CARO 2020 reporting requirements and its related impact

Sr. No

Clause on CARO, 2020

Reporting requirements by CARO, 2020 (amended)

Brief on guidance note by ICAI (new reporting requirements)

1.

3(i) (a) (A) Amendment has been bought in this clause by way of modification.

“whether the company is maintaining proper records showing full particulars, including quantitative details and situation of Property, Plant and Equipment“

This amendment normally changes the terminology of “Fixed Assets” to “Property, Plant and Equipment in align with schedule III. 

It also provides that for right to use asset (ROU) acquired under finance lease (Ind AS-116) should be considered for reporting, Investment property under Ind AS-40 will be considered and Noncurrent asset held for sale will also be considered for reporting. This guidance note provides what constitutes “proper record according to rule 3 and section 2(12) of the Companies Act, 2013, the auditor shall examine procedures as per proper records and report it.

2.

3(i)(b) (B) Amendment has been bought in this clause by way of modification.

“whether the company is maintaining proper records showing full particulars of intangible assets”

The amendment pertains to additions in the clause. This guidance note provides insights of definition of “intangible assets” as per AS and Ind AS perspective. 

It also provides that what constitutes “proper record”, auditor is required to analyze different intangible assets records like customer and artistic based on the audit procedures which can normally be done by checking agreements, original cost details, location, subsequent expenditure, register of amortization etc.

3.

3 (i) (b) Amendment has been bought in this clause by way of modification.

“whether these Property, Plant and Equipment have been physically verified by the management at reasonable intervals; whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the books of account”

The amendment pertains to changing terminology from “fixed asset” to “Property, plant and equipment”. 

Right of use asset (ROU) for Ind AS-116, Investment property for Ind AS-40 and for Ind AS-105, noncurrent assets held for sale should be considered for reporting.

4.

3(i)(c)   Amendment has been bought in this clause by way of modification.

whether the title deeds of all the immovable properties (other than properties where the company is the lessee and the lease agreements are duly executed in favour of the lessee) disclosed in the financial statements are held in the name of the company, if not, provide the details thereof.

The amendments provide to report on these additional details Description of property Gross carrying value Held in name of Whether promoter, director or their relative or employee Period held – indicate range, where appropriate Reason for not being held in name of company also indicate if in dispute

Based on the guidance note, auditor is required to perform the procedures:

Thus, based on above procedures auditor is required to report based on additional details provided by the amendments.

5.

3(i)(d) New sub-clause has been inserted. 

“whether the company has revalued its Property, Plant and Equipment (including Right of Use assets) or intangible assets or both during the year and, if so, whether the revaluation is based on the valuation by a Registered Valuer; specify the amount of change, if change is 10% or more in the aggregate of the net carrying value of each class of Property, Plant and Equipment or intangible assets”

Bases on the guidance note, Auditor is required to check whether as per financial reporting framework, entity is adopting revaluation model and not following cost model. Under this clause reporting is required if entity is following revaluation model, auditor is required to check the valuation rules for “asset class” for the class or class of assets that has been revalued and auditor is required to follow the principles enumerated in SA-500 and not under SA-620, because he is using the work for management expert and make documented a copy of valuation report as per SA-230. Auditor is required to report the quantum if change result in 10% or more.

6.

3(i)(e) New sub-clause has been inserted. 

“whether any proceedings have been initiated or are pending against the company for holding any benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and rules made thereunder, if so, whether the company has appropriately disclosed the details in its financial statements”

Based on the guidance note, Auditor is required to examine whether proceedings have been initiated and if initiated financial disclosed the fact and appropriate provisions are made based on the merit as per relevant financial reporting framework. 

For the ascertainment of any proceedings,

Auditor is required to obtain management representation letter, review legal expense account and review minutes of the meeting.

The reporting is not applicable where the notice is received by the company as a beneficial owner.

7.

3(ii)(a) Amendment has been bought in this clause by way of modification.

