What is CARO,2020?
CARO stands for Companies (Auditor’s Report) Order, As per section 143 of the Companies Act, 2013 at the time of every Audit, The Auditor is also required to report under CARO. CARO is an additional reporting requirement or you can say reporting tool for auditors to report under the Companies Act, 2013.
In CARO,2020 there is a total number of 21 clauses in which 16 clauses are the same as in CARO,2016, and 7 new clauses added and the 1 clause merged with the other, and 1 deleted.
The Ministry of Corporate Affairs(MCA) after consulting with the NFRA (National Financial Reporting Authority) on 25th February 2020 issued CARO, 2020 which replaces the CARO, 2016. for enhancing the quality of reporting.
Note:- This is to inform you that the Ministry of Corporate Affairs vide Order dated 17.12.2020 has extended the applicability date of Companies (Auditor’s Report) Order, 2020 for one more year, i.e. for the financial years commencing on or after the 1st April 2021. Accordingly, CARO, 2020 will be applicable from FY 2021-22 and onwards.
On which entities CARO, 2020 is applicable?
CARO, 2020 is a new format of reporting. Therefore, criteria of applicability have not been changed and hence it shall be applicable to all the companies including foreign Companies as defined under section 2(42) of the Companies Act, 2013. But there are some exceptions given below: –
- Banking Company define in section 5(c) of the Banking Regulation Act, 1949;
- Insurance Company as defined under Insurance Act, 1938;
- The company licensed under section 8 of the Companies Act, 2013;
- One Person Company as defined in Section 2(62) of Companies Act, 2013;
- Small Company defined under section 2(85) of Companies Act, 2013;
- Private Limited Company
- Not being a subsidiary or holding of a Public Company;
- Paid-up capital and Reserve & Surplus, not more than 1 Crore rupees, and
- Total borrowings, not more than 1 Crore rupees, and
- Total Revenue as per Sch-III, not more than 10 Crore rupees.
CARO, 2020 – Which clause newly added, which clause Deleted, and which clause Merged?
- Details of Property, Plant and equipment, and Intangible Assets.
- Details of Inventory and Working Capital Loan more than 5 Crore.
- Details of Investment, guarantee, security, and Loans granted by the Company.
- Compliance in respect to Loan to Director under sections 185 & 186.
- Compliance in respect to Acceptance of Deposits under section 73 to 76
- Maintaining Cost Records as per section 148(1).
- Deposit of Statutory Dues (GST, EPF, ESI, Income Tax, Customs Duty, VAT, etc)
- Unrecorded Income in the Books of Account as per Tax Assessment. (New Clause)
- Default in repayment of Loans or other borrowings.
- Money raised through IPO, FPO, and their Utilisation. (Merged clause)
- Fraud Reporting as per section 143(12).
- Compliance by Nidhi Company( applicable to Nidhi Company only)
- Compliance on transition with Related Party under Section 177 and 188.
- Internal Audit System. (New Clause)
- Non-Cash Transactions with directors.
- Registration as per section 45-IA of RBI Act,1934
- Cash Losses. (New Clause)
- Resignation of Statutory Auditors. (New Clause)
- Reporting on Financial Position to mitigate its Liabilities. (New Clause)
- Transfer of CSR Amount remaining unspent to Fund specified. (New Clause)
- Qualification or adverse remarks in the report of group companies. (New Clause)
- Reporting on Managerial Remuneration (Deleted clause).
CARO, 2020 clauses-wise explanation?
(1.) Maintaining a proper record of Property, Plant and equipment, and Intangible Assets
- Reporting on the proper recording of all the details about the property, plant, and equipment and in respect of Intangible assets.
- Report whether Physically verification has been done in reasonable intervals
- Report whether the material discrepancies found during physical verification, have been properly accounted for in the books of account.
- Report whether all the immovable properties (except property taken on lease) shown in the financial statement are held in the name of the company.
- If any property is not held in the name of the Company, then provide the details of such property in the given format
- Report whether revaluation has been done, if yes, whether the revaluation is based on the valuation by a registered valuer.
- If after revaluation, change is more than 10% then specify the amount.
