– Section 143 (11) of the Companies Act, 2013 stipulates that the Central Government may order for the inclusion of statement on specified matter in the auditor‚Äôs report for specified class or description of companies. Accordingly, CARO 2016 was issued in pursuance of Section 143 (11) of Companies Act 2013 for inclusion of the matters specified therein in auditors‚Äô report.
– Further, in order to enhance transparency and reporting, Ministry of Corporate Affairs has issued Companies (Auditor‚Äôs 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‚Äôs Report) Order, 2020 supersedes the Companies (Auditor‚Äôs Report) Order, 2016.
– MCA vide order dt. 17.12.2020 defer the applicability of Companies (Auditor‚Äôs Report) Order, 2020 to the financial years commencing on or after 01st April, 2021
Comparison of CARO 2020 w.r.t CARO 2016
– There is no change in applicability requirements as compared to CARO 2016 other than requirement of reporting on Consolidated Financial statement
– CARO 2020 includes several new clauses and has revised certain existing clauses and in nutshell increase the reporting requirement for auditors.
– Here we list down the major differences in CARO 2020 w.r.t. CARO 2016 and provide explanation w.r.t difference wherever seems appropriate in three parts.
A. Amendment in existing clauses.
B. Insertion of new clauses.
C. Deletion of clause
|A.¬†¬†¬†¬† Amendment in existing clauses.¬†|
|Clause||Reporting Under CARO-2020||Reporting Under CARO- 2016|
|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, including quantitative details and situation of fixed assets;|
|Expl- To align the clause with the IND-AS and AS, nomenclature of fixed asset is changed to Property, Plant & ¬†Equipment.|
|Whether the company is maintaining proper records showing full particulars of intangible assets;||N.A.|
|Expl-¬† As companies also need to maintain register of Intangible assets just like register of Fixed Assets, thus ¬†CARO 2020 cover the reporting of Intangible assets which was missing in earlier reporting order.|
|(i)(b)||Whether these Property, Plant and Equipment have been physically verified ‚Ä¶||Whether these fixed assets have been physically verified ‚Ä¶..|
|Expl- Nomenclature of fixed asset is changed to Property, Plant & Equipment to align the clause with the IND-AS and AS.|
|(i)(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||Whether the title deeds of immovable properties are held in the name of the company. If not, provide the details thereof;|
|Expl- In the case of adverse opinion , CARO 2020 specify the format in which reporting is to be done.(same can be seen in pg 7 of (https://taxguru.in/company-law/caro-2020.html) ¬†which was not defined in CARO 2016.|
|(i)(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;||N.A.|
|Expl- This clause requires reporting, if in aggregate there is changes in net carrying value of each class of PPE¬† or intangible asset 10% or more.|
|(i)(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;||N.A.|
|Expl- ¬†It requires the auditor to check the appropriateness of disclosures in the financial statement related to any proceeding which is initiated or is pending regarding the benami property.|
|(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;||Whether physical verification of inventory has been conducted at reasonable intervals by the management and whether any material discrepancies were noticed and if so, whether they have been properly dealt with in the books of account;|
–¬† ¬†The scope of the clause has been increased by covering the reporting on coverage and procedure¬† of ¬†verification. Now, the auditor has also to report on appropriateness of procedure followed in the verification.
–¬† ¬†Further CARO 2016 says that if any material discrepancies were noticed then auditor need to check and materiality is a totally judgmental but CARO 2020 specifically state out the monetary limit of discrepancies. i.e. 10% or more which is evaluated on the basis of monetary value and not on quantity basis.
|(ii)(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;||N. A.|
–¬† ¬†This clause put¬† the responsibility¬† on the auditors to find out any disagreement between the books and quarterly statements sent by the company to the financial institution/banks. It will keep the check on incorrect statements which was earlier sent to the financial institution/banks¬† which in turn will leds to reduce the banking related frauds.