“whether physical verification of inventory has been conducted at reasonable intervals by the management and whether, in the opinion of the auditor, the coverage and procedure of such verification by the management is appropriate; whether any discrepancies of 10% or more in the aggregate for each class of inventory were noticed and if so, whether they have been properly dealt with in the books of account”

Based on the guidance note, primarily responsibility lies on the management for carrying out physical verification for reconciling with the stock records, auditor is required to obtain reasonable assurance with respect to the existence and condition of inventories by observing the inventory counting procedure and the internal controls over the method of valuing it with respect to the physical condition and fair value, auditor can verified the procedure by examining relevant document like internal memo, stock sheets, written instruction of management, consolidated sheets etc. If auditor found any discrepancy in inventory and class of inventory, especially if deviation is 10% or more, auditor is required to report that fact.

8. 

3(ii)(b) New sub-clause has been inserted. 

“whether during any point of time of the year, the company has been sanctioned working capital limits in excess of five crore rupees, in aggregate, from banks or financial institutions on the basis of security of current assets; whether the quarterly returns or statements filed by the company with such banks or financial institutions are in agreement with the books of account of the Company, if not, give details”

Based on the guidance note, Auditor is required to check the sanctioned limit and not the utilization limit and auditor can examine through sanctioned letter and agreement, if sanctioned limit is less than 5 crore but due to levy of additional charges, the limit exceeded such cases are not covered. 

This clause further requires the auditor to examine whether the book balances agree with the quarterly returns or statements submitted to the lenders (banks or financial institutions). The responsibility of the submission of such quarterly returns/ statements to banks/ financial institutions is that of the management. It is, however, necessary that the auditor satisfies himself that such quarterly returns/ statements reconciled with the books of account and he has found sufficient and appropriate evidence to arrive at such a conclusion. Such returns/statements would include stock statements, book debt statements, credit monitoring arrangement reports, statements on ageing analysis of the debtors, if discrepancy is found, auditor is required to report the fact.

9.

3(iii)(a) (A) & (B) Amendment has been bought in this clause by way of modification.

“whether during the year the company has made investments in, provided any guarantee or security or granted any loans or advances in the nature of loans, secured or unsecured, to companies, firms, Limited Liability Partnerships or any other parties, if so,- (a) whether during the year the company has provided loans or provided advances in the nature of loans, or stood guarantee, or provided security to any other entity [not applicable to companies whose principal business is to give loans], if so, indicate- (A) the aggregate amount during the year, and balance outstanding at the balance sheet date with respect to such loans or advances and guarantees or security to subsidiaries, joint ventures and associates; (B) the aggregate amount during the year, and balance outstanding at the balance sheet date with respect to such loans or advances and guarantees or security to parties other than subsidiaries, joint ventures and associates”

This clause requires determination of gross amount of all loans, advances in nature of loans, guarantees, security provided during the year to subsidiaries, joint ventures, associates and to any other parties. 

Auditor needs to perform internal control and procedure on subsidiaries, associates and joint venture. The auditor should obtain details of all investments made, guarantee or security provided or loans/advances in nature of loans granted during the year from the management. The details should include, name of the parties, relationship of the company, investments made, guarantees/security provided, loans/advances in nature of loans granted during the year, date and amount of settlement of guarantee/loans / advances in nature of loan as per the terms of contracts etc. Further, in respect of guarantees, security, loans and advances in nature of loans, the details of amounts outstanding as at the reporting date should also be obtained from the management.

Auditor is required to report in the format provided by page 60 of guidance note.

10

3(iii)(e) New sub-clause has been inserted. 

“whether any loan or advance in the nature of loan granted which has fallen due during the year, has been renewed or extended or fresh loans granted to settle the over dues of existing loans given to the same parties, if so, specify the aggregate amount of such dues renewed or extended or settled by fresh loans and the percentage of the 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)”

Auditor has to obtain the list of the parties from the loan register required to maintain under section 189 of the Companies Act, 2013, it is required to maintained in form MBP2, auditor has to examine the loan agreement to ascertain the terms of renewal/extension, loan falling due on the balance sheet date and which were renewed/extended post balance sheet date, also got covered under this clause. 

