Brief Background: – CARO stands for Companies Auditor Report Order. It is an order which lists down the matters on which an auditor is required to report. Section 143 of Companies Act, 2013 mandates reporting on CARO.
CARO was introduced to get reports on certain matters that Ministry of Corporate Affairs (MCA) deemed important. Thus, auditor of those entities on which CARO is applicable is required to report on the clauses given under this order after performing procedures for verification on the matters enumerated. Earlier it was CARO 2016 but on Feb 25, 2020 MCA notifies CARO 2020 version which has 21 Clauses as compared to 16 clauses in previous version, 7 new clauses inserted, 1 clause merged with other and 1 clause related to Managerial Remuneration deleted.
CARO 2020 Applicability
As per principal order passed by MCA on dated Feb 25, 2020, CARO 2020 was applicable from the F.Y 2019-20 onwards. It was subsequently amended vide its order dated March 24, 2020 for the deferment of CARO 2020 from F.Y 2019-20 to F.Y 2020-21. MCA has further deferred the applicability of CARO 2020 from F.Y 2020-21 to F.Y 2021-22 vide its order dated December 17, 2020.
CARO, 2020 is applicable for audit of financial statements of eligible companies for the financial years commencing on or after April 01, 2021 vide order dated December 17, 2020.
Key changes made in CARO 2020 in reference to CARO 2016
| Clause Reference | Particulars of Key Changes | Remarks | ||
| Clause-1:
Property, Plant, Equipment and Intangible Assets (PPEIA) |
Words ‘Fixed Assets’ now replaced with “Property, Plant & Equipment and Intangible Assets (PPEIA)”, to align with AS-10.
Disclosure regarding title deeds of Immovable property (other than properties where the company is the lessee) now required, as per the format specified.
Whether Revaluation of assets done by registered valuer and whether such valuation exceeds 10% the aggregate net carrying value of each class of assets.
Proceedings initiated in respect of ‘Benami transactions’.
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The enhanced disclosure requirements regarding immovable property and benami transactions would require management to provide maintain a detailed information for auditor’s purposes. | ||
| Clause-2: Inventory
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Disclosure regarding the change in inventory if it exceed 10% or more.
in case of Working Capital limit is more than Rs. 5 Core at any point of time during the year, whether Quarterly returns of statement filed by the company with bank or financials institutions are in agreement with books of accounts or not.
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Materiality of 10% has been specified in order to remove ambiguity of discrepancy of changes mention in audit report. Disclosure requirement has been specified now in case of working capital limit exceed more than 5 Crore. | ||
| Clause-3: Loan, Investments, Guarantees, Securities and Advances in nature of Loan:
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Loan given to any person as against the parties covered u/s 189 of Companies Act, 2013.
Words ‘Investment, Guarantees & Security’ has been added.
Disclosure regarding the loan or advance granted, renewed or extended or fresh loans has been settled against the overdue of existing loan.
Disclosure regarding the loans or advances given either repayable on demand or without specifying any terms of period of repayment.
Disclosure of outstanding balance should be made.
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The enhanced disclosure requirement has been made by adding the word ‘Investment, Guarantees & Security and by removing the word ‘parties covered u/s 189. True picture of financial will be shown by disclosing the loan extended or fresh loan settled against overdue loan. | ||
| Clause-5: Deposits | – The word ‘Deemed to be deposits’ has been added.
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In order to wider reporting deemed deposits has been added. | ||
| Clause-7: Statutory Dues | – The word ‘Goods and Service Tax (GST)’ has been added.
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GST was being introduced in July 2017 but GST word was not being added in CARO. So, in order to give more clarity regarding the statutory dues, GST has been added in this clause.
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| Clause-8: Unrecorded Income | – New clause was being inserted, in case 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.
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This clause seeks to coincide books of accounts with the tax assessments made in respect of unrecorded incomes. | ||
| Clause-9: Borrowings | – The word ‘Payment of Interest & Any Lender’ has been inserted.
– Disclosure should be made in case company is a declared as a wilful defaulter.
– Disclosure should be made in case fund raised for short term basis, if utilized for long term.
– Disclosure should be made in case of fund raised by the Company in order to meet the obligation of its subsidiaries, associates or joint ventures.
– Disclosure of loan should be made in case of loans raised on pledge of securities held in its subsidiaries, associates or joint ventures.
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Enhance reporting has been made by adding the word payment of interest on borrowing to any lender in place of Banks, Financials Institutions, Govt. or dues to Debenture holder. Other changes made in order to give more transactional transparency. | ||
| Clause-11: Fraud | – The word ‘Officers or employees’ has been deleted.
– Disclosure in case of any report has been filed in Form ADT-4 under section 143(12) by the auditors with the central government.
– Additional disclosure regarding Whistle-blower (Section 177) complaints to be made.
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In order to enhance disclosure regarding fraud reporting, a compliant regarding fraud by any person has been incorporated. For this purposes, restrictive sources of information of fraud from ‘officers / employees’ has been removed. Further, an additional whistle blower clause has also been inserted.
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| Clause-12: Nidhi Company | – Disclosure of ‘default in payment of interest’ on deposits or repayment thereof.
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Enhance reporting has been made by adding additional disclosure of payment of interest on deposits or repayment thereof.
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| Clause-14:
Internal Audit |
– New clause was being inserted, in order to report whether Company has an internal audit system commensurate with the size and nature of its business.
– Further, a disclosure is also required to be made as to whether the report of Internal Auditor is being considered by Statutory Auditor.
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The addition of this clause re-emphasises the role of internal auditor and expresses the responsibility of statutory auditor in relying upon the work of another auditor. | ||
| Clause-16:
Regulation of RBI |
– Disclosure should be made in case company has conducted any Non-Banking Financial or Housing Finance activities without a valid Certificate of Registration from the Reserve Bank of India.
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| Clause-17:
Cash Losses |
– New clause was being inserted, to disclose cash losses incurred by the company in the financial year and in the immediately preceding financial year.
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| Clause-18:
Resignation of Auditor |
– New clause was being inserted, in order to disclose the issues, objections or concerns raised by the outgoing auditors at the time of resignation from his duty as a Statutory auditor of the company during the year.
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| Clause-19:
Financial Capability of Company |
– New clause was being inserted that whether the company is capable to meet out its liabilities that existing on the balance sheet date as and when they fall due within one year. Auditor needs to analysis on the basis of financial ratio, ageing of financial assets and financial liabilities and Expected realization of those assets and liabilities.
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This entails a complete financial analysis and health check of the company at the time of statutory audit. | ||
| Clause-20:
CSR Compliances |
– New clause was being inserted whether the company has transferred the unspent amount of CSR in case of
a) Outgoing projects to to a special designated bank account.
b) Other than outgoing projects to a fund specified under schedule VII to the Companies Act within a period of six months of the expiry of the financial year.
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Disclosure requirement has been enhanced in order to compliance with second proviso to sub-section (5) of section 135 & sub-section (6) of section 135 of the Companies Act, 2013.
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| Clause-21:
Consolidated Financial Statement |
– New clause was being inserted, to disclose any qualifications or adverse remarks by the auditor in their reports of the companies (subsidiary) should be included in the consolidated financial statements (Parent). |
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The article has been contributed by
FCA Sunny Khanna
Sr. Manager-Audit
Further, we shall be happy to assist in case of any clarifications. For a deeper discussion, feel free to revert us at services@knmindia.com
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