The Companies Auditor’s Report Order 2020, commonly known as CARO 2020, applies to every company, including foreign companies as defined under Section 2(42) of the Companies Act, 2013. However, the Order specifically exempts certain categories of companies from its purview. These exemptions are important for determining the scope of auditor reporting requirements and include several types of companies based on their nature, size, and financial position.
Companies Exempted from CARO 2020
CARO 2020 does not apply to the following companies: a banking company, an insurance company, a company licensed to operate under Section 8 of the Companies Act, a One-Person Company as defined under Section 2(62), and a Small Company as defined under Section 2(85). It also excludes a private limited company that is not a subsidiary or holding of a public company and meets all of the following conditions. First, the company must have a paid-up capital and reserves and surplus not exceeding ₹1 crore as on the balance sheet date. Second, its total borrowings from banks or financial institutions should not exceed ₹1 crore at any time during the financial year. Third, its total revenue as per Schedule III to the Companies Act, including revenue from discontinuing operations, must not exceed ₹10 crore during the financial year.
Reporting Period and Scope
Every auditor’s report prepared under Section 143 of the Companies Act for companies to which CARO 2020 applies, and for financial years beginning on or after April 1, 2021, must include the matters specified in paragraphs 3 and 4 of the Order as applicable. However, the Order does not extend to the auditor’s reports on consolidated financial statements except for the disclosure required under paragraph 3(xxi).
Applicability to Branches
CARO 2020 is also applicable to branch audits. According to Section 143(8) of the Companies Act, the duties of a branch auditor are equivalent to those of a company auditor. This means that auditors of branches must also include the matters specified under CARO 2020, provided the company itself is not exempt from its applicability.
Small Company Definition and Impact
A company that qualifies as a Small Company continues to be exempt under CARO 2020 even if it satisfies the conditions specified for private companies. As per the amended definition effective from September 15, 2022, a Small Company is a company other than a public company with paid-up share capital not exceeding ₹4 crore and turnover as per the last profit and loss account for the immediately preceding financial year not exceeding ₹40 crore. This clarification ensures that companies meeting the criteria for small size are not overburdened with the detailed reporting obligations under the Order.
Meaning and Scope of Paid-Up Capital and Reserves
Paid-up capital refers to the actual amount received by the company for the shares issued, including both equity and preference shares. The amount originally paid up on forfeited shares should also be added to the total paid-up capital. However, share application money is not considered a part of paid-up capital. Reserves include capital reserves, revenue reserves, and revaluation reserves. Any credit balance in the profit and loss account also forms part of the reserves. If there is a debit balance in the profit and loss account, it should be netted off while computing the reserves and surplus.
Interpretation of Borrowings
Borrowings from banks and financial institutions are to be considered in aggregate for CARO 2020 applicability. The term financial institutions includes Non-Banking Financial Companies. Borrowings may include term loans, demand loans, cash credit, overdraft, export credit, and bills purchased or discounted. If a non-fund-based credit facility has devolved into a fund-based credit facility, it should also be treated as an outstanding loan. Both long-term and short-term borrowings, whether secured or unsecured, must be taken into account. Outstanding dues on credit cards are included as well. Interest that is accrued and due is considered a part of the loan, while interest accrued but not yet due is not treated as a loan for this purpose.
Scope of Total Revenue
Total revenue as disclosed in Schedule III includes revenue from operations and other income. For companies other than finance companies, revenue from operations includes revenue from the sale of products, the sale of services, and other operating revenue, reduced by excise duty. For finance companies, revenue from operations primarily includes interest income and income from other financial services. Other income encompasses interest income (for non-finance companies), dividend income, net gains or losses on the sale of investments, and other non-operating income after netting off directly attributable expenses. Understanding the composition of total revenue is essential for determining whether a company meets the exemption threshold under CARO 2020.
