Companies (Auditor's Report) Order, 2020 (CARO 2020) & its variation with CARO 16.

Companies (Auditor's Report) Order, 2020

MCA notifies CARO 2020 on 25th February 2020, and it is applicable for the audit of financial statements of companies for the financial year 2019-20 on wards. In this article we are discussing all the clauses of CARO 2020 along with its differences with old CARO-2016.

APPLICABILITY:- 

There is no change in its applicability. 

It shall apply to every company including a foreign company as defined in clause (42) of section 2 of the Companies Act, 2013 (18 of 2013) [hereinafter referred to as the Companies Act], except–
(i) a banking company as defined in clause (c) of section 5 of the Banking Regulations Act, 1949 (10 of 1949);
(ii) an insurance company as defined under the Insurance Act,1938 (4 of 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 not more than one crore rupees as on the balance sheet date and which does not have total borrowings exceeding one crore rupees from any bank or financial institution at any point of time during the financial year and which does not have a 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.

Number of Clauses:- 

• There are 21 clauses in CARO 2020.
•  In the old CARO-2016 there was 16 clauses. 
• 7 clauses inserted, 1 clause merged with other and 1 clause deleted in the new CARO.

Clause no.1:-  Fixed Assets

(a) (A) whether the company is maintaining proper records showing full particulars, including quantitative details and situation of Property, Plant and Equipment;
      (B) whether the company is maintaining proper records showing full particulars of intangible   assets;
(b) 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;

(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 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*
–	—	–	–	–	*also indicate if in dispute

(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;
(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 there under, if so, whether the company has appropriately disclosed the details in its financial statements;

Changes in Clause-1

• The word 'Fixed Asset' is replaced with the word 'Property, Plant & Equipment'
• Now, there is a separate sub-para on reporting on Intangible Assets.
• A new format for disclosure of Immovable properties which are not held in the name of the company.
• Reporting in case of revaluation of PPE or Intangible Assets by registered valuer & resultant changes is 10% or more of the net carrying amount.
• Reporting on whether company is holding or involved in any legal case for holding Benami properties & its disclosure in the financial statement.

Clause no.2:- Inventory & Other Current Assets

(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; 

(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; 

Changes in Clause-2

• Discrepancies found on verification of inventory is now quantified.
• The auditor needs to report if any discrepancies of 10% or more in the aggregate for each class of inventory were noticed & they have been properly dealt in the books.
• In case of working capital based on current assets in excess of 5 crore rupees is sanctioned from the financial institutions, the quarterly returns or statements filed by the company are in agreement with the books of accounts, if not, give details.

Clause no.3:- Investments, loans or advances by Company

(iii) whether during the year the company has made investments in, provided any guarantee or security or granted any loans or advances in the nature of loans, secured or unsecured, to companies, firms, Limited Liability Partnerships or any other parties, if so,- 

   (a) 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; 

  (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’s 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; 

  (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;

Changes in Clause-3

• In the old CARO this clause was restricted only up to parties whose name are entered in the register which is maintained under section 189 of the Companies. Now, this clause is extended to loans, advances or investments made to any company, firm, LLP or others.
• In case of any investments, provision of loans or advances in the nature of loans, or stood guarantee, or provided security, indicate the aggregate amount during the year and balance outstanding at the balance sheet date
• to subsidiaries, joint ventures, and associates
• to parties other than subsidiaries, joint ventures, and associates
• In case of provision of loans or advances in the nature of loans repayable on demand, without any terms or period of payment, then specify the amount of such loans or advances given to the promoters, related parties.

Clause no.4:- Loan to Directors & Investment made by Company. 

(iv) 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;

There is no Change in this clause.

Clause no.5:-Deposits Accepted by the Company.

(v) 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 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;

There is no Change in this clause.

Clause no.6:-Cost Records 

(vi) 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;

There is no Change in this clause.

Clause no.7:-Statutory Dues 

(vii) (a) 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; 

      (b) where statutory dues referred to in sub-clause (a) have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending shall be mentioned (a mere representation to the concerned Department shall not be treated as a dispute);

There is no Change in this clause.

Clause no.8:-Disclosure of Undislosed Income.

