Applicability of CARO 2020

CARO 2020 is applicable for all statutory audits commencing on or after 1 April 2021 corresponding to the financial year 2020-21. The order is applicable to all companies which were covered by CARO 2016. Accordingly, the order applies to all the companies except the following companies specifically excluded from its purview:

• One person company.
• Small companies (Companies with paid up capital less than/equal to Rs 50 lakh and with a last reported turnover which is less than/equal to Rs 2 crore).
• Banking companies.
• Companies registered for charitable purposes.
• Insurance companies.
• The following private companies are also exempt from the requirements of CARO, 2020: 
• Whose gross receipts or revenue (including revenue from discontinuing operations) is less than or equal to Rs 10 crore in the financial year.
• Whose paid-up share capital plus reserves is less than or equal to Rs 1 crore as on the balance sheet date (i.e., usually at the end of the FY).
• Not a holding or subsidiary of a public company.
• Whose borrowings is less than or equal to Rs 1 crore at any time during the FY.

Reporting Requirements Under CARO 2020

The auditor’s report (CARO 2020) shall include a statement on the following matters, namely:

1. Details of tangible and intangible assets.
2. Details of inventory and working capital.
3. Details of investments, any guarantee or security or advances or loans given.
4. Compliance in respect of a loan to directors.
5. Compliance in respect of deposits accepted.
6. Maintenance of costing records.
7. Deposit of statutory liabilities.
8. Unrecorded income.
9. Default in repayment of borrowings.
10. Funds raised and utilisation.
11. Fraud and whistle-blower complaints.
12. Compliance by a Nidhi.
13. Compliance on transactions with related parties.
14. Internal audit system.
15. Non-cash dealings with directors.
16. Registration under section 45-IA of RBI Act, 1934.
17. Cash losses.
18. Resignation of statutory auditors.
19. Material uncertainty on meeting liabilities.
20. Transfer to fund specified under Schedule VII of Companies Act, 2013.
21. Qualifications or adverse auditor remarks in other group companies.

Comparative View between CARO 2016 and CARO 2020

Clauses & Sub Clauses increased in CARO 2020

Detailed Additional Reporting Under Each Clause

1. Details of tangible and intangible assets

• Whether a revaluation has been done by the company of its property, plant and equipment (including the 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.
• In case of a change in values upon revaluation, 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.
• 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. If yes, whether the company has appropriately disclosed the details in its financial statements.

• Details of inventory and working capital
• Has the company, during any point of time of the year, 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.
• Are the quarterly returns or statements filed by the company with financial institutions or banks in agreement with the books of account of the Company? In case of non-agreement, to provide details of such non-agreement.

• Details of investments, any guarantee or security or advances or loans given
• In case the company has given any loans or advances in the nature of loans either repayable on demand or without specification of any terms or period of repayment. If so, to specify the total amount, percentage thereof to the total loans granted, the total amount of loans granted to promoters, related parties as defined section 2(76) of the Companies Act, 2013.

• Compliance in respect of a loan to directors

• Compliance in respect of deposits accepted

• Maintenance of costing records

• Deposit of statutory liabilities

• Unrecorded income
• Whether any transactions which are not recorded in the accounts have been disclosed or surrendered before the tax authorities as income during the year. The details of such income tax assessments should be disclosed. – Whether such undisclosed income has been recorded in the accounts during the year.

• Default in repayment of borrowings
• In case the company has made any default in the repayment of loans or other borrowings or in the payment of interest thereon to any lender, then the amount and period of default to be reported as per table below:

• Has the company been declared a wilful defaulter by any bank or financial institution or any other lender?

• Have term loans been used for the object for which they were obtained; in case they have not been, the loan funds diverted and disclosure of the end use of such loans.
• Has the company used funds raised for a short-term basis for long term purposes? The nature and the amount of such funds.
• Has the company raised any money from any person or entity for the account of or to pay the obligations of its associates, subsidiaries or joint ventures? The details of the money raised with the description of the transactions and the amounts in each case.
• Has the company raised any loans during the year by pledging securities held in their subsidiaries, joint ventures or associate companies? The details of such loans and also the default in the repayment of the loans.

1. Funds raised and utilisation
2. If the company has raised any funds from a public offer (equity or debt capital), details of the funds applied for the purposes. Also, the details of default or delays and rectification measures taken. – Has the company made any private placement or preferential allotment of shares or convertible debentures (fully, partially or optionally convertible) during the year, whether the same is in accordance with section 42 and section 62 of the Companies Act, 2013. – Whether the funds raised, have been used for the purposes they were raised and the non-compliance, if any.

