In order to enhance transparency and reporting, Ministry of Corporate Affairs has issued Companies (Auditor’s Report) Order, 2020 on Tuesday, 25th February, 2020 after consultation with the National Financial Reporting Authority (NFRA) and on the basis of powers conferred under Section 143(11) of Companies Act, 2013. The Companies (Auditor’s Report) Order, 2020 supersedes the Companies (Auditor’s Report) Order, 2016.
The Companies (Auditor’s Report) Order, 2020 applicable on the financial years commencing on or after 01st April, 2020
I) Applicability of Companies (Auditor’s Report) Order, 2020:
It shall apply to every company including a foreign company as defined under Section 2(42) of Companies Act, 2013.
Explanation: “Foreign Company” means any company or body corporate incorporated outside India which,—
(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
(b) conducts any business activity in India in any other manner.
Exceptions to Companies (Auditor’s Report) Order, 2020:
(i) a banking company as defined under Section 5(c) of the Banking Regulation Act, 1949
Explanation: “Banking Company” means any company which transacts the business of banking in India
(ii) an insurance company as defined under the Insurance Act, 1938
Explanation: “Insurance Company” means any insurer, being a company which is limited by shares, and,
(a) which is formed and registered under the Companies Act, 2013 (18 of 2013) as a public company or is converted into such a company within one year of the commencement of the Insurance Laws (Amendment) Act, 2015;
(b) in which the aggregate holdings of equity shares by foreign investors, including portfolio investors, do not exceed forty-nine per cent. of the paid up equity capital of such Indian insurance company, which is Indian owned and controlled, in such manner as may be prescribed.
Explanation: For the purposes of this sub-clause, the expression “control” shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements;
(c) whose sole purpose is to carry on life insurance business or general insurance business or re-insurance business or health insurance business;
(iii) a company licensed to operate under section 8 of the Companies Act, 2013
Explanation: Formation of Companies with Charitable Objects, etc.
(iv) a one person company as defined under Section 2(62) of the Companies Act, 2013 and a small company as defined under Section 2(85) of the Companies Act, 2013
Explanation: “One Person Company“ means a company which has only one person as a member;
“Small Company” means a company, other than a public company,
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees and
(ii) turnover of which (as per profit and loss account for the immediately preceding financial year) does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees
Provided that nothing in this clause shall apply to-
a. a holding company or a subsidiary company;
b. a company registered under section 8 or
c. a company or body corporate governed by any special act
(v) a private limited company;
> not being a subsidiary or holding company of a public company
> having a paid up share capital and reserves and surplus not more than one crore rupees as on the balance sheet date
> not having total borrowings exceeding one crore rupees from any bank or financial institution at any point of time during the financial year
> not having total revenue as disclosed in Scheduled III to the Companies Act (including revenue from discontinuing operations) exceeding ten crore rupees during the financial year as per the financial statements.
II. Non- Applicability of Companies (Auditor’s Report) Order, 2020:
This order shall not apply to the auditor’s report on consolidated financial statements except clause (xxi) of paragraph 3.
Clause (xxi) of paragraph 3 states; 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.
III. Matters to be included in Auditor’s Report:
1) Property, Plant, Equipment and Intangible Assets
Auditor shall comment on maintenance of proper records showing full particulars of Property, Plant, Equipment as well as Intangible Assets.
Explanation: “Proper records” includes quantitative details, situation of PPE etc.
Also comment on whether physical verification of Property, Plant and Equipment done by management at reasonable intervals, whether any material discrepancies were noticed, such discrepancies shall be properly dealt in the books of accounts.
Explanation: “Reasonable Intervals” depends upon case to case basis. It depends upon the number of assets, nature of assets, value of assets, location of assets etc. Management decides frequency of verification of assets on the basis of factors mentioned above.
Check the title deeds of the Immovable Properties (except lease agreements), disclosed in the financial statements, whether the same are held in the name of the company, if not, provide the details in the format:-
|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|
Explanation: “Title Deeds” constituting evidence of ownership.
Check revaluation of Property, Plant and Equipment (including right of use assets) or intangible assets. 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.
