CARO 2020-New Audit Rules Introduced to Enhance Due Diligence of Auditors

Deepti Shikha

28 Feb, 2020

The Ministry of Corporate Affairs or MCA issued the Companies (Auditor’s Report) Order or CARO 2020 in supersession of Companies (Auditor’s Report) Order 2016 vide Notification dated 25.02.2020. It will come into force from the date of its publication in the Official Gazette. MCA after consulting the National Financial Reporting Authority, which was constituted under Section 132 of the Companies Act, 2013 replaced the existing Companies (Auditors Report) Order, 2016 by CARO 2020. CARO 2020 applies to all the companies, including foreign companies. According to this order, every report of the auditor prescribed in Section 143 of the Companies Act, 2013 must contain the matters as specified in paragraphs 3 and 4 of the order. This rule will not apply in case of consolidated financial statements of the auditors. Basically, CARO 2020 is introduced to bring financial discipline in audits. The Government, through this regulation, has asked the auditors to provide details like loans given by the company, to report the complaints of the whistle-blower, and to assess the internal audit mechanism of firms. CARO 2020 applies to all companies except those mentioned in its negative list. The rules will apply to the audit reports for the financial years commencing on or after April 1, 2019.

What are the Matters to be included in Auditor’s Report as per CARO 2020?

The auditor’s report on the accounts of a company on which CARO 2020 applies shall include a statement on the following matters:-

1. Company’s proper records showing full particulars of intangible assets, the situation of property, plant, and equipment including the quantitative details.
2. Reports related to physical verification of the plant, machinery, and equipment by the management regarding any material discrepancies if noticed and its entry in the books of account.
3. Discrepancies of 10% or more in the aggregate of each class of inventory that is noticed during physical verification of inventory must be reported.
4. Disclosure of the title deeds of immovable properties in the financial statements (except for the properties where the company is the lessee). The title deeds are to be provided in the format mentioned below:

• Disclosure of all the details of proceedings against the company for holding a Benami Property and whether the company has disclosed the details in its financial statements
• Reports related to the investment of the company, loans taken, nature of the fund and default in repayment of loans (if any).   
• Reports regarding compliances on the issue of shares whether it is preference shares, private allotment or convertible debentures and compliances prescribed under Section 42 and Section 62 of the Companies Act, 2013.
• The auditor is required to consider whistle-blower complaints received during the year by the company in his audit.
• Reporting on any fraud made by the company (if any).
• Auditors’ report in form ADT-4 under Section 143(12) of the Companies Act, 2013 with the Central Government.

Reports related to Nidhi Company compliances to meet out the liability:

• The ratio of Net owned funds to deposits must be 1:20.

• Maintenance of term deposits.

• Default in payment of interest on deposits or repayment (if any).

• Disclosures regarding the transactions of both the Private and Public Limited Companies as prescribed in Sections 177 and 188 of the Companies Act, 2013.
• Reporting on the internal audit system of the company.
• The auditor is now required to mention the details of the subsidiary companies, and the sub-clauses’ number containing qualifications or adverse remarks by the respective auditors in the CARO reports of the companies included in the consolidated financial statements.
• The auditor is required to report about the company if it is a declared willful defaulter by any bank or financial institution or any other lender.
• Auditor’s report regarding non-cash transactions of the company with the directors or persons connected with him.
• Reporting of the compliances with RBI related to Registration if needed.
• Auditors report related to functions of any NBFC, Housing Finance Companies and Core Investment Company without a valid certificate of Registration as per RBI Regulations.
• Reporting on cash losses of the company.
• Reports related to the resignation of the statutory auditors.
• Reporting on the qualifications or adverse remarks by the auditors in the CARO reports of companies included in the consolidated financial statements.
• Information regarding the realization of financial assets and payment of financial liabilities within a period of one year from the date mentioned in the balance sheet.
• Reporting transfer of unspent CSR amount to Fund specified in Schedule VII of the Companies Act, 2013.

Benefits of CARO 2020

• Transparency in the financial affairs of the company.
• Prevent fraudulent activities of the companies.
• While the previous rules required the auditor to report any fraud by the promoter or the officials of the company, the audit report will now have to report any fraud by or on the company.
• Revisions to enhance reporting requirements will provide useful information to users about the underlying financial statements and the findings of the auditor.
• To reduce the misuse of books, auditors will have to verify if quarterly statements filed with such banks are in agreement with the books of accounts.

Conclusion

 The CARO 2020 is expected to improve the overall quality of reporting by the Auditors on the financial statements of the companies which will lead to greater transparency and faith in the financial affairs of the companies. This is automatically expected to bring a greater inflow of investment by and in Indian companies. Auditors are now required to comment on 21 matters in CARO 2020 including sub-clauses, as against 16 matters in 2016. The clauses of CARO 2016 have been redrafted to ask the auditors to provide details such as immovable properties whose title deeds are not held in the name of the company but are disclosed in the financial statements.