‘Companies (Auditor’s Report) Order, 2020’ Reporting requirements

CARO 2020 is a new format for issue of audit reports in case of statutory audits of companies under Companies Act, 2013. The aim of CARO 2020 is to enhance the overall quality of reporting by the company auditors. The MCA has notified Companies (Auditor’s Report) Order, 2020 on 25 February 2020. This order (CARO 2020) replaces the earlier order (CARO 2016). This article details about the applicability and the reporting requirements of CARO.

Section 143(11) of the Companies Act, 2013, gives power to the Central Government to specify certain matters to be included in the Auditor’s report in consultation with National Financial Reporting Authority (NFRA). NFRA is an independent regulatory body for regulating the audit and accounting profession in India and it was constituted under section 132 of the Companies Act, 2013.

CARO 2020 consists of 4 Paragraphs and are as follows:

Para 1	Short title, Application and Commencement
Para 2	Auditor’s report to contain matters specified in para 3 and 4
Para 3	Matters to be included in auditor’s report
Para 4	Reasons to be stated for unfavourable or qualified answers

Para 1 : Short title, Application and Commencement

Short title : Companies (Auditor’s Report) Order, 2020

Application : It shall apply to every company including a foreign company except the following

(i) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949;

(ii) an insurance company as defined under the Insurance Act,1938;

(iii) a company licensed to operate under section 8 of the Companies Act;

(iv) a One Person Company as defined in clause (62) of section 2 of the Companies Act and a small company as defined in clause (85) of section 2 of the Companies Act; and

(v) a private limited company, not being a subsidiary or holding company of a public company, having

• a paid up capital and reserves and surplus less than or equal to Rs.1 crore as on the balance sheet date and
• total borrowings less than or equal to Rs.1 crore from any bank or financial institution at any point of time during the financial year and
• total revenue as disclosed in Scheduled III to the Companies Act (including revenue from discontinuing operations) less than or equal to Rs.10 crore during the financial year as per the financial statements.

In short, if all the three conditions above are satisfied then CARO does not applies to the private limited company.

Commencement : CARO 2020 is applicable for all statutory audits commencing on or after 1 April 2020. i.e from Financial Year 2020 – 2021

Para 2 : Auditor’s report to contain matters specified in para 3 and 4

Every report made by the auditor to which this order applies shall in addition, contain the matters specified in paragraphs 3 and 4.

Para 3 : Matters to be included in auditor’s report

The auditor’s report (CARO 2020) shall include a statement on the following matters, namely:

• Details of tangible and intangible assets
• Details of inventory and working capital
• Details of investments, any guarantee or security or advances or loans given
• Compliance in respect of a loan to directors
• Compliance in respect of deposits accepted
• Maintenance of costing records
• Deposit of statutory liabilities
• Unrecorded income
• Default in repayment of borrowings
• Funds raised and utilization
• Fraud and whistle-blower complaints
• Compliance by a Nidhi
• Compliance on transactions with related parties
• Internal audit system
• Non-cash dealings with directors
• Registration under section 45-IA of RBI Act, 1934
• Cash losses
• Resignation of statutory auditors
• Material uncertainty on meeting liabilities
• Transfer to fund specified under Schedule VII of Companies Act, 2013
• Qualifications or adverse auditor remarks in other group companies

Para 4 : Reasons to be stated for unfavourable or qualified answers

In a case where the auditor’s answer to any of the requirements mentioned in para 3 is unfavourable or negative, then the auditor’s report shall also state the reason for such unfavourable or qualified answer. Also, in a case where the auditor is unable to express any opinion on any specified matter, the report shall indicate such fact along with the reasons as to why it is not possible for the auditor to give an opinion on the same.

Detailed Reporting Under Each Clause of Para 3

(i) Details of tangible and intangible assets

• whether the company is maintaining proper records showing full particulars, including quantitative details and situation of tangible (Property, Plant and Equipment) and intangible assets.
• 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.
• 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*
xxx	xxx	xxx	xxx	xxx	*also indicate if in dispute

• 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; (the revaluation may be upwards or downwards).
• 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 there under, if so, whether the company has appropriately disclosed the details in its financial statements.

(ii) Details of inventory and working capital

• whether the management has carried out physical verification of inventory at reasonable intervals. If 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 accounts.
• whether during any point of time of the year, the company has been sanctioned working capital limits in excess of Rs.5 crore, 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.

(iii) Details of investments, any guarantee or security or advances or loans given

• If the company has during the year made any investments in, given any guarantee or security or granted any loans or advances which are characterized as loans, unsecured or secured, to LLPs, firms or companies or any other person.
• If the company has provided advances or provided loans which are characterized as loans, or given guarantee, or given security to any other entity (other than a company carrying on a business of providing loans), the below information should be furnished: The total amount given during the year, and the balances due as at the balance sheet date with respect to such loans or advances and guarantees or security to subsidiaries, joint ventures and associates and to parties other than subsidiaries, joint ventures and associates.
• 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.
• 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. 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.
• In case any loan or advance in the nature of a loan is given which was due for repayment during the year and has been renewed or extended or fresh loans granted to settle the overdue of existing loans given to the same parties. If yes, specify the total amount of such dues renewed or extended or settled by fresh loans and the percentage (proportion) of the total to the total loans or advances granted during the year (other than companies whose principal business is to grant loans).
• In case the company has given any loans or advances in the nature of loans either repayable on demand or without specification of any terms or period of repayment. If so, to specify the total amount, percentage thereof to the total loans granted, the total amount of loans granted to promoters, related parties as defined section 2(76) of the Companies Act, 2013.