Disclosure in financial statements about any proceedings initiated or pending against the company for holding Benami Property under the Benami Transactions (Prohibitions) Act, 1988 (45 of 1988)
Explanation: “Benami Property” means any property which is the subject matter of a benami transaction and also includes the proceeds from such property;
“Benami Transaction” (A) a transaction or an arrangement-
(a) where a property is transferred to, or is held by, a person, and the consideration for such property has been provided, or paid by, another person; and
(b) the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration, except when the property is held by-
(i) a Karta, or a member of a Hindu undivided family, as the case may be, and the property is held for his benefit or benefit of other members in the family and the consideration for such property has been provided or paid out of the known sources of the Hindu undivided family;
(ii) a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of a depository under the Depositories Act, 1996 (22 of 1996) and any other person as may be notified by the Central Government for this purpose;
(iii) any person being an individual in the name of his spouse or in the name of any child of such individual and the consideration for such property has been provided or paid out of the known sources of the individual;
(iv) any person in the name of his brother or sister or lineal ascendant or descendant, where the names of brother or sister or lineal ascendant or descendant and the individual appear as joint-owners in any document, and the consideration for such property has been provided or paid out of the known sources of the individual; or
(B) a transaction or an arrangement in respect of a property carried out or made in a fictitious name; or
(C) a transaction or an arrangement in respect of a property where the owner of the property is not aware of, or, denies knowledge of, such ownership;
(D) a transaction or an arrangement in respect of a property where the person providing the consideration is not traceable or is fictitious;
Explanation.-For the removal of doubts, it is hereby declared that benami transaction shall not include any transaction involving the allowing of possession of any property to be taken or retained in part performance of a contract referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882), if, under any law for the time being in force,-
(i) consideration for such property has been provided by the person to whom possession of property has been allowed but the person who has granted possession thereof continues to hold ownership of such property;
(ii) stamp duty on such transaction or arrangement has been paid; and
(iii) the contract has been registered.
ii) Inventory and Working Capital Loan
Check whether physical verification of inventory has been conducted at reasonable intervals by the management, any discrepancies of 10% or more in the aggregate for each class of inventory, whether discrepancies have been properly dealt in the books of accounts.
Auditor shall state that at any point of time during 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. Check 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;
iii) Loans, Investment, Guarantee and Security
Auditor shall report the information whether during the year the company has made investments, provided any guarantee or security or granted any loans or advances in the nature of loans, secured or unsecured to any party.
Loans or Advances and Guarantees or security provided during the year to Subsidiaries, Joint Ventures, Associates or other parties (not applicable to companies whose principal business is to give loans), Auditor shall report aggregate amount during the year, balance outstanding at the balance sheet date.
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.
Auditor shall state in respect of loans and advances in the nature of loans-
> Schedule of repayment of principal and payment of interest has been stipulated
> Repayments or receipts are regular
Auditor shall state renewal or extension or granting of fresh loans to settle the over dues of existing loans given to same parties (not applicable to companies whose principal business is to give loans)
Auditor shall state loans or advances in the nature of loans (either repayable on demand or without specified terms or period of repayment) granted to Promoters, Related Parties as defined in clause (76) of Section 2 of the Companies Act, 2013
Explanation: “Related Party” with reference to a company, means—
(i) a director or his relative;
(ii) a key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager [or his relative] is a member or director;
(v) a public company in which a director or manager is a director [and holds] along with his relatives, more than two per cent of its paid-up share capital;
(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:
Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;
(viii) any body corporate which is—
(A) a holding, subsidiary or an associate company of such company;
(B) a subsidiary of a holding company to which it is also a subsidiary; or
(C) an investing company or the venturer of the company;
Explanation.—For the purpose of this clause, “the investing company or the venturer of a company” means a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate.]
(ix) such other person as may be prescribed;
iv) Compliance of Section 185 and Section 186 of the Companies Act, 2013
Auditor shall state whether provisions of Section 185 and Section 186 of the Companies Act have been complied or not, if not provide the details thereof;
Brief Explanation: “Section 185” Loan to Directors, etc.
No Company directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by the Directors of such company or any other person in whom Director is Interested.
