The Ministry of Corporate Affairs (MCA) has published in Gazette of India an Order in supersession of the Companies ( Auditor’s Report ) order 2016, after consultation with National Financial Reporting Authority (NFRA) constituted under section 132 of the Companies Act 2013 which may be called the Companies ( Auditor Report) Order 2020 (hereinafter called “CARO 2020)
Now we have shown the key changes of CARO 2020 with CARO 2016.
Clause : 1 Reporting on Property, Plant and Equipments and Intangible Assets - 1) Separate Reporting for PPE and Intangible Assets instead of Fixed Assets
2) No Reporting on title deeds, where Company is lessee and lease agreement is executed in favour of the Company
3) Specific details are required to be given in case title deeds are not in name of the Company
4) New sub-clause (d) has been inserted which requires specific reporting on revaluation of PPE
5) New sub-clause (e) has been inserted which requires specific reporting on any proceedings initiated or pending against the Company under Benami Transactions (Prohibition) Act, 1988 for holding Benami Property
Clause : 2 Reporting on Inventory - 1) Auditor to report whether the coverage and procedure of physical verification by the management is appropriate or not
2) Discrepancies to report for each class of inventory only if it is 10% or more
3) New sub-clause (b) has been inserted which requires auditors to report whether the quarterly returns or statements filed by the company with banks or financial institutions are in agreement with the books of account
(Note: This Reporting is applicable only in case the company has been sanctioned working capital limits in excess of five crore rupees, in aggregate, from banks or financial institutions and they are secured against current assets of the Company)
Clause : 3 Reporting on Loans, Investments, Guarantees, Securities and Advances in nature of loan. - 1) Coverage of reporting has been extended to reporting of Loans given to any party as against parties covered under section 189
2) New sub-clause (b) and (c) inserted which requires reporting on adequacy of terms and conditions regarding Investments made, securities given, guarantees provided and advances given in nature of loan.
3) Additional reporting in terms of Amount of loans or advance in nature of loan granted / guarantees and securities provided to group entities and to others and its balance outstanding as at balance sheet date
4) Additional reporting for any loan or advance in the nature of loan renewed or extended or fresh loans granted to settle the overdues of existing loans
5) Additional reporting for any loan or advance in the nature of loan granted either repayable on demand or without specifying any terms or period of repayment
Clause : 4 Reporting on Compliance of Section 185 & 186- No change
Clause : 5 Reporting on Deposits - Reporting of regulatory compliances with reference to amounts which are deemed to be deposits have been expressly added to remove ambiguity
Clause : 6 Reporting on Cost Records – No change
Clause : 7 Reporting on Statutory Dues - Reporting of regulatory compliances with reference to amounts which are deemed to be deposits have been expressly added to remove ambiguity
Clause : 8 Reporting on Unrecorded Income - Just a drafting change to include Goods and Service Tax and reporting of disputes related to all Statutory Dues.
Clause : 9 Reporting on repayment and Usage of Borrowings - A new clause inserted which requires auditors to report whether previously non recorded Income has been recorded properly based on the outcome of the assessment under Income Tax Act.
Clause : 10 Reporting on Use of Money raised through issue of own shares. - 1) Reporting under two different clauses of CARO 2016 are combined under single clause
2) In case of preferential allotment or private placement of shares or convertible debentures, auditor is also required to verify and report compliance of Section 62.
Clause : 11 Reporting on Frauds - 1) Reporting of all the frauds on the company is required (whether or not it is done by its employees or officers)
2) New sub-clauses (b) and (c) are inserted which requires reporting on
– any reporting made by auditor to central government u/s 143(12)
– consideration of whistle-blower complaints received by the Company
Clause : 12 Reporting on Nidhi Company – A new sub clause (b) has been inserted which requires reporting on default in payment of deposits and interest thereon by Nidhi Company
Clause : 13 Reporting on Related Party Transactions – No Changes
Clause : 14 Reporting on Internal Audit : A new clause is inserted which requires auditors to report whether company has an internal audit system commensurate with the size and nature of its business and whether the reports of the Internal Auditors were considered by the statutory auditor
Clause : 15 Reporting on Non Cash Transactions with Directors – No Changes
Clause : 16Reporting on Registration u/s45-IA of RBI Act – New sub-clauses (b) and (c) are inserted which requires reporting on whether the non-banking finance or housing finance activities are done after taking certificate of registration from RBI fulfilment of classification criteria laid down by RBI for Core Investment Company Number of CICs in the Group to which company belongs
Clause 17 : Reporting on Cash Losses - A new clause is inserted which requires reporting on amount of cash loss (aggregate of operational, investing and financing cash losses) incurred by the company in current as well as previous year
Clause 18 : Reporting on Auditors Resignation : A new clause is inserted which requires reporting on resignation of the statutory auditors during the year, if any and whether the auditor has taken into consideration the issues, objections or concerns raised by the outgoing auditors
Clause 19 : Reporting on Financial Position - A new clause is inserted which requires auditors to report on company’s ability to pay off existing liability over a period of next one year as and when they fall due
Auditors are now loaded with a huge responsibility to verify and report on financial stability of the company for next one year (Prospective Reporting to some extent)
Clause 20 : Reporting on CSR Compliance - A new clause is inserted which requires auditors to report whether unspent amount of CSR has been transferred to a special designated bank account (related to any ongoing project) and to a fund as specified in Schedule VII (where no specific project has been carried out or assigned) or not.
Clause 21 : Reporting on Consolidated Financial Statements – covered above
Deleted Clasue : Reporting on Managerial Remuneration – To remove duplication, reporting on compliance of provisions related to managerial remuneration has been removed as the same is already covered under main Audit Report.