Matters to Be Reported by the Auditor Under Paragraph 3(i)
The auditor is required to comment on various aspects of the company’s property, plant, and equipment. This includes whether the company maintains proper records showing full particulars, including quantitative details and the location of such assets. The auditor must also determine whether proper records of intangible assets are maintained. The term proper records is not defined in the Order and must be interpreted based on the professional judgment of the auditor, taking into account the specific circumstances of the company.
Physical Verification of Property, Plant, and Equipment
The auditor must verify whether the management has conducted physical verification of property, plant, and equipment at reasonable intervals. If material discrepancies are identified during the verification, the auditor must confirm whether those discrepancies have been properly accounted for in the company’s books. The term reasonable intervals is context-specific and may vary depending on factors such as the number of assets, their nature, value, ease of verification, and geographical spread. While an annual verification may be ideal, in cases where it is impractical, a verification program should be in place to ensure all assets are verified at least once every three years. If complete verification was not performed during the year, the auditor must report the fact while commenting on whether the frequency was adequate.
Title Deeds of Immovable Properties
The auditor is also required to verify whether the title deeds of all immovable properties, other than those held under lease agreements, are in the name of the company. If any properties are not held in the company’s name, the auditor must disclose the details, including a description of the property, gross carrying value, name of the title holder, relation of the title holder to promoters or directors, duration of holding, and reasons for not being in the company’s name. The Order does not define title deeds, but they generally include legal documents such as registered sale deeds, transfer deeds, and lease agreements registered with appropriate authorities. The auditor must assess whether the documentation appropriately reflects legal ownership or right of use by the company.
Revaluation of Assets
The auditor must report whether the company has revalued its property, plant, equipment, or intangible assets during the financial year. If a revaluation has occurred, it should be based on the report of a registered valuer. Additionally, if the change in the net carrying amount is ten percent or more for any class of assets, the auditor must specify the amount of such change. This ensures transparency in financial reporting and reflects any significant reassessments of asset values during the year.
Proceedings under the Benami Transactions Act
The auditor is also responsible for verifying whether any proceedings have been initiated or are pending against the company for holding any benami property under the Benami Transactions (Prohibition) Act, 1988, and associated rules. If such proceedings exist, the auditor must check whether the company has disclosed the relevant details in its financial statements. This provision seeks to enhance disclosure and accountability regarding ownership and usage of assets potentially held in violation of statutory provisions.
Inventories under Paragraph 3(ii)
The auditor must examine whether physical verification of inventory has been carried out at reasonable intervals by the management. The auditor is required to assess the adequacy of coverage and the procedure adopted during verification. If discrepancies amounting to ten percent or more in aggregate for any class of inventory were identified, the auditor should confirm whether those discrepancies have been properly recorded in the books. Additionally, if the company has been sanctioned working capital limits exceeding ₹5 crores in aggregate from banks or financial institutions based on current assets as security, the auditor must verify whether the quarterly returns or statements submitted to these institutions align with the books of account.
Investments, Guarantees, and Advances or Loans under Paragraph 3(iii)
The auditor must report whether the company has provided any loans, advances, like loans, stood guarantees, or provided securities to companies, firms, limited liability partnerships, or any other parties during the year. The auditor must determine whether such transactions are by the provisions of the Companies Act, 2013, and whether the terms and conditions are prejudicial to the interests of the company. Furthermore, the auditor must assess whether the repayment or receipts are regular and whether steps have been taken for recovery of overdue amounts, if any. If any amount is overdue for more than ninety days, the auditor should state the total amount and measures taken for its recovery. In case any loans or advances have been renewed or extended or fresh loans given to settle existing dues, the auditor must comment on the number of such cases and the aggregate amount involved. This clause ensures that the auditor reviews financial discipline, legal compliance, and the prudence of such financial assistance.
