The Ministry of Corporate Affairs (MCA) has on 25th February, 2020, after consultation with the National Financial Reporting Authority (NFRA), notified the Companies (Auditor’s Report) Order, 2020 (CARO, 2020) and thereby repealing CARO, 2016.
Few important points pertaining to CARO, 2020, are given hereunder:
- CARO, 2020 shall apply to every company including a foreign company, except, (a) banking company, (b) insurance company, (c) section 8 company, (d) one person company (OPC). (e) small company and (f) private limited company, not being a subsidiary or holding company of a public company, having:
- paid up share capital and reserves (as on the balance sheet date) ≤ Rs. 1 Crore; and
- total borrowings from Bank and Financial Institution (at any point of time during the financial year) ≤ Rs. 1 Crore; and
- total revenue, including revenue from discontinuing operations (during the financial year as per the financial statements) ≤ Rs. 10 Crore.
- CARO, 2020 applies to every report made by the auditor under Section 143 of the Companies Act, 2013 (the Act) on the accounts of every company audited by him for the financial years commencing on or after the 1st April, 2019.
- CARO, 2020 shall not apply to the auditor’s report on consolidated financial statements except clause (xxi) of paragraph 3 of CARO, 2020.
- Paragraph 3 of CARO, 2020 provides the matters on which a statement needs to be included in the auditor’s report on the accounts of a company, few of the important matters are given hereunder:
- 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 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;
- 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;
- 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 thereof;
- 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;
- 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;
- 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’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;
- 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 subsection (6) of section 135 of the said Act – Section 135(6) of the Act has yet not been notified by MCA;
- Where, in the auditor’s report, the answer to any of the questions referred to in paragraph 3 is unfavourable or qualified, the auditor’s report shall also state the 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.
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