–¬† Limit of Rs 5 crores need to seem in aggregate from all banks and financial institutions which are secured against current assets of the company. Further this clause talks about sanctioned limit and not about utilization of funds, thus if utilization of funds is ¬†less than 5 crores but sanctioned limit is more than 5 crores then the same need to be consider in the reporting.
|(iii)||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;||Whether the company has granted any loans, secured or unsecured to companies, firms, Limited Liability Partnerships or other parties covered in the register maintained under section 189 of the Companies Act, 2013. If so,|
Earlier CARO 2016 only applies to loan to¬† parties which are covered under section 189 of the Companies Act 2013, and these covered loan only need to reported if and only if these are covered under any of the sub- clause a or b or c of clause (iii) of CARO 2016.
But CARO 2020 widen the scope of reporting by
–¬† ¬† Covering the loan, advances in the nature of Loan, guarantee or any security¬† to¬† any entity (i.e. also other than which are covered under section 189)
–¬† Make it mandate to report the aggregate amount of the transactions of all loans and advances occur during the year and outstanding balance at balance sheet date.
Loan can be short term or long term, thus companies needs to maintain the details of all loans, advances in the nature of loan, guarantees and securities provided to any entity.
|(iii)||¬†(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‚Äôs 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;
|¬†(a) whether the terms and conditions of the grant of such loans are not prejudicial to the company‚Äôs interest;
(b) whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular;
(c) 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
These sub-clauses are amended to align the same with sub- clause (a) of clause (iii)
|(iii)||(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
–¬† This is new insertion in CARO 2020, which state that if any loan is renewed or due date of repayment has been extended or any fresh loan are provided to settle the existing loan then this sub- clause require reporting of such instances.
– Basically (iii)(e) ¬†requires identification of instances of ever-greening. (An attempt to mask loan default by giving new loans to help delinquent borrower repay principal or pay interest on old loan)
|(v)||In respect of deposits accepted by the company or amounts which are deemed to be deposits, whether‚Ä¶.||In case, the company has accepted deposits, whether‚Ä¶..|
|Expl- Now, the amount which are deemed to be deposit also covered under the said clause.|
|(vii)||(a) whether the company is regular in depositing undisputed statutory dues including Goods and Services Tax, provident fund‚Ä¶.‚Ä¶‚Ä¶..
(b) where statutory dues referred to in sub-clause (a) have ‚Ä¶.
|(a) whether the company is regular in depositing undisputed statutory dues including provident fund‚Ä¶.
(b) where dues of income tax or sales tax or service tax or duty of customs or duty of excise or value added tax have‚Ä¶.
|Expl- Goods and Service Tax specifically included in the amended clause, however there is no need as earlier definition already covers all statutory dues which automatically covers GST.|
|(IX) w.r.t (XIII)||(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 (https://taxguru.in/company-law/caro-2020.html )
(b) whether the company is a declared wilful defaulter by any bank or financial institution or other lender; (c) 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; (d) whether funds raised on short term basis have been utilised for long term purposes, if yes, the nature and amount to be indicated; (e) 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; (f) 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;
|Whether the company has defaulted in repayment of loans or borrowing to a financial institution, bank, Government or dues to debenture holders? If yes, the period and the amount of default to be reported (in case of defaults to banks, financial institutions, and Government, lender wise details to be provided).|
–¬† This clause has diversified its scope by covering the default of any loan or other borrowings or¬† interest thereon taken from any lender which was earlier limited to specified lender only. Now, CARO 2020 also specified the format of reporting.
– Sub Clause b cover the wilful defaulter which means a person having ability to pay are not paying the loan.
–¬† ¬†Sub Clause c requires reporting if term loan taken from any entity or person was utilized for the purpose other than the pupose for which the same was obtained, it was earlier covered in Clause IX of CARO 2016 with Initial Public Offer or Further public offer with narrow scope.