Compliance in Case of Investments and Loans to Related Parties
Where any loan or advance is given to a related party, or any investment or guarantee is made in their favor, the auditor must verify compliance with Section 177 and Section 188 of the Companies Act, 2013. These sections relate to audit committee approvals and disclosure of related party transactions. The auditor must confirm whether such transactions have been approved by the appropriate authority and disclosed in the financial statements as required under the applicable accounting standards. This disclosure requirement ensures transparency in dealings with parties that may influence company decisions.
Deposits or Amounts Deemed to Be Deposits under Paragraph 3(iv)
The auditor must report whether the company has complied with the directives issued by the Reserve Bank of India and the provisions of Sections 73 to 76 of the Companies Act, 2013, or any other relevant provisions and the rules framed under them, in respect of deposits accepted from the public. If any order has been passed by the Company Law Board or the National Company Law Tribunal, or Reserve Bank,, or any other court or tribunal, the auditor must confirm whether the company has complied with the same. This requirement helps ensure that public deposits are handled with due diligence, accountability, and regulatory compliance.
Maintenance of Cost Records under Paragraph 3(v)
If the central government has prescribed the maintenance of cost records under Section 148(1) of the Companies Act, 2013, the auditor must confirm whether such records have been made and maintained. This provision applies primarily to companies in specific sectors such as manufacturing, mining, and certain types of services where detailed cost records are required for regulatory or pricing purposes. The auditor is not required to conduct a detailed cost audit but must report on the existence and maintenance of such records.
Statutory Dues under Paragraph 3(vi)
The auditor must examine whether the company is regular in depositing undisputed statutory dues such as provident fund, employees’ state insurance, income tax, goods and services tax, duty of customs, duty of excise, value added tax, cess, and other statutory dues with the appropriate authorities. If there are any undisputed amounts payable for more than six months from the date they became payable, the auditor must report the amount and the nature of the dues. Additionally, the auditor must verify whether any statutory dues referred to above have not been deposited due to a dispute and provide the amounts involved and the forum where the dispute is pending. This ensures that companies meet their legal obligations and that financial statements disclose any material non-compliance or risks associated with pending tax litigation.
Disclosure of Undisclosed Income under Paragraph 3(vii)
The auditor is required to determine whether the company has surrendered or disclosed any income in the tax assessments under the Income Tax Act, 1961,, which had not been previously recorded in the books of account. If such cases exist, the auditor should confirm whether the income has been properly recorded in the books during the year. This ensures that companies cannot evade taxes by keeping income off the books and later disclosing it through settlements without appropriate accounting.
Default in Repayment of Loans under Paragraph 3(viii)
The auditor must report whether the company has defaulted in repayment of loans or other borrowings or the payment of interest to any lender. In case of any default, the auditor must provide details including the nature of borrowing, the name of the lender, the amount not paid on the due date, and the period of default. If the default is continuing as of the date of the audit report, that must also be stated. The auditor should also assess whether the company has been declared a wilful defaulter by any bank, financial institution, or other lender. If such a declaration exists, it should be disclosed along with the name of the lender and the date of the declaration. This helps stakeholders understand the financial credibility and risk associated with the company.
Utilisation of Loans for Purpose Under Paragraph 3(viii)
The auditor must examine whether the term loans were applied for the purpose for which they were obtained. If not, the auditor must report the amount of loan diverted and the purpose for which it was used. Additionally, if any funds raised on a short-term basis have been used for long-term purposes, the auditor should report the amount involved. This ensures transparency and prevents companies from misusing borrowed funds in a manner that may compromise financial stability.
Utilisation of Borrowings and Advances on Account of or by Others
The auditor must verify whether the company has taken funds from any entity or person and advanced the same to any other person or entity, including foreign entities, on the understanding that the intermediary shall lend or invest in other entities identified by or on behalf of the company. This type of transaction may indicate a round-tripping of funds or potential diversion for unknown purposes. The auditor must disclose the details of such arrangements, including the date and amount of funding. Similarly, if the company has received any funds to be routed through it to others as an intermediary, those details must also be reported.
