The Companies (Auditor's Report) Order, 2020 (CARO 2020) is a regulation which supersedes the CARO 2016, the CARO 2020 was introduced by the Ministry of Corporate Affairs on 25th February 2020. This new format adds up to all statutory audit requirements which are conducted under the Act of 2013. The main objective is to increase the understanding of the audit report by the stakeholders, regulators and investors. It clarifies certain provisions and requirements as well as specifies the audit areas for the compilation of audit reports., This new standard evolved out of the convergence requirement which was initiated by the Ministry which requires Indian accounting and reporting standards to be consistent with international practices. More importantly, it imposes regulatory compliance provisions which have effective governance and dissemination of materials across different aspects of reporting and audit of financial statements.
As independent documents, it enhances the value of the audit reports submitted by statutory auditors. For it introduces the National Financial Reporting Authority (NFRA) which acts as an independent supervisory and regulatory body over the audit and accounting profession in India within the legal framework. This requires auditors to go beyond standard scopes and give proper commentary about important areas and operations of the company and finally helps the scope of concern to widen.
Applicability of CARO 2020
CARO 2020 applies to all companies previously covered under CARO 2016, with expanded requirements. However, certain exemptions are provided to specific categories of companies:
Companies Covered:
- Public companies
- Private companies meeting criteria such as having significant revenue, borrowings, or being a subsidiary or holding of a public company.
- Foreign companies as defined under Section 2(42) of the Companies Act, 2013.
Exemptions:
- One-Person Companies (OPCs).
- Small Companies: Defined under Section 2(85), small companies have:
- Paid-up capital ≤ ₹4 crores, and
- Turnover ≤ ₹40 crores as per the preceding year’s financial statements.
- Banking Companies.
- Insurance Companies.
- Companies registered under Section 8 of the Companies Act (charitable purposes).
- Private companies meeting all of the following:
- Revenue (including discontinuing operations) ≤ ₹10 crores.
- Paid-up share capital and reserves ≤ ₹1 crore.
- Borrowings ≤ ₹1 crore at any point during the financial year.
- Not a holding or subsidiary of a public company.
Reporting Requirements under CARO 2020
CARO 2020 includes 21 clauses that mandate auditors to comment on specific aspects of a company’s operations, governance, and compliance. Below is a detailed analysis of each reporting area:
Property, Plant, and Equipment (PPE)
Auditors must verify:
- Whether proper records are maintained for tangible and intangible assets, including details of location and quantities.
- Physical verification of PPE by management at reasonable intervals and the handling of discrepancies in books of accounts.
- Ownership of immovable properties through title deeds. Any discrepancies must be disclosed in the prescribed format, indicating the property details, value, and reasons.
- If the company has revalued its PPE or intangible assets, the valuation must be conducted by a registered valuer, and changes exceeding 10% of carrying value must be disclosed.
- Compliance with the Benami Transactions (Prohibition) Act, 1988, reporting any proceedings or pending cases against the company.
Inventory and Working Capital
Auditors must ensure:
- Physical verification of inventory is conducted at reasonable intervals by management. Any discrepancies exceeding 10% for any inventory class must be reported.
- For companies availing working capital limits exceeding ₹5 crores, quarterly statements submitted to banks or financial institutions must align with books of accounts.
Investments, Guarantees, and Loans
Auditors must report:
- Details of loans, advances, guarantees, or securities provided to subsidiaries, associates, or third parties.
- Whether these transactions comply with Sections 185 and 186 of the Companies Act.
- Terms of repayment for loans, regularity of repayments, and overdue amounts exceeding 90 days. If loans were renewed or fresh loans granted to settle overdue amounts, details must be disclosed.
- Advances or loans repayable on demand or without terms must be highlighted, specifying amounts provided to promoters or related parties.
Deposits
- Compliance with Sections 73 to 76 and rules related to deposits must be verified.
- Any order passed by the Company Law Board, NCLT, RBI, or other authorities related to deposits must be disclosed, along with compliance status.
Statutory Liabilities
Auditors must confirm:
- Whether the company has deposited statutory dues, such as GST, income tax, and provident fund, on time.
- Any outstanding statutory dues for over six months as of the balance sheet date or disputes must be disclosed.
Unrecorded Income
- Report transactions not recorded in books but disclosed to tax authorities as income, ensuring these have been reflected in the financial statements.
Borrowings and Defaults
Auditors must check:
- Any defaults in repayment of loans to banks, financial institutions, or other creditors. Details of amount and period of default must be disclosed.
- Whether funds raised through term loans were used for the specified purpose. Any diversions must be highlighted.
- If short-term funds were used for long-term purposes, this must be reported.
- If the company has been declared a wilful defaulter, details must be provided.
Funds Utilization
Auditors must confirm:
- Whether funds raised through IPOs, FPOs, or private placements were used for the stated purposes.
- Any deviations or misutilization of funds must be disclosed.
Fraud and Whistleblower Complaints
Auditors must ensure:
- Instances of fraud by or against the company are reported, including amounts involved and action taken.
- Consideration of whistleblower complaints received by the company.
Compliance by Nidhi Companies
Nidhi companies must comply with:
- Maintaining a net-owned fund-to-deposit ratio of 1:20.
- Ensuring unencumbered term deposits equal to 10% of liabilities.
- Reporting any default in deposit repayments.
Transactions with Related Parties
- Auditors must ensure compliance with Sections 177 and 188 regarding related party transactions and verify proper disclosures in financial statements.
Other Key Clauses
- Cash Losses: Report losses incurred during the year and the preceding year.
- Resignation of Auditors: Verify if objections raised by outgoing auditors were considered.
- Material Uncertainty: Assess the company’s ability to meet liabilities based on financial metrics.
- Corporate Social Responsibility (CSR): Ensure unspent CSR funds are transferred to specified accounts or special accounts as per Schedule VII.
- Group Companies: Highlight qualifications or adverse remarks in audit reports of group entities.
Challenges in Implementation
CARO 2020 significantly increases the responsibility of both auditors and companies. Key challenges include:
- Enhanced documentation and record-keeping requirements for companies.
- Need for auditors to exercise greater professional judgment in interpreting clauses.
- Increased scope of audits, requiring more time and resources.
Conclusion
In that respect, the implementation of CARO 2020 metaphor signifies the beginning of improving corporate transparency and governance. Intended to protect stakeholder’s interest and restore confidence in Corporate reporting, it ensures both the auditors and companies to provide detailed reports. This means both companies and auditors have to be involved in ensuring compliance and thus, CARO 2020 is a good way to monitor and keep audit regulated as well as generate confidence from stakeholders.
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