Guide to CARO 2020| Clause-wise analysis

Guide to CARO 2020| Clause-wise analysis

Companies (Auditor’s Report) Order (CARO) is an extended version of an Audit report wherein the Auditor provides more information in his audit report about the auditee company to make the report more transparent and reliable. Under the Companies Act, CARO has been in place for a very long time. However, it has been amended over a period of time as per changes of business and the economy.

Now, new version of CARO has been notified by the Ministry of Corporate Affairs (MCA) by Companies (Auditor’s Report) Order, 2020 (hereinafter referred to as ‘CARO 2020’). The latest version – CARO, 2020 is having 21 clauses and it is applicable for all statutory audits commencing on or after 1st April 2021. With this, the companies have to keep more control over its activities and share information with auditors and users of financial statements for more transparency and accountability.

This article will help you in learning about the new CARO 2020 requirements in detail.

1.   Applicability of CARO, 2020

CARO 2020 is applicable to all companies including foreign companies. However, the following are the exceptions:

  1. A banking company (as defined in section 5(c) of the Banking Regulation Act, 1949);
  1. An insurance company (as defined under the Insurance Act, 1938);
  1. A company licensed to operate u/s 8 of Companies Act
  1. One Person Company
  1. Small company as defined in Section 2(85) of the Companies Act, 2013. As per the Companies Act, Small company is those companies that are not public companies and has:
    1. Paid-up share capital does not exceed INR 4 Crores; and 
    2. Gross turnover does not exceed INR 40 Crores as per its last profit and loss accounts.

The threshold limit for small companies has been revised recently through a press release dated 16th September 2022. The earlier threshold limit for share capital was INR 2 Crores and Gross turnover was INR 20 Crores.

  1. Private Company (not being a subsidiary or holding company of a public company), having-
    1. Paid up Share capital and reserves and surplus not more than INR 1 crore as on the balance sheet date; and
    2. Total borrowings have not exceeded INR 1 Crores from any bank or financial institution at any point time during the financial year; and
    3. Total revenue, as disclosed in Schedule III to the Act (including revenue from discontinuing operations), was up to INR 10 crore during the financial year as per the financial statements. 

2.   Matters to be included in Auditor’s Report

  • Audit report of every auditor, to which CARO applies,  shall contain the matter discussed below.
  • CARO, 2020 is applicable from Financial Year commencing from 01.04.2019.
  • The table is given below lists down all matters required to be reported in the auditor’s report under the purview of CARO, 2020:

Clause (i): Property, Plant & Equipment & Intangible Asset

ClauseReporting Requirement
(a) Whether the company has maintained proper recordsThe Auditor shall specify whether the company is maintaining proper records of Property, Plant & Equipment, and Intangible Asset such as:
1. Quantitative Details
2. Description of Asset
3. Location
4. Cost
5. Year of purchase
6. depreciation, etc.
(b) Physical verification The Auditor shall specify whether the management has physically verified the Property, plant, and equipment at reasonable intervals. Further, any material discrepancies, if found, have been dealt with properly in the books of account.
(c) Title in Immovable PropertyThe requirement of having title deeds in the name of the company as disclosed in financial statements should be verified with the register of Property, Plant, and Equipment. 
In the case of a lease where the company is the lessee, lease agreements are duly executed in favor of the lessee.
The following information shall be provided with respect to Immovable property in which the company is not having the title:
1. Description of Property
2. Gross Carrying Value
3. Held in Name of Whether promoter, director or their relative or employee
4. Reason for not being held in name of the company.
(d) Revaluation of Property, Plant & EquipmentThe auditor shall report whether any property, plant & equipment or intangible asset has been revalued during the year. In case of positive response, the auditor shall mention following information:
1. Whether valuation is based on report of registered valuer;
2. 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) Holding benami propertyWhether any proceedings are initiated or are pending against the company for holding any benami property under the Benami Transactions (Prohibition) Act, 1988. In case of positive response, whether the company has appropriately disclosed the details in its financial statements

Clause(ii): Inventory

ClauseReporting Requirement
(a) Physical verification of inventoryThe auditor shall report:
1. whether physical verification of inventory has been conducted at reasonable intervals or not by the management.
2. Coverage and procedure of such verification is appropriate or not;
3. Whether any discrepancies of 10% or more in the aggregate for each class of inventory were noticed or not and if so, whether they have been properly dealt with in the books of account;
(b) Working Capital limitThe Auditor shall check:
1. Whether the company has been sanctioned working capital limits in excess of INR 5 Crores during the year in aggregate, from banks or financial institutions on security of current assets; 
2. Whether the quarterly returns or statements filed by the company for such loan purposes are in agreement with the books of account of the Company. 
3. In case of deviation, auditor needs to provide details of deviations.