Preferential Allotment or Private Placement of Shares under Paragraph 3(ix)
The auditor must examine whether the company has made any preferential allotment or private placement of shares or convertible debentures during the year. If such allotments were made, the auditor must confirm whether they complied with the provisions of Section 42 and Section 62 of the Companies Act, 2013,, and whether the amounts raised have been used for the purposes for which they were raised. Any deviation from the declared purpose must be reported. This requirement enhances transparency in equity fundraising and protects investor interests.
Fraud Reporting under Paragraph 3(x)
The auditor must report whether any fraud by the company or on the company has been noticed or reported during the year. If so, the auditor must describe the nature and amount of the fraud. Additionally, the auditor should state whether any report under Section 143(12) of the Companies Act has been filed with the central government. If the auditor receives any whistle-blower complaints during the year, they must report whether such complaints have been considered. This ensures early detection and disclosure of fraudulent activities that may affect stakeholder confidence.
Approval of Managerial Remuneration under Paragraph 3(xi)
The auditor is required to verify whether managerial remuneration has been paid or provided by the provisions of Section 197 of the Companies Act. If the company has not complied, the auditor should state the amount involved and whether any approval from the central government has been obtained. This clause ensures that companies adhere to the statutory limits and procedures for remuneration to directors and key management personnel.
Nidhi Company Compliance under Paragraph 3(xii)
For companies registered as Nidhi companies, the auditor must report whether they have complied with the net-owned fund to deposit ratio and other conditions as prescribed under the Nidhi Rules, 2014. If there is any non-compliance, the auditor should comment on the nature of the failure. This ensures regulatory adherence in the operation of Nidhi companies,, which are financial institutions accepting deposits from members.
Transactions with Related Parties under Paragraph 3(xiii)
The auditor must determine whether all transactions with related parties comply with Sections 177 and 188 of the Companies Act, and whether the details have been properly disclosed in the financial statements by applicable accounting standards. This requirement ensures that transactions with promoters, directors, or associates are conducted transparently and disclosed for scrutiny by shareholders and regulators.
Internal Audit System under Paragraph 3(xiv)
The auditor must assess whether the company has an internal audit system that is commensurate with the size and nature of its business. If an internal audit system exists, the auditor must determine whether the reports of the internal auditors for the period under audit were considered by the statutory auditor. This clause helps ensure that internal controls are evaluated and leveraged during the external audit process, leading to more robust and comprehensive financial oversight.
Non-cash Transactions with Directors or Connected Persons under Paragraph 3(xv)
The auditor must examine whether the company has entered into any non-cash transactions with its directors or persons connected with them. If such transactions have occurred, the auditor must confirm whether the provisions of Section 192 of the Companies Act have been complied with. Section 192 prohibits companies from entering into arrangements for the purchase, sale, or leasing of assets from or to directors or their connected persons unless prior approval through a resolution in a general meeting is obtained. This clause aims to ensure transparency in dealings with key managerial personnel and safeguard the interests of shareholders.
Registration with Reserve Bank of India under Paragraph 3(xvi)
The auditor must report whether the company is required to be registered under Section 45-IA of the Reserve Bank of India Act, 1934. If registration is required, the auditor must confirm whether the registration has been duly obtained. Section 45-IA mandates registration of entities engaged in financial business as non-banking financial companies. Furthermore, the auditor must verify whether the company has conducted any non-banking financial or housing finance activities without having a valid Certificate of Registration from the Reserve Bank of India. This requirement ensures that companies engaging in financial services are properly licensed and regulated.
If the company is part of a group that includes Core Investment Companies, the auditor must report whether the group has more than one such company. The auditor must also state whether the company is a Core Investment Company as defined in the RBI regulations. These disclosures are important to track the structure of financial groups and prevent regulatory arbitrage through unregistered or underregulated entities.
