CARO 2020 is a contemporary layout for issuance of audit reports in case of statutory audits of companies under Companies Act, 2013. After debates with the National Financial Reporting Authority (NFRA), CARO 2020 has incorporated additional reporting requirements. National Financial Reporting Authority (NFRA) is an independent regulatory body for synchronizing the audit and accounting profession in India. The intent of CARO 2020 is to amplify the comprehensive standard of reporting by the company auditors.

The main objective behind CARO is to basically augment the overall quality of reporting by company Auditors. CARO 2020 is anticipated to build up accountability, faith and transparency to stakeholders of the Companies. In the past few years, we have witnessed siphoning of funds, misuse or abuse of provisions of law, income tax, round tripping of transactions, ever greening of loans which have resulted in oscillated trust of stakeholders thereby necessitating a regulatory mechanism like CARO 2020.

CARO 2020 follows the same layout of provisions like CARO 2016 with an addition in reporting and modifying disclosures and increasing scope of an auditor.

Analysis of changes in CARO 2020 and its subsequent increase in scope of auditor is summarized as follows:

  • UNRECORDED INCOME (PARA 3 CLAUSE VIII CARO 2020): Disclosure has to be made in respect of unrecorded transactions not recorded in books of accounts but recorded as income in income tax proceedings. This appears to be an effort of rationalizing VIVAAD SE VISHWAAS scheme with the view of harmonizing the financial statements. It shall be difficult for the auditor to obtain information of all the income tax proceedings and the auditor shall have to apply prudence and professional judgment as to income of which income tax proceedings should be reflected in CARO.
  • STRINGENT COMPREHENSIVE REPORTING OF LOANS/OTHER BORROWINGS (PARA 3 CLAUSE IX (b) CARO 2020): It requires the auditor to report whether the company is a declared willful defaulter by any bank or financial institution or other lender. This will put immense responsibility on an auditor to keep a continuous eye on sites of SEBI, RBI and CIBIL to obtain this information. Even then, it will be difficult for the auditor to obtain this information. The last resort left with the auditor shall be to obtain Management representation as to whether the company has been classified as willful defaulter. However, the auditor cannot solely rely on management representation thereby the auditor is at risk if he doesn’t report and the company is in list of willful defaulters.
  • REPORTING OF BENAMI TRANSACTIONS (PARA 3 CLAUSE I (e) CARO 2020): The auditor under this clause is required to report whether any proceedings have been initiated or are pending against the Company for holding and property under the “Benami Transactions (Prohibition) Act, 1988 and Rules made there under; if so, whether the Company has appropriately disclosed the details in its financial statements. Benami act in itself is a mind-numbing act. The auditor can never know whether a Company is listed in Benami transaction act. Only source of information is management that they are not falling under purview of Benami transactions act.
  • REPORTING ON DEEMED DEPOSITS (PARA 3 CLAUSE (v) CARO 2020): This has entailed larger scope and implied greater responsibility. There are a lot of compliances in case of deposits and the auditor shall have to be skeptical throughout. A thorough understanding of Companies act, SEBI regulations is expected to ensure proper reporting under this clause. For e.g. certain financial accommodations made by the Company which otherwise do not come under the gamut of deposit but are de facto deposits.
  • OPINION ON INTERNAL AUDIT SYSTEM (PARA 3 CLAUSE (XIV) CARO 2020): Here the auditor is required to report as to whether the Company has an internal audit system that commensurate with the size and nature of its business Though this point has been rightly included however it adds a layer of responsibility on statutory auditor and also increase the chances of ego clashes due to segregation of audit and non-audit services. This clause may however not be applicable to many private companies since the limit for applicability of internal audit under section 138 Companies Act 2013, is far more as compared to companies covered under CARO.
  • REPORTING ON SUSTAINAIBILTY OF COMPANY ON THE BASIS OF FINANCIAL RATIOS (PARA 3 CLAUSE (xix) CARO 2020): This clause requires auditors to report on capability of company of meeting its liabilities existing at the date of balance sheet 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, 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; this seems to be a major challenge for the auditor since SA 570 relies on assertion given by management but now the auditor cannot rely on management’s assertion but shall have to obtain sufficient and appropriate audit evidence that holds future and financial viability.
  • REPORTING ON WHISTLE BLOWER (PARA 3 CLAUSE (X) CARO 2020): The auditor shall have to assess the authenticity of the complaint, whether it has been resolved, whether reflected in financial statements which in itself require investigating into whistle blowing mechanism which in itself is a tedious task. The whistle blower is a confidential and private mechanism headed by the Chairman of the Audit Committee.

CONCLUSION: Obviously CARO 2020 has widened the role of auditor in respect of identification of defaults and discrepancies in Compliance expectations. This is expected to restore the trust of stakeholders of the companies. CARO 2020 is expected to lead the way of new standards of transparency. Although a situation of tug of war is expected between auditor and the company in process of gathering data and information and providing information.

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March 2021