Companies (Auditor’s Report) Order, 2020

• Auditing and Assurance
• ||
• April 22, 2020

Introduction
CARO 2020, commonly known as Companies Auditors Report Order 2020 is the latest prescribed format of audit reports of companies under Companies Act, 2013 which supersedes CARO 2016. The objective of CARO 2020 is to cover the wide variety of information mandated to be disclosed by the auditors in their Audit reports, covering the additional requirements of the National Financial Reporting Authority, to be disclosed to the shareholders and to enhance the overall reliability and transparency of reporting in the financial statements of companies. For instance, earlier, details of any proceedings pending under the Benami Transactions (Prohibition) Act, 1988 against the company weren’t disclosed to the shareholders but now, CARO2020 mandates to make its appropriate disclosure in Financial Statements. It is a welcome move by the industry and experts with an aim to prevent DHFL & ILFS like situations.

Applicability of CARO 2020
The Ministry of Corporate Affairs notifies Companies (Auditor’s Report) Order, 2020 on 25^th February 2020 and extends its applicability for the statutory audit of financial statements of Companies commencing on or after 1^st April 2020. Accordingly, CARO 2020 applies to all the companies including foreign companies except:

• One Person Company
• Small Companies
• Banking Companies
• Companies registered under section 8 Companies Act,2013
• Insurance Companies
• Private Limited Companies

1. Whose revenue is less than or equal to INR 10 crore in the financial year
2. Whose paid-up share capital plus reserves and suplus is less than or equal to Rs 1 crore as on the balance sheet date.
3. Not a holding or subsidiary of a public company.
4. Whose borrowings are less than or equal to INR 1 crore at any time during the FY.

Attributes of CARO 2020

• CARO 2020 is far more detailed than CARO 2016 as MCA has specified 21 broad clauses of information that an auditor must include in its report.
• CARO 2020 includes 10 new items or details in the existing items, earlier which were not required to be reported.
• Specific reporting requirements, if revaulation amount is 10% or more on Property, Plant and Equipment.
• The auditor has to disclose the details of proceedings about Benami Property against the company and disclose the same in the financial statements.
• The auditor has to report discrepancies in case of physical verification of inventory where the discrepancy is 10% or more, during the financial year.
• A new format has been prescribed in CARO 2020 where the auditor has to report about all the title deeds of the company which are not in the ownership of the company but disclosed in financial statements.
• CARO 2020 extends its reporting requirements towards the details of investments, guarantee or security or loans and advances made by companies to various entities during the year are not prejudicial to the interests of the company.
• CARO 2020 requires the auditor to report the cash losses incurred in the financial year and the immediately preceding financial year.
• If any bank or financial institution or lender declares a company willful defaulter, various details related to such deafult is required to be reported by the auditor.
• CARO 2020 widens the scope of reporting of fraud in the company or any fraud which has been noticed or reported and enables the auditor to report the nature or amount involved during the year.
• During the audit, the auditor has to consider all the whistle-blower complaints received by the company and report it in an audit report accordingly.
• CARO 2020 extends its reporting requirements for the auditors where the loans were used for the purpose other than the principal business activities and the amount of loan involved in it.
• The auditor has to report on the details as to whether the company has been sanctioned working capital limits above INR 5 crores in aggregate from the banks/financial statements as against the security and quarterly returns filed by the company with such banks.
• The auditor is required to express his opinion that no material uncertainty exists as on the date of the audit report based on financial ratios, expected dates of realization financial assets and payment of financial liabilities, etc. The auditor should also report that the company can meet its liabilities whenever they are due over one year from the date of closure of financial statements.
• CARO 2020 now requires the auditor to report, if the company operates any NBFC activity without holding a valid certificate of registration from the RBI.
• CARO 2020 shall not apply to the Auditor’s report on consolidated financial statements except Clause (xxi) of paragraph 3, where the auditor of holding company in its audit report indicates qualifications/adverse remarks by the respective auditors of subsidiary companies included in consolidated financial statements.

At AJSH, we assist our clients in dealing with various corporate matters (Company incorporations, statutory audits, ROC Compliances) in India by providing them adequate support and guidance from our end. To know more about CARO, please click here.