CARO (Company Auditor’s Report Order) 2016 was replaced by CARO 2020 for the statutory audits commencing on or after 1 April 2020. However, due to the pandemic, CARO was deferred and now applicable to all statutory audits on or after 1 April 2021. Reporting under CARO 2016 encompassed 16 clauses with 21 sub-clauses. Under CARO 2020, reporting requirements have been enhanced to focus on transparent reporting comprehensively. With 21 clauses comprising 50 sub-clauses, CARO 2020 is a substantial value addition to the readers of the Auditor’s report compared to the erstwhile version. The increased reporting requirements of CARO 2020 put an onus on the management of the auditee entity to ensure comprehensive disclosures and provision of additional details. On the other hand, the Auditor is tasked with stringent reporting requirements and checking.

This article presents a summary of new reporting requirements and modifications that have been introduced under CARO 2020. Here is the link to a webinar on CARO 2020, which deep dives into the novel reporting requirements, modifications, clauses carried forward, and deletions and provides insights both from the perspective of the reporting entity and the Statutory Auditor.

Clause 3 (i) (a), (b), (c), (d) ,(e): Property, Plant and Equipment (including right of use assets) and Intangible Assets

New Reporting Requirements

• Revaluation of 10% or more (upwards/downwards) based on a valuation by Registered Valuer in the aggregate of the net carrying value of each class of Property, Plant, and Equipment or intangible assets.
• Auditor to report on Proceedings initiated or pending against the Company for holding any Benami property defined under ’Prohibition of Benami Property Transactions Act, 1988.’

Modifications

• Maintenance of proper records showing full particulars of intangible assets.
• Title deeds of immovable property that are not held in the name of the Company will have to be disclosed along with:
  • The name of the party in whose name the title deeds are held
  • Whether any title deeds are held in the name of promoters, directors or their relatives or employees
  • Reasons for not holding the title deeds in the name of the Company

Clause 3 (ii) (a): Inventory

New Reporting Requirements

• Auditor to report on discrepancies of 10% or more for each class of inventory and whether such discrepancies have been properly dealt with in the books of accounts

Modifications

• Enhanced reporting requirements introduced require the auditor to comment on the appropriateness of the coverage and procedure of inventory verification carried out by the management.

Clause 3 (ii) (b): Working Capital

New Reporting Requirements

Auditor to report:

• If at any point of the year the Company has been sanctioned working capital in excess INR 5 crores on the basis of security of current assets by banks or financial institutions.
• Whether the quarterly returns or statements filed with such banks and financial institutions are in agreement with the books of accounts of the Company.

Clause 3 (iii): Investments, Guarantees, Securities, Loans and Advances

New Reporting Requirements

• Reporting to include investments, guarantees or security provided in addition to loans or advances in the nature of loans to companies, firms, LLPs or any other parties.
• Additional reporting required (for all Companies other than those who are in the principal business of giving loans) for loans or advances in the nature of loans granted, guarantees provided or security given to any other entity. Reporting required for-
  • Aggregate amount during the year and balance outstanding on the balance sheet date for such loans or advances and guarantees or security to subsidiaries, joint ventures and associates
  • Aggregate amount during the year and balance outstanding in the balance sheet date for such loans or advances and guarantees or security to parties other than the ones mentioned above.
• Whether investments made, guarantees provided, security given and the terms and conditions of the grant of all loans and advances in the nature of loans and guarantees provided are not prejudicial to the Company’s interest.
• Renewal/extension of loans which has fallen due during the year or new loans granted to settle overdues of existing loans given to same parties; reporting required for-
  • Aggregate amount of such dues renewed/extended or settled by fresh loans and
  • Percentage of aggregate to the total loans or advances in the nature of loans granted during the year
    [not applicable to Companies whose principal business is to give loans]
• Reporting on loans and advances granted without stipulating any terms or period of repayment or repayable on demand; reporting required for-
  • Aggregate amount, percentage thereof to the total loans granted, aggregate amount of loans granted to promoters and related parties

Clause 3(v): Deposits

Modifications

• Reporting under CARO 2020 for deposits is extended to include reporting on “deemed deposits.”

Clause 3(vii) (a), (b): Statutory Dues

Modifications

• Reporting on statutory dues under CARO 2020 is expanded to include
• Goods and services tax; and
• Statutory dues under dispute

Clause 3 (viii): Unrecorded Income

New Reporting Requirement

• The auditor shall be required to report the transactions not recorded in the books of account that have been surrendered or disclosed as income during the year in the income tax assessments.