Company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the directors of the company is interested, subject to conditions;
a. A special resolution is passed by the company in general meeting
b. The loans are utilized by the borrowing company for its principal business activities
“Section 186” Loan and Investment by Company
Company shall disclose to the members in the financial statement the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security.
Special resolution shall be passed if loan and investment exceeds sixty per cent. of its paid-up share capital, free reserves and securities premium account or one hundred per cent. of its free reserves and securities premium account, whichever is more.
v) Deposits by Companies
Auditor shall state with respect to deposits or amounts which are deemed to be deposits, accepted by the Company.
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
Brief Explanation: “Deposits” includes any receipt of money by way of deposit or loan or in any form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.
vi) Cost Records
Auditor shall state whether maintenance of cost records has been specified by the Central Government under subsection (1) of section 148 of the Companies Act and whether such accounts and records have been so made and maintained.
vii) Statutory Dues
Auditor shall state whether the Company is regular in depositing undisputed statutory dues including Goods and Services Tax, Provident Fund, Employees State Insurance, Income tax, Sales tax, duty of customs, duty of excise, value added tax, cess and any other statutory dues to the appropriate authorities, if not;
Auditor shall indicate 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 become payable.
Statutory dues have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending shall be mentioned.
viii) Unrecorded Transactions
Auditor shall give disclosure of 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), also state that the previously unrecorded income has been properly recorded in the books of account during the year.
ix) Default in repayment of Loans or other Borrowings
Auditor shall report in the format prescribed below, where the Company has defaulted in repayment of loans or other borrowings or payment of interest thereon to any lender;
|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.|
Auditor shall state whether the company is declared as a wilful defaulter by any bank or financial institution or other lender.
Explanation: “Wilful Defaulter” An entity or person that has not paid the loan back despite the ability to repay it.
Auditor shall state whether there is any diversion of loans.
Auditor shall state funds raised on short term basis have been utilized for long term purposes, if yes, the nature and amount to be indicated.
Auditor shall state funds obtained to meet the obligations of its subsidiaries, associates or joint ventures.
Also state funds obtained on the pledge of securities held in its subsidiaries, associates or joint ventures.
x) Funds Raised
Auditor shall state that the funds raised during the year through initial public offer or further public offer including debt instruments were utilized for the purposes for which those are raised, if not utilized for the purpose, the details together with delays or default and subsequent rectification, if any, as may be applicable, be reported.
Auditor shall state whether company has complied section 42 and section 62 of Companies Act, 2013 for preferential allotment or private placement of shares or convertible debentures (fully, partially or optionally convertible) during the year, funds raised have been used for the purposes for which the funds were raised, if not, nature of non-compliance shall be reported.
Auditor shall report whether any fraud by the company or any fraud on the company has been noticed or reported during the year, if yes, nature and amount involved is to be indicated.
Whether any report under section 143(12) of the Companies Act, 2013 has been filed by the Auditor in Form ADT-4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014 with Central Government.
Explanation: If an auditor of a company, in the course of the performance of his duties as statutory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of rupees one crore or above, is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the Central Government.
Report shall be in the form of statement as prescribed in Form ADT 4
Section 177(9) of Companies Act, 2013 states to establish vigil mechanism for directors and employees to report genuine concerns, auditor has to consider whistle-blower complaints, if any, received during the year by the company.
xii) Nidhi Company
Explanation: “Nidhi” means a company which has been incorporated as a Nidhi with the object of cultivating the habit of thrift and savings amongst its members, receiving deposits from, and lending to, its members only, for their mutual benefit, and which complies with such rules as are prescribed by the Central Government for regulation of such class of companies.
Auditor shall state whether Nidhi Company has complied with the Net Owned Funds to Deposits in the ratio of 1:20 to meet out the liability;
Also state whether Nidhi Company is maintaining ten per cent. unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability;
Auditor shall report whether there has been any default in payment of interests on deposits or repayment thereof for any period and if so, the details thereof;
xiii) Compliance of Section 177 and Section 188 of the Companies Act, 2013
Auditor shall state whether all transactions with the related parties are in compliance with sections 177 and 188 of the Companies Act, 2013 where applicable.