Auditor is required to report in the format provided by page 68 of guidance note.

11.

3(iii)(f) New sub-clause has been inserted. 

“whether the company has granted any loans or advances in the nature of loans either repayable on demand or without specifying any terms or period of repayment, if so, specify the aggregate amount, percentage thereof to the total loans granted, aggregate amount of loans granted to Promoters, related parties as defined in clause (76) of section 2 of the Companies Act, 2013″

Auditor should obtain the list of promoter and related parties as per section 2(69) and section 2(76) of the Companies Act, 2013, Auditor should consider the requirement of SA-550. 

Auditor has to examine the loan agreements/mutually agreed letter of arrangement and In case the auditor identifies that loans/advances in nature of loans are granted to promoters or related parties which are repayable on demand or without specifying any terms or period of repayment, the auditor should state the fact and report the gross amount of such loans/advances in nature of loan granted during the year

Format of reporting is provided under page 69 of the guidance note.

12.

3(v) Amendment has been bought in this clause by way of modification.

“in respect of deposits accepted by the company or amounts which are deemed to be deposits, whether the directives issued by the Reserve Bank of India and the provisions of sections 73to 76 or any other relevant provisions of the Companies Act and the rules made thereunder, where applicable, have been complied with, if not, the nature of such contraventions be stated; if an order has been passed by Company Law Board or National Company Law Tribunal or Reserve Bank of India or any court or any other tribunal, whether the same has been complied with or not”

Auditor additional procedure is restricted to this clause includes reporting on ‘amounts which are deemed to be deposits’ in addition to deposits accepted by the company. 

There are some instances where an amount could be deemed to be deposits, the auditor should obtain the list of amounts received in the course of the business of the company as advances, security deposits and assess them against the requirements of sub-clause (xii) of Rule 2(1) (c) of the Companies (Acceptance of Deposits) Rules, 2014, to analyze whether such amounts have been given the color and shape of deposits. Auditor should also examine the Form DPT-3 filed by the company as required under the provisions of Companies Act, 2013.

13.

 3(vii)(a) Amendment has been bought in this clause by way of modification.

 ” whether the company is regular in depositing undisputed statutory dues including Goods and Services Tax, provident fund, employees’ state insurance, income-tax, sales-tax, service tax, duty of customs, duty of excise, value added tax, cess and any other statutory dues to the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as on the last day of the financial year concerned for a period of more than six months from the date they became payable, shall be indicated”

Auditor procedures and reporting remains the same as earlier procedures apart from that auditor must perform additional procedures on examining statutory dues relating to goods and service tax. Auditor can obtain written representation and examine the monthly return filling whether it is regular and reconciled with the vendor balance in respect of input tax credit and check for any notice of demand by consulting with legal counsel and review minutes of meeting and legal expense account for any provision made for late fees. 

Reporting format has been provided under page 93 of guidance note.

14.

 3(viii) Amendment has been bought in this clause by way of modification.

 “whether any transactions not recorded in the books of account have been surrendered or disclosed as income during the year in the tax assessments under the Income Tax Act, 1961 (43 of 1961), if so, whether the previously unrecorded income has been properly recorded in the books of account during the year”

The auditor should also obtain a copy of the statements made during search and survey to verify the nature of income so surrendered or disclosed. Accordingly, where the addition is made by the income tax authorities and the company has disputed such additions, reporting under this clause is not applicable. Auditor is required to review all the tax assessment till the date of signing auditor’s report to identify whether assessee has surrendered or disclosed any income. 

Auditor has also to view on Ind As- 8 and AS-5 perspective for recording any prior period entry or recorded as exceptional items.

15.

 3(ix)(a) Amendment has been bought in this clause by way of modification.

