 10% 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.

Clause (xiii): Related Parties:

Whether all transactions with the related parties are in compliance with sections 177 and 188 of Companies Act & are disclosed as per accounting standard.

Clause (xiv): Internal Audit:

• 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.

Clause (xv): Non cash Transaction With Directors:

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 (xvi): RBI:

• Whether the company has obtained registration under section 45-IA of the Reserve Bank of India Act, 1934 (if required).
• Whether the company has conducted any Non-Banking Financial or Housing Finance activities without a valid Certificate of Registration (CoR) from RBI.
• Whether the existing Core Investment Company (CIC) 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 too.
• 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 (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 (xviii): Resignation of statutory Auditor:

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 (xix): Material Uncertainity:

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.

Clause (xx): Amount Transferred To Fund:

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.

Clause (xxi): Auditor’s Qualifications:

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.

So, these were the 21 clauses of the CARO 2020. I hope it will serve as a useful material from the perspective of revision during exam time.

Thank You.

The author may be contacted at atulkhurana9@gmail.com.