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Shubham Chauhan
| Updated: 02 Mar, 2020 | Category: Finance & Accounting, Latest News

CARO 2020: New Norms Issued for Auditors

CARO 2020

The Ministry of Corporate Affairs recently on 25 February notified the Companies Auditor’s Report Order, 2020, CARO 2020 and made it mandatory for companies to disclose all whistleblower complaints to the auditor. MCA issued CARO 2020 in the suppression of the Companies (Auditor’s Report) Order, CARO 2016 and would be applicable for the audit of financial statements of eligible companies for the financial years commencing on or after 1 April, 2019. The introduction of new norms for Auditors is an attempt from the government to curb corporate frauds and scams and strengthen the corporate governance framework under the Companies Act, 2013. From now on, Auditors will be required to give detailed disclosures about loan defaults, immovable properties and other aspects about companies in their annual report.

CARO 2020 has been issued by MCA after consultation with the National Financial Reporting Authority which was established under section 132 of the Companies Act 2013[1] on 1st October, 2018.

Read our article:Filing of Financial Statement with Registrar

Applicability of CARO 2020

 The applicability of CARO 2020 for Companies has been kept similar to that of CARO 2016.

Important features of CARO 2020

  • The number of Reporting clauses in paragraph 3 has been increased to 21 from earlier 16 clauses.
  • CARO 2020 lays its focus on reporting of “Property, Plant and Equipment”. In CARO 2016, reporting was required on all fixed assets. However, now auditor will have to comment on Intangible assets as well.
  • CARO 2020 provides a specific format for reporting the details of the immovable properties of which title deeds are not held in the name of the Company but are disclosed in the financial statements.
  • The auditor will also have to disclose whether the Company has revalued its Property, Plant and Equipment or intangible assets and if yes whether the revaluation was based on the valuation by a Registered Valuer specifying the amount of change and if the change in net value of the asset is more than 10% then the amount of change has to be mentioned in the report.
  • Under CARO 2020 Auditors will have to report the proceedings against the Company for holding ‘Benami Property’ under the Benami Transactions (Prohibition) Act, 1988.

Inventory

  • Auditors will have to report whether the Company has conducted the physical verification of inventory. Under CARO 2016 auditors had to report for material discrepancies but CARO 2020 has defined materiality to be 10% for each class of inventory. Discrepancies of 10% or more would have to be reported.
  • The auditor will have to provide specific details whether during any point of the time of the year, the Company was sanctioned working capital limits in excess of Rs 5 crores from financial institutions on the basis of the security of current assets. The auditors will have to report about the quarterly disclosure made by the Company to the Bank.

Loan given by Company [Clause 3 (iii)]

  • Earlier under CARO 2016 auditors only had to report loans given to parties covered under Section 189 of Companies Act, 2013. However, CARO 2020 covers all loans granted by the Company.
  • Under CARO 2020 Auditor will have to report the investments made by the Company in form of any loans or advances granted, secured or unsecured, to companies, firms, LPPs or any other parties during the year, that they are not prejudicial to the interests of the Company.
  • The Auditors will have to report the aggregate amount of the loan given by Company along with balances at balance sheet date. The loan is given to Subsidiary, Joint Ventures and Joint Associates has to be reported separately than loan given to other parties.
  • Auditors will have to report if any new loan has been given to settle down the old loan or if there has been an extension in existing loan and if so the amount and percentage of such loan to total loan will have to be reported.
  • In CARO 2020 a specific format has been prescribed to report the period and amount of default by the Company in repayment of loans or other borrowings to any lender. Earlier under CARO 2016 auditors had only had to report default in repayment of loans to a financial institution, banks, government or dues to debenture holders however under CARO 2020 auditors will have to report default in repayment of loans to any lender in given specific format.

Reporting of Fraud

  • The auditor will have to report any fraud by the Company or any fraud on the Company with the nature of fraud and amount involved. Any report under subsection (12) of section 143 of Companies Act has been filed by the auditors in Form ADT – 4 as prescribed under rule 13 of Companies (Audits and Auditors) Rules, 2014 with the Central Government has to be reported by the auditor.
  • Reporting the whistle blower complaints is an additional responsibility for auditors which was not there in CARO 2016.

Internal Audit

  • This clause was not there in CARO 2016. Under this clause, auditors are required to report whether the Company has an internal audit system equivalent with the size and nature of its business. Auditors will also have to report whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor.

Registration

  • Under CARO 2020 the auditors will have to report on activities carried out by NBFCs and HFCs without a valid certificate of registration (CoR) from the Reserve Bank of India as per the Reserve Bank of India Act 1934.
  • Auditors are also required to report on Core Investment Company (CIC), whether it fulfils the criteria of CIC, and in case the Company is an exempted or unregistered CIC, whether it continues to fulfil such criteria.

Cash Losses

  • With a new addition to CARO 2020, auditors will have to report whether the Company has suffered cash losses in the financial year and the immediately preceding FY and if so the number of cash losses will have to be reported.

 Auditors Resignation

  • Auditors are required to report whether there has been any resignation of the statutory auditors during the year and if so it should be taken into account whether the auditor considered the issues, objections or concerns that were raised by outgoing auditors.

Capable of meeting Liabilities

  • The auditors are required to take and report detailed justification of whether the Company is capable of meeting its liabilities existing at the date of the balance sheet as and when they fall due within a period of one year from the balance sheet date. Addition of this new clause will give more clarity to the cash flow of the companies.

Corporate Social Reporting

  • CARO 2016 didn’t have to report of Corporate Social Responsibility, which now has been added to CARO 2020 increasing the responsibility of auditors.

Under CARO 2020 auditors are required to report any qualifications or adverse remarks by the respective auditors in the audit report. Auditors will have to give detailed reasons for unfavourable or qualified answers in their report also any unfavourable or qualified answers to the questions referred to in paragraph 3. Moreover, if the auditor is unable to express any opinion on any specified matter, he will have to give reasons for the same in his report.

 Take Away 

CARO 2020 is expected to improve the overall quality of the reporting by auditors on financial statements of the companies. Under CARO 2020 companies will have to disclose all whistleblower complaints to the auditors which till now we’re termed as Benami complaints and weren’t revealed to the shareholders. This would lead to greater transparency in the financial affairs of the companies.

Read our article:Accounts Receivable: Definition and Tips to Manage

CARO-2020

Shubham Chauhan

A passionate legal content writer, a nature enthusiast, an avid reader, and a part-time thinker. By means of conducting in-depth research on industry related topics, Shubham often builds flawless and intelligible legal content for populace from all walks of life.

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