Cash Losses under Paragraph 3(xvii)
The auditor must report whether the company has incurred cash losses in the financial year and the immediately preceding financial year. If such losses exist, the auditor must specify the amount of cash loss in each of those years. Cash loss refers to the loss from operations after excluding non-cash items such as depreciation and amortisation. Disclosure of cash losses is important for evaluating the sustainability of a company’s operations and its ability to generate sufficient internal cash flow.
Resignation of Statutory Auditors under Paragraph 3(xviii)
The auditor must report whether there has been any resignation of the statutory auditors during the year. If such a resignation has occurred, the auditor should evaluate whether the outgoing auditors have raised any concerns or issues with the financial statements or internal control systems. The incoming auditor must consider such concerns, if raised, and include their comments in the audit report. This provision helps identify potential red flags and improves audit transparency during changes in auditors.
Financial Position and Material Uncertainty under Paragraph 3(xix)
The auditor must assess whether there is any material uncertainty as on the date of the audit report,, indicating that the company is not capable of meeting its liabilities existing at the balance sheet date when they fall due within one year. The auditor’s evaluation should be based on financial ratios, ageing and expected realisation of financial assets and payment obligations, operating plans, and projected cash flows. If the auditor concludes that there is a material uncertainty, the same must be reported in the audit report. This ensures that stakeholders are aware of potential risks to the company’s ability to continue as a going concern.
Transfer of Unspent CSR Amount under Paragraph 3(xx)
The auditor must examine whether the company has transferred the unspent amount under sub-section (5) of Section 135 of the Companies Act to a fund specified in Schedule VII within six months of the expiry of the financial year. The auditor must also confirm whether any unspent amount relating to an ongoing project under sub-section (6) of Section 135 has been transferred to a special account within thirty days from the end of the financial year. This provision ensures compliance with Corporate Social Responsibility obligations and the timely transfer of unutilised CSR funds for intended social benefits.
Qualifications or Adverse Remarks by Auditors in Group Companies under Paragraph 3(xxi)
The auditor must review the reports of companies included in the consolidated financial statements to identify whether there are any qualifications or adverse remarks made by the auditors in those reports. If such remarks exist, the auditor should report the details. This disclosure allows users of consolidated financial statements to be aware of any significant concerns raised in the audits of the subsidiaries, associates, or joint ventures that may impact the group as a whole.
Summary of CARO 2020 Requirements
CARO 2020 significantly enhances the disclosure obligations of auditors by requiring specific comments on several operational, financial, compliance, and risk-related aspects of the audited company. These include proper maintenance of accounting records, verification of physical and legal ownership of assets, confirmation of compliance with laws governing loans, deposits, and related party transactions, scrutiny of statutory dues and CSR compliance, and transparency in reporting potential frauds and financial distress. The Order promotes accountability and aims to improve the quality of financial reporting by requiring auditors to conduct a thorough review of the company’s internal and external obligations.
Practical Impact of CARO 2020
For companies, compliance with CARO 2020 requires maintaining robust documentation, internal controls, and systems that can provide evidence for all matters that auditors are expected to report. The scope of audit procedures has expanded significantly, and companies must ensure that they have adequate processes for maintaining asset records, verifying ownership, documenting loan terms, and complying with statutory dues and CSR obligations. For auditors, CARO 2020 necessitates the use of professional judgment in evaluating materiality and risk while also imposing increased responsibility for disclosure. The need to report specific findings increases the depth of audit procedures and requires a closer examination of company records.
CARO 2020 and Corporate Governance
CARO 2020 also supports better corporate governance by encouraging transparency in financial and operational matters. The mandatory disclosures help investors and stakeholders understand the financial health, compliance status, and ethical practices of the company. The requirements also act as a preventive measure against malpractices and encourage companies to adopt structured policies to ensure accuracy in financial statements and adherence to the law. By ensuring that auditors report on detailed operational and financial matters, the Order strengthens the framework for monitoring corporate conduct.