“whether the company has defaulted in repayment of loans or other borrowings or in the payment of interest thereon to any lender, if yes, the period and the amount of default to be reported”

 Auditor is required to report whether the company has defaulted in repayment of loans or other borrowings or in the payment of interest thereon to any lender, it is clarified that the borrowings do not include public deposits as the reporting on public deposits is covered by clause 3(v) of the Order. It is clarified that for the purpose of reporting under this clause, preference share capital should not be considered as borrowing. The auditor should obtain the schedule of repayments to all lenders from the management of the company. The auditor should examine the relevant agreements containing the terms and conditions of the loans and borrowings of the company taken from all lenders.

16.

3(ix)(b) New sub-clause has been inserted. 

 “whether the company is a declared wilful defaulter by any bank or financial institution or other lender”

Reporting under this clause would normally be required when there has been a default by the company in repayments of loans and/or interest to lenders. Auditor is required to refer Reserve Bank of India master circular RBI/2014- 15/73DBR.No.CID.BC.57/20.16.003/2014-15 dated July 1, 2014, to analyze the definition of willful default, and the term lender appearing in the RBI Circular covers all banks/financial institutions to which any amount is due, provided it is arising on account of any banking transaction, including off balance sheet transactions such as derivatives, guarantee and letter of credit. Auditor should obtain confirmation from banks and financial institution regarding any willful default. The auditor should enquire from the management whether the company has been declared a willful defaulter or has been issued a show-cause notice by any bank, financial institution or government/government authority as per the procedure described under the RBI Circular. The auditor should obtain a signed declaration in this regard from the management.

17.

 3(ix)(d) New sub-clause has been inserted. 

“whether funds raised on short term basis have been utilised for long term purposes, if yes, the nature and amount to be indicated”

Under this clause, auditor must evaluate the respective maturity pattern based on the deployment of fund as a risk management technique adopted by the company. It would be easier for the auditor to comment upon this clause since a comparison of sources of funds with their deployment based on their respective maturity patterns. For example, if an entity has issued long term debentures of Rs.50,00,000 that is scheduled to be mature within the next 18 months and an equivalent amount in a investment in equity stocks that would mature after 3 years, based on the analysis the maturity pattern analysis would indicate the inability to meet the liability on the debt on due date. This clause also requires the auditor to state the nature of application of funds if the company has financed long-term assets out of short-term funds.

18.

3(ix)(e) New sub-clause has been inserted. 

“whether the company has taken any funds from any entity or person on account of or to meet the obligations of its subsidiaries, associates or joint ventures, if so, details thereof with nature of such transactions and the amount in each case”

The auditor needs to consider new loans or advances given during the year, meeting the obligations of subsidiaries, joint ventures, or associate companies during the year and new investments made during the year for the purpose of reporting under this clause. The auditor should obtain list of all subsidiaries, associates and joint ventures from the company. The auditor should also obtain details of all loans, advances including advances loans granted to subsidiaries, associates and joint ventures and investments made in such companies. The auditor should also obtain schedule of related party transactions required to be made under the provisions of the Companies Act, 2013, and verify it with the relevant parties to whom the loan and advances are given. 

Reporting format has been provided under page 120 of the guidance note. 

19.

3(ix)(f) New sub-clause has been inserted. 

“whether the company has raised loans during the year on the pledge of securities held in its subsidiaries, joint ventures or associate companies, if so, give details thereof and also report if the company has defaulted in repayment of such loans raised”

Clause 3(ix)(a) of the Order requires the auditor to report whether the company has defaulted in repayment of loans or other borrowings or in the payment of interest thereon to any lender, and if yes, the period and the amount of default to be reported. Since the requirement of clause 3(ix) (a) is to report on defaults in case of all lenders, the auditor would have already performed necessary procedures even in respect of loans referred to in this clause, Thus, auditor is required to provide the details of defaults gathered from performing procedure above. 

Reporting format has been specified in page 123-124 of guidance note.

