Companies (Auditor’s Report) Order, 2020 [“CARO, 2020”] has been notified by the Ministry of Corporate Affairs (MCA) vide its order dated 25th February 2020, in exercise of the powers conferred in sub-section 11 of Section 143 of Companies Act,2013 and after consultation with the National Financial Reporting Authority (NFRA),. Companies (Auditor’s Report) Order, 2020 (CARO, 2020) [hereinafter referred as “Order”] is in supersession of the Companies (Auditor's Report) Order, 2016.
Companies (Auditor’s Report) Order, 2020 [“CARO, 2020”]
A. Effective From
The CARO,2020 will apply to every report made by the auditor under Section 143 of Companies Act, 2013 from the financial year commencing on or after 01st April 2019. However, the order will come into force on the date of its publication in Official Gazette.
B. Applicable Companies
The 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 and surplus (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 as disclosed in Schedule III of the Companies Act,2013 (including revenue from discontinuing operations) (during the financial year as per the financial statements) ≤ Rs. 10 Crore.
C. Non- applicability
CARO, 2020 shall not apply to the auditor’s report on consolidated financial statements except clause (xxi) of paragraph 3 of CARO, 2020 i.e., indicate the details of the companies and paragraph numbers of the Companies (Auditor’s Report) Order (CARO) report containing the qualifications or adverse remarks, if there are any adverse remarks or qualifications in the CARO Order of consolidated financial statements.
D: Matters to be included in the Auditor’s Report
The auditor's report on the accounts of a company shall include a statement on the following matters:
- 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 of 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 a specific format has been provided for reporting the details of such immovable properties;
- 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;
- disclose the details of proceedings that have been initiated [or] are pending against the company for holding any Benami property under the Benami Transactions (Prohibition) Act, 1988 and whether the company has appropriately disclosed the details in its financial statements.
- if there are any discrepancies of 10% or more in the aggregate of each class of inventory noticed during physical verification of inventory.
- provide specific details as to whether during any point of time of the year, the Company has been sanctioned working capital limits in excess of Rs. 5 crores, in aggregate, from banks or financial institutions based on security of current assets; and whether the quarterly returns/statements filed by the company with such banks or financial institutions are in agreement with the books of account of the Company, if not to provide the details;
- provide details on the investments made by the company in, any guarantee or security provided or any loans or advances in the nature of loans granted, secured or unsecured, to companies, firms, Limited Liability Partnerships or any other parties (related or unrelate) during the year, that they are not prejudicial to the interests of the company.
- in respect of loans, investments, guarantees, and security whether provisions of section 185 and 186 of the Companies Act, 2013 have been complied with. If not, provide the details thereof.
- in respect of deposits accepted or deemed 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, 2013 and the rules framed 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;
- whether maintenance of cost records has been specified by the Central Government under sub-section (1) of section 148 of the Companies Act, 2013 and whether such accounts and records have been so made and maintained.
- whether the company is regular in depositing undisputed statutory dues including goods and services tax, provident fund, employees' state insurance, income tax, sales tax, service tax, duty of customs, duty of excise, value-added tax, cess, and any other statutory dues to the appropriate authorities and if not, the extent of the 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 became payable, shall be indicated;
- whether dues of income tax or sales tax or service tax or a duty of customs or duty of excise or value-added tax as mentioned above point have not been deposited on account of any dispute, then the amounts involved and the forum where the dispute is pending shall be mentioned. (A mere representation to the concerned Department shall not be treated as a dispute).
- 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;
- provide details in a specific format to report the period and the amount of default by the company in repayment of loans or other borrowings or in the payment of interest thereon to any lender; whether the company is a declared willful defaulter by any bank or financial institution or other lender;
- 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.
- whether funds raised on short term basis have been utilized for long term purposes, if yes, the nature and amount to be indicated.
- 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.
- 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 funds raised by way of an initial public offer or further public offer (including debt instruments) and term loans 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.
- whether the company has made any preferential allotment or private placement of shares or fully or partly or optionally convertible debentures during the year under review and if so, as to whether the requirement of section 42 and Section 62 of the Companies Act,2013 have been complied with and the funds raised have been used for the purposes for which the funds were raised. If not, provide the details in respect of the amount involved and the nature of non-compliance.
- whether any fraud by the company or on the Company has been noticed or reported during the year; If yes, the nature and the amount involved to be indicated
- whether any report under sub-section (12) of section 143 of the Companies Act,2013 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.
- whether the auditor has considered whistle-blower complaints if any, received during the year by the company
- whether the Nidhi Company has complied with the Net Owned Funds to Deposits in the ratio of 1: 20 to meet out the liability and whether the Nidhi Company is maintaining ten percent unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability. Also is there any default in payment of interest on deposits or repayment thereof for any period and if so, the details thereof.
- whether all transactions with the related parties are in compliance with sections 177 and 188 of Companies Act,2013 where applicable and the details have been disclosed in the financial statements, etc., as required by the applicable accounting standards.
- whether the company has an internal audit system commensurate with the size and nature of its business and whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor.
- whether the company has entered into any non-cash transactions with directors or persons connected with him and if so, whether the provisions of section 192 of Companies Act, 2013 have been complied with.
- whether the company is required to be registered under section 45-1A of the Reserve Bank of India Act, 1934 and if so, whether the registration has been obtained.
- 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 and 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; 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.
- the amount of cash losses incurred in the financial year and in the immediately preceding financial year.
- whether the issues, objections or concerns raised by the outgoing auditors before forming his opinion has been considered.
- to render his opinion based on 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, 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, in respect of other than ongoing projects, 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 the second proviso to sub-section (5) of section 135 of the Companies Act,2013;
- whether any amount remaining unspent under sub-section (5) of section 135 of the Companies Act,2013 pursuant to an ongoing project, has been transferred to a special account in compliance with the provision of subsection (6) of section 135 of the Companies Act,2013.
- shall indicate the details of the companies and paragraph number of qualifications or adverse remarks, if there are any adverse remarks or qualifications in the CARO Order of consolidated financial statements.
Comparison between CARO, 2016 and CARO,2020:
- Inclusion of additional clauses - As compared to CARO, 2016, the CARO, 2020 includes certain additional clauses i..e, 2,5,6,7,8,15,17,18,19,20,24,25,28,31,32,33,34,35,36 and 37 point as mentioned above,
- Re-drafting of Existing Clauses - The existing clauses of CARO, 2016 have been re-drafted to elicit detailed comments from the auditors i.e., 1,3,4,9,13,16 and 26 point as mentioned above.
- Specific Format to be followed- The CARO,2020 specifies a certain format for the detailed comments from the auditors concerning the 4 and 16 point as mentioned above.
The CARO, 2020 is expected to improve the overall quality of reporting by the statutory auditors on the financial statements of the companies and thereby lead to greater transparency and faith in the financial affairs of the companies. By this, it is expected to have a greater inflow of investment by and in Indian companies.
Disclaimer: The entire contents of this document have been developed based on relevant provisions and are purely the views of the authors. Though the author has made utmost efforts to provide authentic information, however, the authors and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and consequences of anything done or omitted to be done by any such person in reliance upon the contents of this document.