Details of the transactions have been disclosed in the financial statements, etc. as required by the applicable accounting standards.
xiv) Internal Audit
Auditor shall state whether the company has an internal audit system commensurate with the size and nature of its business;
Auditor should state whether the reports of the Internal Auditors for the period under audit were considered by him.
Explanation: “Section 138” of Companies Act, 2013 prescribes such class or classes of Company viz. The following class of companies shall be required to appoint an internal auditor which may be either an individual or a partnership firm or a body corporate, namely:-
(a) every listed company;
(b) every unlisted public company having-
(i) paid up share capital of fifty crore rupees or more during the preceding financial year; or
(ii) turnover of two hundred crore rupees or more during the preceding financial year; or
(iii) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year; or
(iv) outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial year; and
(c) every private company having-
(i) turnover of two hundred crore rupees or more during the preceding financial year; or
(ii) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year)
xv) Non- Cash transactions with directors or persons connected with him
Auditor shall state whether the company has entered into any non-cash transactions with directors or person connected with him and if so, whether the provisions of section 192 of Companies Act, 2013 have been complied with.
Explanation: “Section 192” of Companies Act, 2013- Restriction on Non-cash Transactions Involving Directors;
(1) No company shall enter into an arrangement by which—
(a) a director of the company or its holding, subsidiary or associate company or a person connected with him acquires or is to acquire assets for consideration other than cash, from the company; or
(b) the company acquires or is to acquire assets for consideration other than cash, from such director or person so connected, unless prior approval for such arrangement is accorded by a resolution of the company in general meeting and if the director or connected person is a director of its holding company, approval under this sub-section shall also be required to be obtained by passing a resolution in general meeting of the holding company.
(2) The notice for approval of the resolution by the company or holding company in general meeting under sub-section (1) shall include the particulars of the arrangement along with the value of the assets involved in such arrangement duly calculated by a registered valuer.
xvi) Non-Banking Financial Companies
Auditor shall state that 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.
Explanation: “Section 45-IA” states that it is mandatory for a company to obtain Certificate of Registration (CoR) from Reserve Bank of India (RBI) before commencing or to carry on business of a non-banking financial institution.
Auditor shall 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;
Auditor shall state that 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 fulfill the criteria of a CIC, and in case the company is an exempted or unregistered CIC, whether it continues to fulfill such criteria;
Also state 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;
Explanation: “Companies in the Group” means an arrangement involving two or more entities related to each other through any of the following relationships, viz. Subsidiary – parent (defined in terms of AS 21), Joint venture (defined in terms of AS 27), Associate (defined in terms of AS 23), Promoter-promotee as provided in the SEBI (Acquisition of Shares and Takeover) Regulations, 1997 for listed companies, a related party (defined in terms of AS 18) Common brand name, and investment in equity shares of 20% and above)
xvii) Cash Losses
Auditor shall state 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;
(Cash Losses: Depreciation and amortization to be added in negative profit before tax)
xviii) Resignation by previous statutory auditors
Auditor shall state 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;
xix) Company capable of meeting its liabilities existing at the date of balance sheet
Auditor shall state 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 company is capable of meeting its liabilities existing at the date of the balance sheet as and when they fall due within a period of one year from the balance sheet date.
Also state that no material uncertainty exists as on the date of the audit report.
(Standard on Auditing-570: Auditor’s responsibilities in the audit of financial statements relating to going concern and the implications for the auditor’s report)
xx) Corporate Social Responsibility
Other than ongoing projects: Auditor shall state that the company has transferred unspent amount to a Fund specified in Schedule VII to the Companies Act, 2013 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;
Ongoing Project: Auditor shall state that any amount remaining unspent under sub-section (5) of section 135 of the Companies Act, 2013 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
Explanation: “Section 135(6)” Any amount remaining unspent under sub-section (5), pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in pursuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account, and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.
(Above provisions w.r.t. CSR are yet to be notified under the Companies (Amendment) Act 2019)
xix) Qualifications or Adverse Remarks
Auditor shall report 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.
IV) Reasons to be stated for unfavourable or qualified answers:
Auditor’s report shall state answer to any of the questions referred to in paragraph 3 is unfavourable or qualified, basis for such unfavourable or qualified answer, as the case may be.
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.