Clause 3(ix) (a), (b), (c), (d),(e), (f): Default in Repayment of Loans

New Reporting Requirement

Auditor to report:

• If the Company has been declared a wilful defaulter by any bank/ Financial Institution/ other lenders.
• If terms loans were applied for the purpose of which the loans were obtained by the Company; if not, amount of loan so diverted and purpose for which it is used to be reported.
• If short term funds were utilized for long term purposes, nature and amount to be indicated
• If the Company has taken any funds from any entity/person on account of or to meet the obligations of its subsidiaries, associates or joint ventures, the details thereof with nature of such transactions and the amount in each case.
• If the Company has raised loans during the year on the pledge of securities held in its subsidiaries, joint ventures or associate companies, the details and also report where the Company has defaulted in repayments of such loans.

Clause 3 (xi) (a), (b), (c): Fraud and Whistle-Blower

New Reporting Requirement

Whistle-blower Mechanism:

• The auditor shall be required to report whether any complaints from whistle-blowers were received during the year by the company.

Modifications

• CARO 2020 requires the auditor to assess and report upon all frauds whether by the company or on the Company. The assessment and reporting of frauds on the Company are not limited only to frauds committed by officers and employees, as was the case under previous CARO.

Clause 3(xii)(c): Nidhi Companies

New Reporting Requirement

• Auditor shall report whether Company has defaulted in the payment of interest and principal on deposits for any period.

Clause 3 (xiv) (a), (b):Internal Audit

New Reporting Requirement

The auditor will be required to:

• Comment on whether the internal audit system of the Company is commensurate with the size and nature of its business.
• Consider the reports of the internal auditor for the period under audit

Clause 3(xvi)(b), (c), (d): Reserve Bank of India (RBI) Compliances

New Reporting Requirements

Auditors of Non-Banking Financial Companies (NBFCs) will have to report:

• Whether any non-banking financial or housing finance activities have been conducted before obtaining a Certificate of Registration from the RBI.
• Whether the Company is a Core Investment Company (CIC) as per the criteria laid down by the RBI.
• Whether the Company is an exempted or unregistered CIC as per the criteria laid down by the RBI.
• If the Group has more than one CIC and the number of CICs which are part of a Group.

Clause 3 (xvii): Cash Losses

New Reporting Requirements

• Auditor to report whether the Company has incurred “cash losses” in the financial year and the immediately preceding financial year.
• In case of cash losses being incurred, the amount of cash loss has to be reported.

Clause 3(xviii): Resignation of Statutory Auditor

New Reporting Requirements

• The auditor shall have to report if there has been a resignation of the statutory auditor during the year.
• The auditor shall have to consider issues, objections, and concerns raised by the outgoing auditor.

Clause 3 (xix): Going Concern

New Reporting Requirement

• The auditor shall be required to opine whether there is no material uncertainty on the date of audit report, and the Company can meet its liabilities existing at balance sheet date as and when they fall due within a period of one year from the balance sheet date.

Clause 3 (xx): Corporate Social Responsibility (CSR)

New Reporting Requirement

The auditor is required to report:

• Whether unspent amounts on CSR activities other than ongoing projects have been transferred to a fund specified in Schedule VII of the Companies Act, 2013 within 6 months from the expiry of the financial year.
• Whether unspent amounts on CSR activities for ongoing projects have been transferred to a special bank account opened in a Scheduled bank called “Unspent CSR account” within 30 days from the end of the financial year.

Clause 3 (xxi): Consolidated Financial Statements

New Reporting Requirement

• CARO 2020 is not applicable to the auditor’s report issued for consolidated financial statements.
• The auditor is required to report on whether there have been any qualifications or adverse remarks by auditors of the Companies included in the consolidated financial statements (components).
• CARO 2020 provides an “index” of all CARO qualifications and adverse for the parent entity’s standalone financial statements and every individual component reported in the consolidated financial statements.

The reporting requirements under CARO 2020 for the following areas have been carried forward as they were from CARO 2016:

Deleted Clause

Managerial Remuneration

Amendments to the Companies Act, 2013 in September 2018 resulted in reporting for the above clause being covered under “Other Legal and Regulatory Requirements” section of the audit report. Hence, reporting for clause under CARO led to duplicity and the same has been removed in CARO 2020.