Clause (iii): Investments made, Guarantee or security given

  1. This clause requires reporting of:
    1. Investments made, 
    2. The guarantee provided or security provided or
    3. Loan or advances granted, secured or unsecured, 

to companies, firms, LLP, or any other parties during the year.

  1. If the company has provided loans or advances or stood guarantee or provided security to any other entity during the year then the auditor shall report:
    1. loans or advances and guarantees or security to subsidiaries, joint ventures and associates: the aggregate amount given during the year and balance outstanding at the balance sheet date 
    2. Loans or advances and guarantees or security to other: the aggregate amount given during the year and balance outstanding at the balance sheet date.
  1. Whether these investments or guarantees or security and their terms and conditions are not prejudicial to the company’s interest;
  2. In the case of loans and advances, whether the repayment schedule of principal and interest has been stipulated and whether the repayments are regular. In case of an amount overdue for more than 90 days, whether the company has taken reasonable steps for recovery.
  3. In case any loan or advance is due during the year, whether the such loan has been renewed or extended or fresh loans are granted against existing loans. If yes, the auditor shall specify:
    1. Amount of dues renewed or extended or settled by fresh loans
    2. % of aggregate to the total loans or advances in the nature of loans granted during the year.
  4. whether the company has granted any loans or advances without specifying any terms or period of repayment. In case of an affirmative answer, the auditor shall report:
    1. aggregate amount, 
    2. % of such loan to the total loans granted, the aggregate amount of loans granted to Promoters, related parties as defined in clause (76) of section 2 of the Companies Act, 2013;

Clause (iv): loans, investments, guarantees, and security given

  • This clause requires the auditor to check whether the Company has complied following provisions:
    • provisions of Section 185 in case of loans to Directors; and
    • Provisions of Section 186 in case of Loans and Investment by Company.
  • Compliance such as loan or advance to a whole-time director or managing director or any person in whom the director is interested is entered in the register of contract or arrangements. Further, investments made should have proper approvals of the board and of shareholders in case the amount of investments exceeds the prescribed threshold.
  • In case of non-compliance, the auditor is required to provide details of non-compliance.

Clause (v): Deposits

  • In case a company has accepted any deposits or amounts deemed as deposits, the auditor shall ensure that whether the company has complied with following provisions:
    • Directives issued by RBI;
    • Provisions of Sections 73 to 76 of the Companies Act
    • Any other applicable provisions of Companies At and Rules made thereunder
  • In case of contravention, the auditor shall report the nature of the Contravention. 
  • Further, in the case where any order has been passed by the Company law board or NCLT or RBI or Any court or tribunal, whether the same has been complied with or not.

Clause (vi): Cost Records

  • The auditor shall report whether:
    • the company is required to maintain cost records;
    • Whether such cost records have been made and maintained if required.

Clause (vii): Statutory Dues

  • The auditor shall check whether the company is regular in depositing undisputed statutory dues such as GST, Provident Funds, ESI, Income Tax, Service Tax, and any other statutory dues.
  • In case of non-compliance, the auditor shall report:
    • Amount of statutory dues outstanding as of the last day of the Financial year for more than 6 months.
    • Whether such amount is not deposited on account of any dispute, if so, then the auditor shall report:
      • Amount involved;
      • Forum where the dispute is pending
  • A mere representation to the concerned department shall not be considered as a dispute

Clause (viii): Prior period undisclosed Income

This clause reports whether there is any transaction that is not recorded in the books of accounts. However, such a transaction is disclosed as income under Income Tax Act. If so, whether previously unrecorded income has been properly recorded in books of accounts.

Clause (ix): Default in repayment of loans and Borrowings

ClauseReporting Requirements
(a) Default in repayment of loans or borrowingsThe Auditor shall scrutinize whether the company has defaulted in repayment of loans or interest thereon to any lender.
If Yes, the auditor shall provide the following information:
1. Nature of Borrowings including debt security;
2. Name of Lender
3. Amount not paid on due date
4. Whether principal or interest
5. Number of days delay or unpaid
(b) Wilful DefaulterWhether the company has been declared as a willful defaulter by any bank or financial institutions
(c) Utilisation of LoanWhether the Loan has been utilized for the same purpose for which it was obtained. If no, the auditor shall report:
1. Amount of loan so diverted; and
2. Purpose of utilization

Further, funds raised on a short-term basis are utilized for long-term purposes. If yes, nature and amount.
(d) Loans to meet the obligation of Subsidiary, Associates, or JVWhether the company has obtained any loan to meet the obligation of its subsidiary company, Associates or Joint Venture. If so, the auditor shall provide:
1. Nature of such transaction; and
2. Amount
(e) Loan on a pledge of Securities held in name of Subsidiary, JV or AssociatesThe auditor shall provide details of loans obtained on a pledge of securities held in its subsidiary, JV, or Associates and default in repayment of such loans.

