Accounting and Audit News

Amendments in CARO 2020

The Ministry of Corporate Affairs issued the Companies (Auditor’s Report) Order, 2020 (CARO 2020) in supersession of the Companies (Auditor’s Report) Order, 2016, which is applicable to a wide range of companies and includes several new reporting requirements as compared to the previous version. Some of the clauses are re-introduced in the CARO 2020 and some clauses are updated with respect to current changing market conditions. Based on the current market scenario and in the wake of recent corporate frauds, through CARO 2020 MCA has put additional responsibility on the auditor to report with respect to the loan related disclosures and the Company’s internal audit system. On an overall basis, CARO 2020 is a step in the right direction seeking to enhance reporting and governance in several key areas.

The Companies (Auditor’s Report) Order, 2020 lists out as many as 21 broad items compared to 16 broad items in Companies (Auditor’s Report) Order, 2016 on which the applicable companies are mandatorily required to report. MCA vide order dated 17 December 2020 has changed the applicability date of Companies (Auditor’s Report) Order, 2020 to the financial years commencing on or after the 1 April 2021. So, Companies (Auditor’s Report) Order, 2020 (CARO 2020) will be applicable from FY 2021-22.

Mentioned below are the differential clauses areas where amendments / changes have been made in CARO 2020:

List of Clauses	Amendments in CARO, 2020
Non-Current Assets	Amendment – Words „Fixed Assets" now replaced with Property, Plant, Equipment and Intangible Assets (PPEIA). If Title deeds of the immovable properties not in the name of Company, then report all such instances. Any Benami Proceedings initiated to be reported. Revaluation of property, plant or equipment or intangible property to be reported.
2. Inventory and Other Current Assets	a. Auditor to report whether the coverage and procedure of physical verification by the management is appropriate or not. b. Any Discrepancy beyond 10 per cent to be disclosed. c. New sub-clause b. has been inserted which requires auditors to report any working capital limit above 5 crores on the collateral of Current Assets to be disclosed and returns filed with bank in consonance with books.
3. Reporting on Loans, Investments Guarantees, Securities and advances in nature of Loan	In CARO 2020, this clause now includes Investments, provision of loans or advances in the nature of loans, or stood guarantee, or provided security, indicate the aggregate amount during the year, and balance outstanding at the balance sheet date: to subsidiaries, joint ventures and associates to parties other than subsidiaries, joint ventures and associates. Where there are loan and advances in the nature of repayable on demand, without any terms or period of payments then to specify the amount of loans or advances given to promoters and related parties.
4. Reporting on Unrecorded Income	Newly inserted – Auditor needs to report on: a. Transaction not recorded in books but disclosed in the income tax assessment. b. Whether or not the unrecorded income has been disclosed in the books of accounts.
5. Loans & Other Borrowings	a. Default of Interest payment is also covered. b. Coverage of reporting is expanded to include all types of lender as against Bank, FI, Government and Debenture holders as per old CARO (e.g. Default in repayment of Inter-corporate Loans also needs to be reported) c. New sub-clauses requires reporting on: The details of funds borrowed by holding company for the purpose of discharging obligations of group entities - usage of long term and short term funds. The details of funds borrowed by pledging the securities held in its group entities and defaults in its repayment. Whether the company is a declared willful defaulters, diversion of loan taken for the other purpose or not.
6. Reporting on use of money raised through issue of own shares	a. Reporting under two different clauses of CARO 2016 are combined under single clause. b. 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.
7. Fraud Reporting	Reporting to be done for any fraud report filed by the auditor in Form ADT 4 u/s 143(12) to the CG or any complaints from the informers considered by the auditors while submitting the reports.
8. Reporting on Nidhi Company	Newly inserted sub-clause (c) for reporting as under: Whether there has been any default in payment of interest on deposits or repayment thereof for any period and if so, the details thereof;
9. Reporting on Internal Audit System	Newly inserted: a. whether the company has an internal audit system commensurate with the size and nature of its business b. whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor
10. Reporting on Registration u/s 45-IA of RBI Act	New sub-clauses (b),(c) and (d) 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
11. Reporting on Cash Losses	A new clause is inserted which requires reporting on amount of cash loss incurred by the company in current as well as previous year.
12. Resignation of the Statutory Auditors	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
13. 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.
14. Reporting on CSR Compliance	A new clause is inserted which requires to report on: a. 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, 2013 within a period of 6 months of the expiry of F.Y. b. Whether any amount remaining unspent has been transferred to special account.
15. Qualifications or adverse remarks in the consolidated financial statements	A new clause is inserted which requires to report on: 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 statements, if yes, indicate the details of the companies and the paragraph numbers of the CARO report containing the qualifications or adverse remarks

Concluding Remarks

The new CARO amendments to enhance reporting requirements will provide useful information to users about the underlying financial statements and the findings of the auditor. These have been designed to bring in greater transparency in the financial state of affairs of the companies.