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;

Changes in Clause 8

• This is a newly inserted clause.
• If the company has disclosed any undisclosed income to Income tax department under any proceedings.then the auditor needs to report whether the same has been incorporated in the books.

Clause no.9:-Borrowings from Bank or Others.

(ix) (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 below:-

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.

(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;

Changes in clause 9.

• A new format has been specified for reporting the details of the default in repayment of loans or other borrowings.
• Reporting on whether the company is declared wilful defaulter by any bank or financial institutions or others.
• Reporting on whether the loans are utilised for the purpose it was obtained.
• Various reporting clauses of sec 143 is inserted as a part of CARO in respect of term loans, short term loans, funds raised to meet the obligations of subsidiaries.

Clause no.10:-Money raised by IPO & Private placement of preferential issue:

(x) (a) whether money raised by way of an 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;
(b) whether the company has made any preferential allotment or private placement of shares or convertible debentures (fully, partially or optionally convertible) during the year and if so, whether the requirements 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 details in respect of amount involved and nature of non-compliance;

Changes in clause 10.

• 2 Clauses of CARO 2016 are merged into 1.
• Clause (xiv) of CARO 2016 – compliance in relation to preferential allotment or private placement of shares is now merged with this clause.

Clause no.11:-Reporting on Fraud

(xi) (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;

Changes in clause 11.

• Whether any report in form ADT-4 has been filed by the auditor.
• Whether any complaints from the whistleblower are received by the company,

Clause no.12:- Nidhi Company.

xii)  (a) whether the Nidhi Company has complied with the Net Owned Funds to Deposits in the ratio of 1: 20 to meet out the liability; 

      (b) whether the Nidhi Company is maintaining ten per cent. unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability; 

      (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

There is no Change in this clause.

Clause no.13:- Related Party Transactions.

(xiii) 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;

There is no Change in this clause.

Clause no.14:- Internal Audit:-

(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;

Changes in clause 14:

• This is a newly inserted clause.
• Reporting on whether the company has an adequate internal audit system.
• Whether the reports of the Internal Auditors were considered by the statutory auditors.

Clause no.15:- Non-Cash Transactions:-

(xv) 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 have been complied with;

There is no change in this clause

Clause no.16:- Registration under RBI Act

xvi) (a) 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; 

      (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; 

Changes in Clause 16

• Whether the company has conducted non-banking financial or housing finance activities without a valid certificate.
• If the company is a core investment company whether it continues to fulfill the criteria of a Core Investment company.
• Some additional disclosures relating to core investment companies need to be reported.

Clause no.17:- Cash losses:-

(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;

Changes in clause 17:-

• This is a newly inserted clause.
• Reporting on whether the company has incurred any cash loss during the current financial year and preceding finacial year and disclose the amount of loss.

Clause no.18:- Resignation of Statutory Auditors

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;

 Changes in Clause-18

• This is a newly inserted clause.
• Whether the auditor has taken consideration of the issues raised by the outgoing auditor in case of resignation by previous auditor,

Clause no.19:- Material Uncertainty in relation to realisation of financial assets and payment of financial liabilities.

(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’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;

Changes in Clause 19-

• This is a newly inserted clause.
• In the opinion of the auditor whether the company is in a position to meet its financial liabilities existing at the balance sheet date which are fall due within a period of one year from the balance sheet date.

Clause no 20- CSR Compliance:-

(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 subsection (6) of section 135 of the said Act;

Changes in Clause 20:-

• This is a newly inserted clause.
• The company has transferred unspent amount in respect of other than ongoing projects and ongoing projects to specified funds/accounts as per sec 135(5) and (6) respectively.
• (This is a new concept and we are going to upload a seperate article on this clause)

Clause no 21:- Qualification/Adverse remark in the Consolidated Financial Statements:-

(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.

Changes in Clause 21:-

• This is a newly inserted clause.
• If there is any qualification or adverse remark reported in the stand-alone financial statements of the respective company in the group by the respective auditor then details of such companies along with the paragraph numbers of the CARO need to be reported here.

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[Disclaimer:-This article is being furnished for informational purposes only. We make every effort to use reliable & comprehensive information, but we do not represent that the contents of the article are accurate or complete.]