20.

3(xi)(a) Amendment has been bought in this clause by way of modification.

“whether any fraud by the company or any fraud on the company has been noticed or reported during the year, if yes, the nature and the amount involved is to be indicated”

Prior to the amendment, auditor is required on the fraud committed by the officers and the employees of the company, now the amendment provision has stretched the responsibility of reporting of fraud committed by the company or on the company. If any fraud is noticed / reported, the auditor is required to state the amount involved and the nature of fraud. This clause does not require the auditor to discover such frauds on the company and by the company. Rather than only frauds noticed and reported by the management needs to be reported but does not relieve the auditor from complying with the principles of SA-240. 

Auditor should perform procedures as:

21.

3(xi)(b) New sub-clause has been inserted. 

“whether any report under sub-section (12) of section 143 of the Companies Act has been filed by the auditors in Form ADT-4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central Government”

Reporting under this clause provides the instance where owing to performing audit procedures, audit has identified any instance of fraud involving an amount of Rs.1 crore or more, auditor is required to report the fact to central government along with comments from audit committee and board of directors in form ADT-4, as the case may be, u/s 143(12) of the Companies Act, 2013. 

Auditor is required to report the fact additionally if any cost accountant under section 148 and company secretary u/s section 204 of the act, submitted such form, that fact also required to be reported.

22.

3(xi) (c) New sub-clause has been inserted. 

“whether the auditor has considered whistle-blower complaints, if any, received during the year by the company”

This is a new reporting requirement in the Order and requires the auditor to consider whistle blower complaints, if any, received by the company during the year under audit. Auditor has to examine firstly, on which entities it is mandatory by analyzing SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and Section 177(9) of the Companies Act, 2013, the auditor should check as to whether the company has an ethics/whistle blower/ hotline process with adequate procedures to handle anonymous complaints (received from inside and outside the company),. Additionally, auditor can perform following procedure:

23.

3(xiv)(a) New sub-clause has been inserted. 

“whether the company has an internal audit system commensurate with the size and nature of its business”

Based on the guidance note, auditor firstly needs to examine the internal auditor mandatory requirements as per the statute, in considering this clause, auditor can perform the following procedure:

Auditor should also examine based on the inputs received, effectiveness and continuing operations of internal control system and its design and enquire from the management also.

24.

3(xiv)(b) New sub-clause has been inserted. 

“whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor”

Under this reporting clause statutory auditor considered the report prepared by the internal auditor for the purpose of collecting sufficient and appropriate evidence. 

Auditor can perform following procedure to collect sufficient and appropriate evidence:

25. 

3(xvi)(b) New sub- clause has been inserted. 

“whether the company has conducted any Non-Banking Financial or Housing Finance activities without a valid Certificate of Registration (CoR) from the Reserve Bank of India as per the Reserve Bank of India Act, 1934”

Primarily, the Reserve Bank of India prohibits companies from carrying on the business of a non-banking financial institution without obtaining the certificate of registration. 

Auditor should perform these relevant procedures:

26.

3(xvi) (c) New sub- clause has been inserted. 

“whether the company is a Core Investment Company (CIC) as defined in the regulations made by the Reserve Bank of India, if so, whether it continues to fulfil the criteria of a CIC, and in case the company is an exempted or unregistered CIC, whether it continues to fulfil such criteria”

Under this clause, the auditor is required to examine whether the company is engaged in the business which attracts the requirement of registration as Core Investment Company. 

Auditor shall perform the following procedure:

27.

3(xvi)(d) New sub- clause has been inserted. 

“whether the Group has more than one CIC as part of the Group, if yes, indicate the number of CICs which are part of the Group”

This clause requires the auditor to report whether there is more than one CIC as part of the Group and if there are more than one CIC in the Group the number of CICs shall be indicated in the report. 

