Applicability of CARO Report – Companies Auditor’s Report Order

Ministry of Corporate Affairs (MCA), on 25th February 2020, notified Companies (Auditor’s Report) Order 2020 (CARO, 2020) with consultation with National Financial Reporting Authority (NFRA)^[1]. This CARO 2020 has repealed CARO 2016. 

Section 143(11) of Companies Act 2013 empowers Central Government to notify certain matters for inclusion in an auditor’s report for a specific class of companies. CARO 2020 is issued with enhanced disclosure by the auditors in their audit report on the basis of recommendations made by a committee set up by the Ministry. 

Companies (Auditor’s Report) Order 2020 (CARO, 2020)

CARO 2020 is applicable on all reports issued by the statutory auditors on accounts of each company audited for financial years starting from or after 1st April 2021. Such CARO reports are issued under Section 143 of the Companies Act 2013. 

The​​ reporting requirements have been prescribed under the Companies (Auditor’s Report) Order, 2015 (CARO, 2015) issued by the Ministry of Corporate Affairs on 10th ​​April 2015. Thereafter on the basis of the recommendation of the Committee set up​​ by the Ministry of Corporate Affairs, CARO, 2016 was issued on 9th February 2016. To reduce corporate fraud and scams, the Ministry of Corporate Affairs has now further issued CARO 2020 on 25th February 2020. It is submitted that in the exercise of the powers conferred by sub-section (11) of section 143 of the Companies Act 2013 and in supersession of the Companies (Auditor’s Report) Order, 2016, except things done or omitted to be done before such supersession, Government, after consulting with National Financial Reporting Authority (NFRA) constituted under section 132 of the Companies Act, 2013, has prepared CARO, 2020.

Sub section 11 of Section 143 of the Companies Act 2013

Applicability of the CARO report is dependent on section 143 (11). Section 143 of Companies Act 2013, in its sub-section 11, states that Central Government, in consultation with the NFRA, be general or special order may in respect of such specific class or description of companies as specified in the order that the auditor’s report includes any statement on the matters as specified therein.  

Applicability of CARO Report

The CARO 2020 is the same as CARO 2016. It is applicable to all the companies to which CARO 2016 was applicable. However, it is not applicable to consolidated financial statements like CARO 2016. Ministry of Corporate Affairs has deferred the applicability of CARO 2020 from the financial year commencing from 1st April 2021 instead of 1st April 2020 as per its notification of 17th December 2020. It was done to ease the burden on companies and their auditors for the year 2020-21 amid coronavirus disease (Covid-19).  

Applicability of CARO Report: companies 

CARO 2020 applies to all companies, including any foreign company, except for the followings:

• One person company (OPC) as defined in clause (62) of section 2 of the Companies Act 2013
• Small companies (Companies with paid-up capital less than or equal to Rs. 50 lakhs and with last turnover less than or equal to Rs. 2 crores)
• Banking companies as defined under clause (c) of Section 5 of the Banking Regulation Act 1949
• Insurance companies, as defined under Insurance Act 1938
• Companies registered for charitable purposes under Section 8 of the Companies Act
• Private companies with gross receipts or revenue (including revenue from discontinuing operations) of more than Rs. 10 crores as per financial statements during the financial year.
• Private companies with paid-up share capital and reserves and surplus not more than Rs. 1 crore as on balance sheet date, i.e., at the end of the financial year.
• A private company that is not a holding or subsidiary of a public company.
• A private company that does not have total borrowings of more than Rs. 1 crore from any financial institution, including banks, at any point time during the financial year

Applicability of CARO Report: Matters

Applicability of CARO Report is on the following matters:

• Details of tangible (Property, Plant, Equipment) and intangible assets
• Details of investments, guarantees, security or advances or loans granted.
• Details of inventory and working capital
• Compliance in respect of deposits accepted.
• Compliance related to the loan to directors
• Funds raised and utilisation.
• Compliance with transactions with related parties
• Compliance by Nidhi Company
• Unrecorded income
• Default in re-payment of borrowings
• Maintenance of costing records
• Deposit of statutory liabilities 
• Internal Audit System
• No-cash dealings with directors
• Funds raised by a company by way of an Initial Public Offer (IPO)
• Registration under Section 45 IA of the RBI Act
• Cash losses
• The company does any fraud.
• Transfer to fund specified under Schedule VII of Companies Act, 2013
• Resignation of statutory auditors
• Material uncertainty in meeting liabilities
• Qualifications or adverse auditor reports in other group companies.