- Report on pending proceedings or any proceedings initiated against the company for holding any Benami property under the Benami Transaction (Prohibition) Act, 1988 and if so comment whether it is disclosed in the financial statement.
(2.) Physical verification of Inventory
- Whether physical verification has been conducted at reasonable intervals by the management.
- Whether the procedure of verification followed by management is appropriate.
- If any discrepancies found during verification are more than 10%, accounted in the books of account.
- Whether during the year company has been sanctioned working capital limit more than 5 Crores rupees from the banks or financial institutions on the basis of security of current assets. If yes then verify the quarterly statement filed with such bank are in agreement with the books of accounts and report discrepancies if found any.
(3.) Repayment of Investment, guarantee, security, and Loans granted by the Company
- Report whether the company has made an investment or provide guarantee or security or grant any loan or advances to companies, firms, LLP, or any other parties (u/s 186 of Companies Act, 2013);
- Specify the aggregate amount during the year and balance at the balance sheet date, if the company has provided loans or advances and guarantee or security to subsidiaries, joint ventures and associates; [not applicable to those companies whose principal business is to give Loans]
- Specify the aggregate amount during the year and balance at the balance sheet date, if the company has provided loans or advances and guarantee or security to persons other than subsidiaries, joint ventures and associates; [not applicable to those companies whose principal business is to give Loans]
- Whether Investment made, the guarantee provided, security given, and loans and advances provided are not prejudicial to the Company’s interest;
- Report whether the schedule of repayment of principal and payment of interest has been stipulated and repayment or receipt is on regular basis.
- If the Amount is overdue for more than 90 days, report the same and ensure that reasonable steps are taken by the company to recover the same.
- If any loan or advance granted has been renewed or extended or fresh loan given to settle the overdue of the existing loan to the same party then specify the aggregate amount of such dues and the %age of aggregate to total loans granted during the year; [not applicable to those companies whose principal business is to give Loans]
- If Company gives any loan or advances without specifying any term or period, then specify the aggregate amount of loan granted to promoters, related parties u/s 2(76) of the Companies Act, 2013
(4.) Compliance of section 185 & 186
- If a company gives any loan or advances to the director or any other person related to its director or made any investment, report whether the company compliance with the provisions of section 185 and 186 of the Companies Act, 2013.
(5.) Acceptance of Deposits
- Whether company complied with the directives issued by RBI and provisions of section 73 to 76 or any other relevant provisions of Companies Act, 2013 and rules made thereunder, if there are any contraventions then stated in the report;
- If an order has been passed by Company law board or National Company Law Tribunal or Reserve Bank of India or any other court, whether complied with the same;
(6.) Cost Records
- Verify and report whether the company is required to maintain records under the provision of section 148(1) of the companies Act, 2013. If yes whether all the records related to costing has been properly maintained.
(7.) Statutory Dues
- Whether company deposited statutory dues (GST, EPF, ESI, Income Tax, Custom Duty, VAT, etc) on regular basis;
- If any statutory due pending for more than 6 Months on balance sheet date specify that Due;
- If any statutory dues are pending due to dispute, specify that amount along with forum where dispute is pending
(8.) Disclosure of Transactions NOT recorded in the Books of Account
- Verify Whether there is any transaction that is not recorded in books and disclosed as income during the year in the TAX Assessments under section 43 of Income Tax Act, 1961. If yes verify whether such unrecorded transactions have been properly recorded in books of Accounts
(9.) Default in repayment of Loans or other borrowings
- Verify whether company has made default in repayment of loans or other borrowings or interest thereon. If yes, report the period and amount of the default in prescribed format;
- Whether company declared as willful defaulter by any bank or financial institution or other lender
- Report if Term loan is applied for any other purpose other than the purpose for which the loan was obtained if yes, specify the amount and such purpose for which such amount is used;
- Whether the Short-term funds raised used for long term purpose if yes report amount and nature of transaction;
- Verify whether company has taken any fund to meet obligations of its subsidiaries, associates or joint ventures, if yes, provide the details thereof (Amount, Nature, etc)
- Verify whether company has raised any loan during the year on pledge of securities held in its subsidiaries, joint venture or associates’ companies. if yes, give details thereof and also report if there is any default on the part of company.
