COMPANIES (AUDITOR’S REPORT) ORDER, 2020 (CARO 2020)

[Mr. M. GOVINDARAJAN]

Introduction

Section 143 of the Companies Act, 2013 (‘Act’ for short) gives powers to auditors while carrying out the audit of a company and also prescribe the duties of the auditors.  Section 143(2) provides that the auditor shall make a report to the members of the company on the accounts examined by him and on every financial statement which are required by or under this Act to be laid before the company in general meeting and the report shall after taking into account the provisions of this Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of this Act or any rules made there under or under any order made under sub-section (11) and to the best of his information and knowledge, the said accounts, financial statements give a true and fair view of the state of the company's affairs as at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed.

Section 143(11) of the Act provides that the Central Government may, in consultation with the National Financial Reporting Authority, by general or special order, direct, in respect of such class or description of companies, as may be specified in the order, that the auditor's report shall also include a statement on such matters as may be specified therein.

Since National Financial Reporting Authority has not been established immediately after the commencement of the Companies Act, a proviso has been inserted.  The proviso provides that until the National Financial Reporting Authority is constituted, the Central Government may hold consultation required under this sub-section with the Committee chaired by an officer of the rank of Joint Secretary or equivalent in the Ministry of Corporate Affairs and the Committee shall have the representatives from the Institute of Chartered Accountants of India and Industry Chambers and also special invitees from the National Advisory Committee on Accounting Standards and the office of the Comptroller and Auditor-General.

CARO 2015

The Central Government made Companies (Auditor’s Report) Order, 2015, in supersession of the Companies (Auditor’s Report) Order, 2003, in consultation with the Institute of Chartered Accountants of India, vide Notification No. S.O. 990(E), dated 10.04.2015.

CARO 2016

In supersession of the CARO 2015, the Central Government made Companies (Auditor’s Report) Order, 2016 in consultation with the Committee constituted under proviso to section 143(11) of the Act, vide Notification No. S.O. 1228(E), dated 29.03.2016.

CARO 2020

In supersession of the CARO 2016 the Central Government made Companies (Auditor’s Report) Order, 2020 in consultation with the National Financial Reporting Authority vide Notification No. 849(E),   dated 25.02.2020.  The objective in framing this CARO 2020 is to strengthen the corporate governance framework under the Companies Act, 2013 to attain the national objective of becoming a $5 Trillion economy.   CARO 2020 would necessitate enhanced due diligence and disclosures on the part of auditors of eligible companies and has been designed to bring in greater transparency in the financial state of affairs of such companies.  The aim of CARO 2020 is to enhance the overall quality of reporting by the company auditors.

Applicability

This order is shall apply to every company including a foreign company.

Non applicability

This order is not applicable in respect of the following companies-

• a banking company;
• an insurance company ;
• section 8 company;
• one person company;
• small company;
•  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 ₹ 1 crore as on the balance sheet date and which does not have total borrowings exceeding ₹ 1 crore 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 ₹ 10 crores during the financial year as per the financial statements.

Matters to be included in the audit report

Para 3 of this order provides that the auditor's report on the accounts of a company to which this Order applies shall include a statement on the matters mentioned in this para that may be discussed in detail in the coming paras.

Fixed assets - para 3(i)

In respect of fixed assets the following statements are to be included-

• whether the company is maintaining proper records showing full particulars, including quantitative details and situation of Property, Plant and Equipment?

•  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, 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

• whether the company is maintaining proper records showing full particulars of intangible assets?

Revaluation

• whether the company has revalued its Property, Plant and Equipment (including Right of Use assets) or intangible assets or both during the year?
• 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.

Pending proceedings

• whether any proceedings have been initiated or are pending against the company for holding any benami property under the  and rules made there under?
•  if so, whether the company has appropriately disclosed the details in its financial statements.

Inventory - para 3(ii)

In respect of inventory the following statements are to be included-

• 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 ₹ 5 crores, 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?

Loan given by company - para 3(iii)

In respect of this item, the following statements are to be included-

•  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-

• 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;
• 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;

•  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?
• 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?
• 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?
•  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 over dues 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]
• 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.

Loans to Directors and investments by the company – para 3(iv)

In respect of this item, the following statement is   to be included-

• 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?

Deposits – para 3(v)

In respect of this item, the following statements are to be included-

• 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 ther eunder, 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.

Cost records – para 3(vi)

In respect of this item, the following statement is  to be included-

• 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?

Payment of statutory dues – para 3(vii)

In respect of this item, the following statements are to be included-

• 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?
• 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.
• where statutory dues referred to above 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).

Unrecorded income – para 3(viii)

In respect of this item, the following statements are to be included-

• 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?
•  if so, whether the previously unrecorded income has been properly recorded in the books of account during the year.

Repayment of loan – para 3(ix)

In respect of this item, the following statements are to be included-

• 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.

• 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.

Utilization of public offers – para 3(x)

In respect of this item, the following statements are to be included-

• 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.
• 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.

Fraud – para 3(xi)

In respect of this item, the following statements are to be included-

• 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.
• 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?
• whether the auditor has considered whistle-blower complaints, if any, received during the year by the company?

Nidhi companies – para 3(xii)

In respect of this item, the following statements are to be included-

• whether the Nidhi Company has complied with the Net Owned Funds to Deposits in the ratio of 1: 20 to meet out the liability?
• whether the Nidhi Company is maintaining 10% unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability?
• whether there has been any default in payment of interest on deposits or repayment thereof for any period and if so, the details thereof?

Related parties transactions – para 3(xiii)

In respect of this item, the following statement is to be included-

• 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?

Internal audit system – para 3(xiv)

In respect of this item, the following statements are to be included-

• whether the company has an internal audit system commensurate with the size and nature of its business?
• whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor?

Non cash transactions – para 3(xv)

In respect of this item, the following statements are to be included-

• whether the company has entered into any non-cash transactions with directors or persons connected with him?
•  if so, whether the provisions of section 192 of Companies Act have been complied with.

Certificate of registration with RBI – para 3(xvi)

In respect of this item, the following statements are to be included-

• whether the company is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934?
• 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?
•  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?
• 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?

Cash losses – para 3(xvii)

In respect of this item, the following statements are to be included-

• 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.

Resignation of statutory auditor – para 3(xviii)

In respect of this item, the following statements are to be included-

•  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.

Material uncertainty – para 3(xix)

In respect of this item, the following statement is to be included-

• on the basis of 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, 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?

Transfer of unspent amount – para 3(xx)

In respect of this item, the following statements are to be included-

• 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?
•  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 sub-section (6) of section 135 of the said Act?

Adverse remarks – para 3(xxi)

In respect of this item, the following statements are to be included-

•  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 statement?
• if yes, indicate the details of the companies and the paragraph numbers of the CARO report containing the qualifications or adverse remarks.

Reasons for qualified answer

Para 4 of the order provides that where, in the auditor's report, the answer to any of the questions referred to in paragraph 3 is unfavorable or qualified, the auditor's report shall also state the basis for such unfavorable 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.

Application to consolidated financial statements

This Order shall not apply to the auditor’s report on consolidated financial statements except clause (xxi) of paragraph 3.

Effective date

The effective date of this order is 01.04.2019.  But due to Korana impact this order will be applicable for the financial year 2020-21 and not for 2019-20.

Conclusion

The CARO 2020 is expected to significantly improve the overall quality of reporting by the Auditors on the financial statements of the Companies and thereby lead to greater transparency and faith in the financial affairs of the companies. This is automatically expected to greater inflow of investment by and in Indian companies.