Clause (x): Issuance of Security

  1. IPO/FPO: 
    1. The auditor shall ensure that funds raised through IPO/FPO during the year were applied for the purpose for which funds were raised.
    2. If it is not the case, the auditor shall report:
      1. Delays or defaults
      2. Subsequent rectification, if any.
  1. Preferential Allotment or Private Placement or Convertible Debentures:

The Auditor shall check:

  1. provisions of sections 42 (private placement) and 62 (Issue of shares on preferential basis) of the Act have been complied with or not.
  2. Funds raised are utilized for the purpose for which it was raised.

In case of non-compliance, the auditor shall report the amount involved and the nature of non-compliance.

Clause (xi): Fraud

  • This is another important clause in CARO, 2020 wherein the auditor shall check whether any fraud by the company or any fraud on the company has been noticed. If so, the auditor shall report the nature and amount involved.
  • Fraud involving amounts of INR 1 crore or more needs to be reported by the auditor to the board or audit committee and after their replies, it should be submitted to the Central Government in ADT-4. This clause covers the reporting of Form ADT-4.
  • In this chain, this clause also needs to report on any complaint made by a whistle-blower to the company during the current year.

Clause (xii): Nidhi Companies

  • Reporting is required whether the Nidhi company has compiled with the following requirement:
    • Net Owned Funds to Deposit in the ratio of 1:20
    • 10% unencumbered term deposits is maintained
    • Whether there has been any default in repayment of interest on deposits 

Clause (xiii): Related Party Transactions

  • According to this clause, all related party transactions entered into are to be checked for compliance viz. approvals, limits, etc. of sections 177 (audit committee) and 188 (related party transactions) of the Act. 
  • Also, the disclosures of related party transactions in financial statements should be in accordance with applicable accounting standards.

Clause (xiv): Internal Audit & Auditor

  • Internal audit, is a major system prevailing in listed companies and other specified companies given in section 138 of the Companies Act, 2013.
  • The Auditor shall ensure that whether the internal audit system implemented by the company is commensurate with the size and nature of its business.
  • Whether the Report of the internal auditor is used by the auditor or not.

Clause (xv): Non-Cash transactions

  • This clause puts a check on non-cash transactions undertaken by a company that involves the director or any person connected with him/her. 
  • If such transactions have taken place in the company, then make sure that proper approvals as required in section 192 of the Act are obtained.

Clause (xvi): Banking & Investment Companies

This clause requires reporting on the following issues:

  • Whether the company is required to be registered under RBI Act. 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 from RBI.
  • Whether the company is a Core Investment Company (CIC) and if so, whether it continues to fulfil the criteria of CIC.
  • Whether the group has more than one CIC. If yes, number of CICs

Clause (xvii): Cash Losses

The auditor shall report the cash losses incurred in the current year and last year.

Clause (xviii): Resignation of statutory auditors

This clause requires reporting of any resignation by a statutory auditor during the year along with the objections, and concerns raised.

Clause (xix): Liquidity and solvency position

  • This clause examines a company’s solvency position for repayment of its liabilities over a period of one year considering various factors like financial ratios, ageing, knowledge of management and board of directors plan, and most importantly, non-existence of any material uncertainty in business.

Clause (xx): Transfer of unspent amount of CSR funds

  • This clause is relating to CSR funds and their application. Confirmation from management is to be obtained about activities undertaken in accordance with Schedule VII of the Act.
  • Details of the amount spent on projects should also be taken from management and verified with bank statements, vouchers, etc.
  • The basis that, it should be reported that any unspent amount on projects is transferred to a fund specified in the aforesaid schedule for projects other than ongoing ones within 6 months of the close of the financial year and to a special account for ongoing projects within 30 days of the close of the financial year.

Clause (xxi): Qualification in CARO,2020 of standalone financial statements

  • In case any qualifications or adverse remarks are included by the respective auditors,  then details of the companies and the paragraph numbers of the CARO, 2020 report containing the qualifications or adverse remarks are required to be included in the consolidated financial statements of the group.

 3. Qualification in report/unfavorable report

A statutory auditor has to mention comments against each matter applicable to the company. In cases, where an auditor is unable to express any opinion on any such matter which is applicable to the company, he is also required to indicate in his report such a fact, together with the reasons why he is unable to express any opinion. 

Also, in case of a qualified or unfavorable opinion, the auditor shall state the basis for such opinion.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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