(10.) Money raised by IPO, FPO & Preferential allotment/ Private placement of shares or convertible debentures
- Verify whether the company raised funds from the IPO (Initial Public Offer) FPO (Further Public offer) during the previous year AND also verify whether such amount is used for the purpose for which it is raised, if No, then report the same( details of default/ delays and rectification, if any) in CARO.
- Verify whether the company made any Preferential allotment or private placement of shares or convertible debentures during the previous year. if yes, verify whether the company complied with the provisions of section 42 and section 62 of the Companies Act, 2013 AND funds raised used for the purpose for which it is raised. if any contravention then specifies the details of the same.
(11.) Fraud Reporting
- if any fraud by the company or on the company has been reported or noticed during the year, specify the nature and amount involved
- Whether any report under section 143(12) of the companies Act, 2013 filed with Form ADT-4 as given in rule 13 of the Companies ( Audit and Auditors ) Rules, 2014.
- Whether auditors considered whistleblower complaints, if any, received by the company
(12.) Compliance by Nidhi Company( applicable to Nidhi Company only)
- Verify whether the Nidhi Company has complied with the ratio requirement of Net Owned Funds to Deposits (1:20) to meet liabilities.
- Verify whether the company is maintaining 10% unencumbered Term Deposits to meet liabilities.
- if there is any default on the part of the company in payment of interest or repayment of the loan, specify the details of such default.
(13.) Compliance with Section 177 and 188
- Verify whether compliances has been made with the provisions of section 177 and 188 of the Companies Act, 2013 in respect all the transactions with related parties.
- Verify whether disclosure has been made in financial statements, if required.
(14.) Internal Audit System
- Whether company has an internal audit system in line with the size and nature of company.
- Whether the Statutory Auditor has considered the report(for the period of audit) of Internal Auditors.
(15.) Non-Cash Transactions with directors
- Check whether company has entered any Non-Cash transaction with directors or any person related to directors, if yes verify whether company has complied with the provisions of section 192 of the Companies Act, 2013.
(16.) Registration with RBI
- Whether company is required to registered under section 45IA of the Reserve Bank of India Act, 1934 and has been obtained such registration.
- whether company has conducted any activity with NBFC or HFC without having registration certificate from RBI.
- If Company is CIC (Core Investment Company) under the regulations of RBI, verify the criteria of CIC fulfills.
- If Company is exempted or unregistered CIC (Core Investment Company) under the regulations of RBI, verify it continues fulfil the criteria.
- 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.
(17.) Cash Losses
- State the amount of Cash losses, if any, incurred during the financial year or immediately preceding financial year.
(18.) Resignation of Statutory Auditors
- If there has been any resignation of the Statutory Auditor during the year, New Auditor should consider issues, objections, or concerns raised by the outgoing Auditor.
(19.) The capability of the company of meeting its liabilities existing at the date of balance sheet/ Reporting on Financial Position
- Auditors have to report on companies’ ability to meet the existing liability over a period of the next one year from the date of the balance sheet as and when falls due.
- Such valuation is based on the aging report, financial ratio, expected date of realization of financial assets and payment of liabilities, any other information available in the financial statement, and knowledge about the board of directors and management plan.
(20.) Transfer of Amount remaining unspent under section 135(5) to Fund specified in Schedule VII of Companies Act, 2013
- Whether the company has transferred the unspent money within 6 months from the expiry of the financial year to fund specified in Schedule VII of the Companies Act, 2013.
- Whether the company has transferred the unspent money within 6 months from the expiry of the financial year in a special account in Section 135(6) of the Companies Act, 2013.
(21.) Reporting on Consolidated Financial Statements
In case there is any qualification or adverse remarks in the report of the companies which is to be included in the consolidated financial statements, then indicate such qualification and adverse remarks appropriately.
Note:- one clause related to Managerial Remuneration has been removed in the CARO,2020.
In short, in CARO, 2020 all the transactions which are crucial and close nexus with the Solvency/Financial Risk of the company have been covered.