Clause 16: Non-Cash Transactions with Directors or Connected Persons
This clause requires the auditor to report whether the company has entered into any non-cash transactions with its directors or with persons connected to the directors, and if so, whether the provisions of section 192 of the Companies Act, 2013 have been complied with. Section 192 prohibits companies from entering into certain non-cash transactions with directors unless approved by a resolution in a general meeting. The auditor must evaluate whether such transactions, if any, were duly authorized and legally valid.
Clause 17: Registration with RBI as an NBFC
Under this clause, the auditor must report whether the company is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934, and whether the registration has been obtained. Section 45-IA mandates that a company engaged in the business of a non-banking financial institution must register with the RBI. The auditor must assess the company’s financial activities to determine if such registration is required and verify whether the company has obtained it if applicable.
Clause 18: Group NBFC Status
This clause further asks whether the company has conducted any Non-Banking Financial or Housing Finance activities without a valid Certificate of Registration (CoR) from the RBI. It also checks whether the company is part of a group of companies that collectively conduct NBFC business without proper registration. The auditor must examine the structure and financial dealings of group entities to identify any such regulatory lapses.
Clause 19: Cash Losses
The auditor must report whether the company has incurred cash losses in the current financial year and the immediately preceding financial year. Cash losses are losses that are not merely on paper but represent actual outflows exceeding inflows. This clause helps stakeholders evaluate the company’s operational efficiency and cash management.
Clause 20: Auditor Resignation and Reasons
This clause requires disclosure if any statutory auditor has resigned during the year. If yes, the auditor must consider the issues, objections, or concerns raised by the outgoing auditor before forming their own opinion. This requirement helps in maintaining audit continuity and transparency, especially where auditor resignations may indicate financial or governance issues.
Clause 21: Financial Viability Assessment
This clause requires the auditor to report whether there is any indication of a material uncertainty about the company’s ability to meet its liabilities existing at the balance sheet date, based on the audit procedures performed. This is aligned with the auditor’s responsibility to evaluate going concern status and helps stakeholders assess financial health.
Clause 22: Corporate Social Responsibility Compliance
If the company is required to spend funds on Corporate Social Responsibility (CSR) under section 135 of the Companies Act, 2013, the auditor must report whether the amount has been spent and whether any unspent amount is transferred to the appropriate fund or CSR account as required. Failure to comply with CSR provisions can attract penalties, and this clause helps enforce transparency in CSR obligations.
Clause 23: Consolidated Financial Statements Reporting
When the company prepares consolidated financial statements, the auditor must include remarks on CARO clauses for all entities included in the consolidation. The auditor needs to consider the reports of auditors of the component entities and state whether there are any qualifications or adverse remarks in those reports. This helps provide a complete picture of the compliance status of the entire group.
Importance of CARO 2020 for Stakeholders
CARO 2020 is a tool designed to improve the quality of financial disclosures by requiring auditors to report more extensively on key risk and control areas. For investors, creditors, and regulators, these disclosures provide greater confidence in the audit process and the company’s compliance status. CARO 2020 holds auditors accountable for not only financial accuracy but also compliance with key legal and regulatory frameworks.
Practical Considerations for Auditors and Companies
Auditors need to ensure thorough documentation and review of relevant records to fulfill the expanded responsibilities under CARO 2020. Companies, on the other hand, must maintain proper records, comply with internal control measures, and cooperate fully during the audit process to avoid negative remarks in the audit report. Any deviations from regulatory compliance can have reputational as well as legal consequences.
Conclusion
CARO 2020 represents a significant enhancement in the corporate audit landscape in India. By mandating detailed disclosures across a broad range of areas, it promotes corporate accountability, strengthens stakeholder confidence, and ensures higher transparency in financial reporting. Companies and auditors must work together to ensure that these requirements are met accurately and promptly. Proper implementation of CARO 2020 can lead to stronger governance, improved risk management, and better-informed decision-making for all stakeholders involved.