The Companies Act, 2013 requires auditors of specified classes of companies to include a statement in their reports on specific matters as prescribed in the Companies (Auditors’ Report) Order (CARO). In 2020, the Ministry of Corporate Affairs (MCA) issued a revised CARO (CARO 2020) which is applicable to a wide range of companies.

The CARO 2020 contains significant changes and several new reporting requirements vis-à-vis CARO 2016.

No of Clauses of CARO 2022: The CARO 2020 has 21 claused whereas CARO 2016 had 16 Clauses. Hence CARO 2020 has made major changes as compared to CARO 2016.

Applicability of CARO 2020 from FY: CARO 2020 is applicable from FY 2021-22 i.e The Auditors will be required to include this amended CARO 2020 from FY 2020-21.

Applicability of CARO (Companies Auditor’s Report Order) 2022

Similar to CARO 2016, CARO 2020 is applicable to every company including a foreign companies (as defined under the 2013 Act).
It will not apply to:-

(a.) banks, insurance companies, Section 8 Company, one person, and a small company.

(b.) private limited company if it meets all of the following conditions:

(i). It is not a subsidiary or holding company of a public company

(ii). Its paid-up capital and reserves and surplus do not exceed Rs 1 Crore as on the balance sheet date

(iii). Its total borrowings do not exceed Rs 1 Crore from any bank or financial institution at any point of time during the FY (financial year).

(iv). Its total revenue as disclosed in Scheduled III to the 2013 Act (including revenue from discontinuing operations) does not exceed Rs 10 Crore during the financial year as per the financial statements.

Note:

  • CARO 2020 would be equally applicable to the audit of the branch(es) of a company as to a company and audits of the project office/liaison office established outside India.
  • CARO 2020 is not applicable to the auditor’s report on CFS. However, an auditor is required to state in its report details of companies included in CFS with qualifications or adverse remarks by their respective auditors.

Following are the 21 Clauses of CARO 2020 (Companies Auditor’s Report Order)

Note: The changes in CARO 2020 as compared to CARO 2016 are in italics and underlined. In case a new clause or sub-clause is added, then specifically the same has been mentioned.

Clause 3(i): Property Plant and Equipment (PPEs) and Intangible Assets (IA’s)

(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 the name of Whether promoter, director or their relative, or employee Period held – indicate the 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 the change is 10% or more in the aggregate of the net carrying value of each class of Property, Plant and Equipment or intangible assets (Newly added by CARO 2020).

(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, and if so, whether the company has appropriately disclosed the details in its financial statements; (Newly added by CARO 2020).

Clause 3(ii): Physical Inventory Verification and Working Capital Sanction

(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; (Newly added by CARO 2020).

Clause 3(iii): Loans and Investment and repayment of dues

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 (Newly added by CARO 2020)

  • the aggregate amount during the year, and the balance outstanding at the balance sheet date with respect to such loans or advances and guarantees or security to subsidiaries, joint ventures, and associates;
  • the aggregate amount during the year, and the 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; (Newly added by CARO 2020)

(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 overdue 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.] (Newly added by CARO 2020)

(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, the aggregate amount of loans granted to Promoters, related parties as defined in clause (76) of section 2 of the Companies Act, 2013; (Newly added by CARO 2020).

Clause 3(iv): Compliances with the Sections 185 and 186 of the Companies Act 

In respect of loans, investments, guarantees, and security, whether provisions of sections 185 and 186 of the Companies Act have been complied with, and if not, provide the details thereof;

Clause 3(v): Acceptance of deposits by a company

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;

Clause 3(vi): Maintenance of cost records

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;

Clause 3(vii): Payment of Statutory Dues

(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, the 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) [above] 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);

Clause 3(viii): Disclosure of undisclosed Income in the tax assessments

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; (Newly added by CARO 2020).

Clause 3(ix): Default in Loan repayment, Application of Term Loans, Application of short term fund for the long-term purpose (Newly added by CARO 2020)

(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 lenders;

(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 the 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;

Clause 3(x): Utilisation of money raised through an IPO and private placement of shares and debentures

(a) whether moneys raised by way of 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;

Clause 3(xi): Reporting of Fraud

(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; (Modified by CARO 2020)

(b) whether any report section 143(12)* 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; (Newly added by CARO 2020)

* Requirements of the 2013 Act

  • Currently, Section 143(12) of the 2013 Act read with Rule 13 of the Audit Rules requires specific reporting by an auditor of a company in case of frauds. According to it, an auditor has to report a fraud committed in the company by its officers or employees involving an amount of Rs 1 Crore or above to the CG in Form ADT-4 within 15 days from the date of receipt of reply or observations from the board of directors or audit committee.
  • In case, fraud involves an amount less than Rs 1 Crore, the matter needs to be reported to the audit committee or the board of directors of the company within two days of an auditor’s knowledge of the fraud.
  • The reporting under Section 143(12) of the 2013 Act is also applicable to a cost auditor and secretarial auditor of a company.

(c) whether the auditor has considered whistle-blower complaints, if any, received during the year by the company; (Newly added by CARO 2020)

Clause 3(xii): Nidhi Company compliances

(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 percent. 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;

Clause 3(xiii): Related Party transactions compliances as per Section 177 and 178 of the Companies Act, 2013

Whether all transactions with the related parties are in compliance with sections 177 and 188 of the Companies Act where applicable and the details have been disclosed in the financial statements, etc., as required by the applicable accounting standards;

Clause 3(xiv): Internal Audit System (Newly added by CARO 2020)

(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;

Clause 3(xv): Non-cash transaction with Directors or Persons connected with him

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 the Companies Act have been complied with.

Clause 3(xvi): RBI registration, Conduct of business as NBFC or Housing finance

(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; (Newly added by CARO 2020)

(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 fulfill the criteria of a CIC, and in case the company is an exempted or unregistered CIC, whether it continues to fulfill such criteria; (Newly added by CARO 2020)

(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; (Newly added by CARO 2020)

Clause 3(xvii): Cash Losses

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; (Newly added by CARO 2020)

Clause 3(xviii): Statutory Auditors resignation

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. (Newly added by CARO 2020)

Clause 3(xix): Existence of Material Uncertainty

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 the balance sheet as and when they fall due within a period of one year from the balance sheet date; (Newly added by CARO 2020)

Clause 3(xx): Transfer of Unspent CSR amount

(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 the 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;

Clause 3(xxi): Qualifications in an auditor’s report of companies included to prepare CFS (Consolidated financial statements)

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. (New clause added by CARO 2020)

 

Conclusion: The CARO 2020 has amended CARO 2016 drastically to enhance the reliability of the financial statement for its uses.