AMENDMENTS – CARO 2020

APPLICABILITY:

CARO 2020 is applicable to all the companies which were covered under CARO 2016. There has been absolutely no change on the applicability of CARO with respect to CARO 2016. It is applicable to all the statutory audits commencing on or after 1^st April, 2021 corresponding to the financial year 2020-21.

Previously, there were 16 clauses and 10 sub-clauses, but after CARO 2020, there are 21 clauses and 28 sub-clauses. 7 clauses were newly entered, 1 clause has been merged and 1 has been deleted.

The amendments made under CARO 2020 have been divided into 4 categories:

SCHEDULE III AMENDMENTS –

1. Clause 3(i)(c) Title Deeds of Immovable Properties: There had been an amendment in this clause as-

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

2. Clause 3(i)(d) PPE Revaluation: This clause has been newly added under CARO 2020.

“Whether the company has revalued its Property, Plant and equipment (including the Right to 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”;

3. Clause 3(i)(e) Benami Property: This clause has been newly added under CARO 2020.

“Whether any proceedings have been initiated or are pending against the company or 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.”

4. Clause 3(ii)(b) Working Capital: This clause has been newly added under CARO 2020.

“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;

FAQs on Working Capital

Q1. Can working capital loan be sanctioned on the basis other than current assets?

A. No, working capital loan cannot be sanctioned other than on the basis of current assets.

Q2. If the amount of loan sanctioned is more than 5 crores, but the amount utilized is 1 crore – is it covered here?

A. Yes, it is covered here too since the provision only states about the sanction of the loan not about utilization.

Q3. Does the term ‘Sanction’ include Renewal?

A. Yes, renewal is allowed but it should be only on the basis of current assets.

Q4. If the company is also submitting monthly returns – whether the same also need to be verified by the auditor?

A. Guidance Note provides that the auditor will verify the returns on quarterly basis only.  Even if the returns are submitted monthly, it will be verified by the auditor quarterly.

5.  Clause 3(viii) Surrender or disclosure of Unrecorded income: This clause has been newly added under CARO 2020.

“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, if so, whether the previously unrecorded income has been properly recorded in the books of accounts during the year”;

6. Clause 3(iii)(f) Loans /Advances to Promoters/ Related Parties: This clause has been newly added under CARO 2020.

“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.

7. Clause 3(ix)(b) Wilful Defaulter: This clause has been newly added under CARO 2020.

“Whether the company is a declared wilful defaulter by any bank or financial institutions or other lender”;

If the company is declared as a wilful defaulter, then the details such as date of declaration, date of default, amount of default and it’s nature, shall be disclosed to the Auditor.

8. Clause 3(ix)(d) Short term fund utilization for long term: This clause has been newly added under CARO 2020.

“Whether the funds raised on short term basis have been utilized for long term purposes, if yes, the nature an amount to be indicated”;

9. Clause 3(xix) Capacity of meeting current liability: This clause has been newly added under CARO 2020.

“On the basis of financial ratios, ageing and expected dates of realization 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 the 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.

10. Clause 3(xx) Transfer of CSR fund: This clause has been newly added under CARO 2020.

(a) “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”;

(b) “Whether any amount remaining unspent under sub-section (5) of the 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”;

FUND RELATED AMENDMENTS

11. Clause 3(iii)(a) Investment/Guarantee/Security: There had been an amendment as well as new addition in this clause as-

“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 do, 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 venture 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;

12. Clause 3(iii)(b) Investment, Guarantee, Security, Loan/Advance given – not prejudicial: There had been an amendment in this clause as-

“Whether the investments made, guarantees provided, security given and the terms and conditions of the grant of all loans and advances in the nature of loans and guarantees provided are not prejudicial to the company’s interest;

13. Clause 3(iii)(e) Ever-greening of Loan: This clause has been newly added under CARO 2020.

“Whether the 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 overdues 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];

14. Clause 3(v) Deemed Deposit: There had been an amendment in this clause as-

“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 73 to 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;

15. Clause 3(ix)(a) Default in Repayment: There had been an amendment in this clause as-

“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 in the format given – to give lender wise details in case of banks, financial institutions and Government only and not in respect of other lenders.

16. Clause 3(ix)(e,f) Fund – Subsidiaries, Associates, Joint Ventures: These clauses has been newly added under CARO 2020.

e) “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;

f) “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;

17. Clause 3(xvii) Cash Losses: This clause has been newly added under CARO 2020.

“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;

CONTROL RELATED AMENDMENTS

18. Clause3(i)(a) Record of Intangible Assets: This clause has been newly added under CARO 2020.

B. “Whether the company is maintaining proper records showing full particulars of intangible assets”

19. Clause 3(ii)(a) Inventory Physical Verification: There had been an amendment in this clause as-

“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;

20. Clause 3(ix) Fraud Related: There had been an amendment in this clause as-

“Whether any fraud by the company or any fraud on the company by its officers or employees has been noticed or reported during the year; if yes, the nature and the amount involved is to be indicated;

“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;

21. Clause 3(ix) Whistle Blower Complaints: This clause has been newly added under CARO 2020.

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

22. Clause 3(xiv) Internal Audit system and report: This clause has been newly added under CARO 2020.

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

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

23. Clause 3(xviii) Resignation of Statutory Auditor: This clause has been newly added under CARO 2020.

“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;

24. Clause 3(xxi) Consolidated Financial Statements: This clause has been newly added under CARO 2020.

The CARO 2016 did not apply to the consolidated financial statements. But the CARO 2020 contains this clause that is now applicable to report on consolidated financial statements.

“Whether there has 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”

SPECIFIC REGULATION AMENDMENTS

25. Clause 3(xii)(c) Default in Payment: This clause has been newly added under CARO 2020.

“Whether there has been any default in payment of interest on deposits or repayment thereof for any period and if so, the details thereof”;

26. Clause 3(xvi) NBFC/CIC: This clause has been newly added under CARO 2020.

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

c) “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”;

d)” 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”;

The aim of CARO 2020 is to enhance the overall quality of reporting by the company auditors. Therefore, CARO 2020 has included the above-mentioned reporting requirements.