–¬† ¬†Sub Clause d any fund which was raised for short term basis if used for loan term purpose then the same should become the part of the report; and
Expl of sub-clause e
– This clause ¬†covers both long term and short term funds taken to meet the obligations of the specified entity which was either taken during the¬† audit period or in earlier years but outstanding during the audit period.
–¬† Obligation means any amount which is paid by company on behalf of the specified entity.
Expl of sub-clause f
–¬† ¬†This clause requires reporting if company has taken loan on the pledge of securities held in specified entity and also if company has defaulted in repayment of principal or interest of such loans.
|(X)(b) w.r.t. (XIV)||Whether the company ‚Ä¶.section 42 and section 62 of the Companies Act, 2013‚Ä¶||Whether the company‚Ä¶.section 42 of the Companies Act, 2013‚Ä¶.|
|(XI) w.r.t. (X)||(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;||Whether any fraud by the company or any fraud on the Company by its officers or employees has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated;|
– If ADT-4 is filed by the auditor to central government then same also need to disclose under this clause
– If any whistle blower complaints received by the company including any anonymous complaints, whether the same has been properly evaluated by the auditor or not need to be reported under this clause.
|(XII)||(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;||–|
|Expl- In case Nidhi company¬† has make the default of repayment or interest thereon then this clause put obligation to the auditor for reporting the default.|
|B.¬† Insertion of new clauses.|
|(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;|
|Expl- If any income has been surrendered in any provision of the Act ¬†(including during search) which may relate to any Assessment Year, whether the same has been properly recorded into books of accounts or not.|
|(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.|
|Expl- This clause put obligation to the auditor to report on the appropriateness of¬† internal audit system w.r.t nature and size of the ¬†business of the company and consideration of all internal audit observations by the statutory auditors.|
|(XVI)||(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;|
|(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;|
–¬† The term ‚Äėcash loss‚Äô is not defined in the Act.
– However, as per general understanding Cash Loss means losses without considering the Non- Cash items (such as Depriciation, Amortisations, Foreign exchange gain/losses, Fair value adjustments, Impairments)
|(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;|
–¬†¬†¬†¬†¬†¬†¬†¬†¬† This clause is also applicable in case of resignation of joint auditor.
–¬†¬†¬†¬†¬†¬†¬†¬†¬† The auditor need to report whether all issues, objections or any concern which was raised by outgoing auditor has been properly dealt with.
|(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‚Äôs 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 clause basically related to Going Concern concept which is the responsibility of the auditor as per Standard of Auditing- 570 (Auditor‚Äôs responsibilities in the audit of financial statements relating to going concern and the implications for the auditor‚Äôs report)
–¬† Financial Assets and Financial Liabilities may be considered as defined in IND AS 32, Financial Instruments.
–¬† Auditor need to consider various financial ratios (Liquidity ratio, efficiency ratios), ageing of debtors/creditors, management plans and various other things which may impact on Entity‚Äôs Going Concern.
|(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 sub-section (6) of section 135 of the said Act;|
|Expl- This clause requires the auditor to check whether section 135 of the Act has been properly complied or not.|
|(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-|
–¬†¬†¬†¬†¬†¬†¬†¬†¬† The CARO 2016 was not applied to consolidated financial statements but CARO 2020 put out exception on the same i.e. if there is an adverse remarks in the report of any component then details of that component ¬†including para number of CARO report containing the qualification need to be reported.
|C.¬† ¬† Deletion of clause|
|(xi)||whether managerial remuneration has been paid or provided in accordance with the requisite approvals mandated by the provisions of section 197 read with Schedule V to the Companies Act? If not, state the amount involved and steps taken by the company for securing refund of the same;|
|In Section 197 read with schedule V, requirement of approval from Central Government was now removed. Thus this clause was deleted in CARO 2020.|
Thus, CARO 2020 enhance the scope of reporting by covering various aspects which in turns leads to increase the reporting of the auditors and also put greater responsibility on companies to share more information to the auditors.
Many clauses in CARO 2020 are appreciable which will definitely increase the transparency in the financial statement.¬†