The Auditor’s Report Order is supposed to state the reasons for unfavourable or qualified answers, and also, if the auditor is unable to state any opinion on a particular matter, then in the report, he needs to indicate such fact along with reasons why it is not possible for him to state any opinion on the same. 

Applicability of CARO Report 2020 and 2016

The applicability of CARO Report 2020 is similar to CARO 2016; however, it has 21 clauses, and CARO 16 has only 16 clauses. Seven new clauses are added, and nine clauses are re-drafted in CARO 2020. Only five clauses are left untouched/unchanged in CARO 2020.

New clauses added in CARO 2020

New clauses added under Companies (Auditor’s Report) Order, 2020 for applicability of CARO report are as follows:

Clauses	CARO 2020
(viii)	Reporting requirements on disclosure of transaction
(xiv)	Reporting requirements on internal audit system consideration of report of internal audit by statutory auditor
(xvii)	Reporting requirements on cash losses in financial year or immediately preceding financial year
(xviii)	Reporting requirements on auditors’ resignation
(xix)	Reporting requirements on material uncertainty in relation to financial assets and meeting its liabilities
(xx)	Reporting requirements on transfer of CSR amount
(xxi)	Reporting requirements on adverse remark or any qualification in consolidates financial statement by auditors

Modified Clauses of CARO 2016 in CARO 2020

Certain clauses of CARO 2016 are modified in CARO 2020 for the applicability of the CARO report, and such modified clauses are as follows:

Clauses	CARO 2020
(i)	Reporting requirements on property, plants and equipment and intangible assets
(ii)	Reporting requirement on physical verification of inventory, any discrepancies of 10% or more in aggregate. Compliances if company was sanctioned working capital limits. Quarterly returns or statements filed
(iii)	Reporting requirements on investments in or providing of any guarantee or security or granting any loans or advances in nature of loan.
(v)	Reporting requirements on compliances with RBI directives and provisions of Companies Act with respect to deposits or deemed deposits
(ix)	Reposting requirements on default in repayment, will defaulter, utilisation of term loan other than purpose it was taken for, utilisation of fund raised, funds taken to meet obligations and loans raised on pledge of securities
(x)	Reporting requirements on utilisation of money raised by way of IPO or further public offer during the year were applied for purpose for which those are raised preferential allotment or private placement of share or fully, partially or optionally convertible debenture during the year (Section 42 and 62 of Companies Act 2013)
(xi)	Reporting requirement on notice of fraud. Treatment of whistle-blower complaints. Report under section 143 (12)
(xii)	Reporting requirement on net owned funds to deposits of Nidhi Company, default in the payment or re-payment of interest on deposits.
(xvi)	Reporting requirements on registration under section 45 IA of RBI Act 1934. About registration, NBFC activities or housing finance activities without valid certificate of registration. Criteria of Core Investment Company (CIC)

Clauses of CARO 2016 remain unchanged in CARO 2020

The clauses of CARO 2016 that remain untouched or unchanged in CARO 2020 for applicability in the CARO Report are as follows:

Clauses	CARO 2020
(iv)	Reporting requirements on the compliances of sections 185 and 186 of the Companies Act, 2013 in matters related to loans, investments, guarantees and security
(vi)	Reporting requirements on maintenance of cost records
(vii)	Reporting requirements on statutory dues
(xiii)	Reporting requirements on transaction with related parties
(xv)	Reporting requirements on no-cash transactions with director or any person connected with him

Conclusion

Applicability of CARO Report 2020 is for audits of the financial year 2021-2022 and onwards. Applicability of the CARO Report is also dependent on the type of companies as there are certain kinds of companies over which this does not apply, such as banking and insurance companies. For the applicability of the CARO report, some extra clauses have been added, and some of the clauses from CARO 2016 are modified, though some of them are not changed.

Read our Article:CARO 2020: New Norms Issued for Auditors