(iv) Compliance in respect of a loan to directors

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.

(v) Compliance in respect of deposits accepted

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 there under, 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.

(vi) Maintenance of costing records

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.

(vii) Deposit of statutory liabilities

Whether the company has regularly deposited statutory dues or there are any statutory dues pending for a period more than 6 months as on the balance sheet date. In case of any disputed statutory dues, the amount of such dues and the forum before whom the dues are litigated need to be mentioned.

Statutory Dues: Goods and Services Tax, Provident Fund, Employees’ State Insurance, Income tax, Sales tax, Service tax, Customs duty, Excise duty, Value Added Tax, Cess and any other statutory dues to the appropriate authorities.

(viii) Unrecorded income

Whether any transactions which are not recorded in the accounts have been disclosed or surrendered before the tax authorities as income during the year. If so, whether such undisclosed income has been recorded in the books of accounts during the year.

(ix) Default in repayment of borrowings

• In case the company has made any default in the repayment of loans to banks, government, debenture-holders, etc. then the amount and period of default as per the below format:

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 been declared a wilful defaulter by any bank or financial institution or any other lender.
• Have term loans been used for the object for which they were obtained. If not, the amount of loan so diverted and the purpose for which it is used may be reported.
• Whether funds raised on short term basis have been utilized for long term purposes If yes, the nature and the amount of such funds to be mentioned.
• 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.
• Has the company raised any loans during the year by pledging securities held in their subsidiaries, joint ventures or associate companies. If so, the details of such loans and also the default in the repayment of the loans.

(x) Funds raised and utilization

• 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.
• Has the company made any private placement or preferential allotment of shares or convertible debentures (fully, partially or optionally convertible) during the year, whether the same is in accordance with section 42 and section 62 of the Companies Act, 2013. Whether the funds raised, have been used for the purposes they were raised, if not, provide details in respect of amount involved and nature of non-compliance.

(xi) Fraud and whistle-blower complaints

• Has there been any fraud by the company or any fraud done on the company. If any such fraud has been noticed or reported any time of the year. If yes, nature and amount involved have to be reported.
• Whether the auditors of the company have filed a report in Form ADT-4 with the Central Government as prescribed under the Companies (Audit and Auditors) Rules, 2014.
• In case of receipt of whistle-blower complaints, whether the complaints have been considered by the auditor.

(xii) Compliance by a Nidhi

Compliance with provisions applicable to a Nidhi company: –

• Maintaining of net owned funds to deposit ratio of 1:20 for meeting liabilities.
• Maintaining 10% term deposits (which are unencumbered) for meeting liabilities.
• Details of any default in payment of interest on deposits or repayment of for any period.

(xiii) Compliance on transactions with related parties

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.

(xiv) Internal audit system

Does the company have an internal audit system in accordance with its size and business activities. Whether the reports of the internal auditors been considered by the statutory auditor.

(xv) Non-cash transactions

In case the company has undertaken non-cash transactions with their directors or other persons connected to the directors, if so whether the provisions as per section 192 of the Companies act has been complied with.

(xvi) Registration under Section 45-IA of RBI Act, 1934

• Is the company required to be registered under section 45-IA of the Reserve Bank of India Act, 1934 and if so, whether the company has obtained registration.
• Whether the company has carried on any Non-Banking Financial or Housing Finance activities (NBFC or HFC) without having a valid registration certificate from RBI.
• Is the company a Core Investment Company (CIC) under the RBI regulations and does it continue to fulfill the criteria of a CIC. In case the company is an exempted or unregistered CIC, does the company continue to fulfill the criteria for exemption.
• Does the group to which the company belongs have more than one CIC as part of it, then indicate the number of CICs which are in the group.

(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.

(xviii) Resignation of statutory auditors

Whether during the year, has there been any resignation of statutory auditors, if yes, has the auditor considered the objections, issues or concerns raised by the outgoing auditors.

(xix) Material uncertainty

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.

(xx) Transfer to fund specified under Schedule VII of Companies Act, 2013

• With respect to obligations under Corporate Social Responsibility, in case of other than ongoing project whether the company has transferred the unspent amount to a Fund specified in Schedule VII to the Companies Act within a period of 6 months from the expiry of the financial year.
• In case of ongoing project whether any amount which remains unspent has been transferred to a special account in accordance with provisions of section 135 of the Companies Act, 2013.

(xxi) Qualifications or adverse auditor remarks in other group companies

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.

All the above stated clauses need to be mandatorily reported whether there is a discrepancy or not. Also, the disclosures are to be given appropriately.