1. Fraud and whistle-blower complaints
2. Whether the auditors of the company have filed a report in Form ADT-4 with the Central Government as prescribed under the Companies (Audit and Auditors) Rules, 2014.
3. In case of receipt of whistle-blower complaints, whether the complaints have been considered by the auditor.

1. Compliance by a Nidhi
2. Details of any default in payment of interest on deposits or repayment of for any period.

1. Compliance on transactions with related parties

1. Internal audit system
2. Does the company have an internal audit system in accordance with its size and business activities?
3. Have the reports of the internal auditors been considered by the statutory auditor.

1. Non-cash transactions

1. Registration under Section 45-IA of RBI Act, 1934
2. Whether the company has carried on any Non-Banking Financial or Housing Finance activities (NBFC or HFC) without having a valid registration certificate from RBI.
3. Is the company a Core Investment Company (CIC) under the RBI regulations and does it continue to fulfil the criteria of a CIC. In case the company is an exempted or unregistered CIC, does the company continue to fulfil the criteria for exemption.
4. Does the group to which the company belongs have more than one CIC as part of it, then indicate the number of CICs which are in the group?

1. Cash losses
2. Has the company incurred any cash losses in the financial year and the immediately preceding financial year, the amount of cash losses incurred?

1. Resignation of statutory auditors
2. Whether during the year, has there been any resignation of statutory auditors, if yes, has the auditor considered the objections, issues or concerns raised by the outgoing auditors.

1. Material uncertainty
2. Existence of any material uncertainty on the date of the audit report on an evaluation of: the ageing report, financial ratios and expected dates of realisation of financial assets and payment of financial liabilities, any other information accompanying the financial statements, the auditor’s knowledge of the Board of Directors and management plans. Opinion whether the company can meet its the liabilities which exist as at the balance sheet date when such liabilities are due in the future.

• Transfer to fund specified under Schedule VII of Companies Act, 2013
• With respect to obligations under Corporate Social Responsibility, whether the company has transferred the unspent amount to a Fund specified in Schedule VII to the Companies Act within a period of 6 months from the expiry of the financial year. – Whether any amount which remains unspent has been transferred to a special account in accordance with provisions of section 135 of the Companies Act, 2013.

• Qualifications or adverse auditor remarks in other group companies
• In case there have been any qualifications or adverse remarks in the audit reports issued by the respective auditors in case of companies included in the consolidated financial statements, to indicate the details of the companies and the paragraph numbers of the respective CARO reports containing the qualifications or adverse remarks.

All the above-stated clauses are mandatory to be reported on. Also, the disclosures are to be given appropriately.

Announcement by the Institute of Chartered Accountants of India

The Ministry of Corporate Affairs (MCA) issued the Companies (Auditor’s Report) Order, 2020 (CARO 2020) in February 2020. CARO 2020 contains many new reporting requirements for auditors such as revaluation of property, plant and equipment (including right of use assets) or intangible assets, benami property, working capital limits on basis of security of current assets, granting loans or advances in the nature of loans which are either repayable on demand or without specifying any terms or period of repayment, undisclosed income, company declared as wilful defaulter, material uncertainty in meeting liabilities, CSR activities. The Auditing and Assurance Standards Board (AASB) of the ICAI has issued the “Guidance Note on the Companies (Auditor’s Report) Order, 2020” (Guidance Note on CARO 2020) in July 2020 to provide detailed guidance on various clauses of CARO 2020 and reporting requirements for auditors.

To ensure that the management of companies provide various disclosures which pertain to clauses of CARO 2020 especially the aforesaid new reporting requirements, the MCA has brought out corresponding amendments in Schedule III (Division I, Division II and Division III) to the Companies Act, 2013 vide its notification dated 24th March 2021 for preparation of the financial statements. In addition to the said amendments, various other disclosure requirements have also been added in Schedule III to the Companies Act, 2013.

The members may note that in light of the said amendments, a comprehensive revision of the Guidance Note on CARO 2020 is being initiated by AASB. In the interregnum, the members should read CARO 2020 in conjunction with the corresponding amendments made in Schedule III to the Companies Act, 2013 for presentation and disclosure requirements stated therein and perform the audit procedures accordingly.

Annexure A to this Announcement summarises interplay of some of the clauses in CARO 2020 and consequential amendments to Schedule III to the Companies Act, 2013.

Annexure A