Auditor procedure shall be limited to obtain a written representation from management about the CICs in the group and its completeness. To the extent possible, the auditor shall corroborate this with the list of registered CICs from the RBI Website and auditor shall also If the group has no CIC or not more than one CIC, the auditor shall report this fact. If the group has more than one CIC the auditor shall report the number of CICs in the Group

28.

3(xvii) New clause has been inserted. 

“whether the company has incurred cash losses in the financial year and in the immediately preceding financial year, if so, state the amount of cash losses”

Under this clause, it is pertinent to mention that the term “cash losses” is not defined in the Act and the accounting standards/Indian accounting standards. The figure of cash losses is not readily available from the financial statements of the company. Accordingly, for the purpose of reporting under this clause, the auditor would need to determine the figure of cash losses for the period covered by the audit report and for the financial year immediately preceding the period covered by the audit report.

Based on different financial reporting framework, adjustments need to be made:

Further, under other comprehensive income (OCI) cash profit/loss realized and recognized before reclassifying into profit and loss.

However, it may not be appropriate to consider such cash flows for the specific and limited purpose of this clause considering that items such as interest income/expense are also relevant for determination of cash losses.

29.

 3(xviii) New clause has been inserted. 

“whether there has been any resignation of the statutory auditors during the year, if so, whether the auditor has taken into consideration the issues, objections or concerns raised by the outgoing auditors“

This clause is applicable where new auditor (‘incoming auditor’) is appointed during the year to fill a casual vacancy caused by resignation of the auditor created in the office of the previous auditor under section 140(2) of the Act. 

Prior to accepting the position of the statutory auditor, Incoming auditor should obtain reasons for resignation and it should be valid and bonafide, there should not be any ambiguity, as per ICAI code of ethics.

Incoming Auditor is required to perform the following procedure:

30.

3(xix) New clause has been inserted. 

“on the basis of the financial ratios, ageing and expected dates of realisation of financial assets and payment of financial liabilities, other information accompanying the financial statements, the auditor’s knowledge of the Board of Directors and management plans, whether the auditor is of the opinion that no material uncertainty exists as on the date of the audit report that company is capable of meeting its liabilities existing at the date of balance sheet as and when they fall due within a period of one year from the balance sheet date”

Under this reporting clause, auditor shall evaluate whether company had ample amount of liquidity to meets its short-term obligations. 

Auditor shall perform the following procedures:

Auditor should also make written representation regarding the management of collection of receivables and any material uncertainty, if auditor concludes material uncertainty exist, auditor is required to report the fact.

31.

3(xx) (a) & (b) New clause has been inserted. 

“whether, in respect of other than ongoing projects, the company has transferred unspent amount to a Fund specified in Schedule VII to the Companies Act within a period of six months of the expiry of the financial year in compliance with second proviso to sub-section (5) of section 135 of the said Act”

“whether any amount remaining unspent under sub-section (5) of section 135 of the Companies Act, pursuant to any ongoing project, has been transferred to special account in compliance with the provision of sub-section (6) of section 135 of the said Act”

Both the clause pertains to the same scenario but run on a different footing, under sub clause (a), company shall be required to transfer the unspent amount to fund specified in schedule VII, Auditor shall perform the following procedure:

Now, in relation to sub-clause (b), the procedures required to perform at sub clause (a) also be performed at this sub clause, except that procedures be performed in light of ongoing project and check whether amount transferred to special account within 30 days, and amount shall be required to be spend in 3 years in ongoing project from the date of transfer to special account. 

Reporting format specified in page 208 and 212 of GN.

32.

3(xxi) New sub-clause has been inserted. 

“whether there have been any qualifications or adverse remarks by the respective auditors in the Companies (Auditor’s Report) Order (CARO) reports of the companies included in the consolidated financial statements, if yes, indicate the details of the companies and the paragraph numbers of the CARO report containing the qualifications or adverse remarks”

This clause is self-explanatory, auditor is required to identify the adverse remarks and qualification made by the respective auditors included in consolidated financial statement and thus auditor shall be required to report the fact.