Ministry of Corporate Affairs (MCA) vide notification dated 25th February 2020, has published Companies (Auditor’s Report) Order, 2020 in exercise of the powers conferred by:
Section 143(11) of the Companies Act, 2013 (18 of 2013) and in supersession of the Companies (Auditor's Report) Order, 2016, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (ii), vide number S.O. 1228 (E), dated the 29th March, 2016, except as respects things done or omitted to be done before such supersession, consultation with the National Financial Reporting Authority constituted under section 132 of the Companies Act, 2013.
Applicability:
It shall come into force on the date of its publication in the Official Gazette. Further, the government has deferred implementation of the strict disclosure requirements for auditor reports of companies by one year, a move that comes amid the disruptions caused by the coronavirus pandemic.
Extension Granted: Applicable for F.Y. 2021-22
Ministry of Corporate Affairs (MCA) has issued the Companies (Auditor’s Report) Second Amendment Order, 2020 {CARO, 2020} vide Gazette Id CG-DL-E-19122020-223784 published in NIOG on 19th December, 2020. In the Companies (Auditor’s Report) Order, 2020, in paragraph 2, for the figures, letters and word “1st April, 2020”, the figures, letters and word “1st April, 2021” shall be substituted.
“The MCA has extended the applicability date of Companies (Auditor’s Report) Order, 2020 (CARO) for 1 more year, i.e., for the FYs commencing on or after the 1st April 2021 (earlier 1st April 2020). Accordingly, CARO, 2020 will be applicable from FY 2021-22 and onwards.”
Companies covered under this Rule:
It shall apply to every company including a foreign company as defined in clause (42) of section 2 of the Companies Act, 2013 (18 of 2013) [hereinafter referred to as the Companies Act], except–
i) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
ii) an insurance company as defined under the Insurance Act,1938 (4 of 1938);
iii) a company licensed to operate under section 8 of the Companies Act;
iv) a One Person Company as defined in clause (62) of section 2 of the Companies Act and a small company as defined in clause (85) of section 2 of the Companies Act; and
v) a private limited company, not being a subsidiary or holding company of a public company, having a paid up capital and reserves and surplus not more than one crore rupees as on the balance sheet date and which does not have total borrowings exceeding one crore rupees from any bank or financial institution at any point of time during the financial year and which does not have a total revenue as disclosed in Scheduled III to the Companies Act (including revenue from discontinuing operations) exceeding ten crore rupees during the financial year as per the financial statements.
CARO 2020 would necessitate enhanced due diligence and disclosures on the part of auditors of eligible companies and has been designed to bring in greater transparency in the financial state of affairs of such companies.
The salient features of the CARO, 2020 are as under:
1) The CARO, 2020 includes certain additional clauses, as compared to CARO, 2016, and the existing clauses of CARO, 2016 have been re-drafted to elicit detailed comments from the auditors.
2) A specific format has been provided for reporting the details of such immovable properties whose title deeds are not held in the name of the company but are disclosed in the financial statements.
3) Disclosure of details of proceedings against the company for holding Benami Property and whether the company has disclosed the details in its financial statements.
4) Discrepancies of 10% or more in the aggregate of each class of inventory noticed during physical verification of inventory would have to be reported.
5) The auditor is to provide specific details as to whether during any point of time of the year, the Company has been sanctioned working capital limits in excess of Rs. 5 crores, in aggregate, from banks or financial institutions on the basis of security of current assets and whether the quarterly returns/statements filed by the Company with such banks or financial institutions are in agreement with the books of account of the Company.
6) In clause 3(iii) of CARO, 2020, the auditor is to report in detail on the investments made by the company in, any guarantee or security provided or any loans or advances in the nature of loans granted, secured or unsecured, to companies, firms, Limited Liability Partnerships or any other parties during the year, that they are not prejudicial to the interests of the company.
7) A specific format has been prescribed to report the period and the amount of default by the company in repayment of loans or other borrowings or in the payment of interest thereon to any lender.
8) The auditor is required to render his opinion on the basis of the 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, 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.
9) The amount of cash losses incurred in the financial year and in the immediately preceding financial year have to be reported.
10) The auditor has to take into consideration the issues, objections or concerns raised by the outgoing auditors before forming his opinion.
11) The auditor is required to report about the company if it is a declared wilful defaulter by any bank/ financial institution/ other lender.
12) The auditor would have to report as to whether term loans were applied for the purpose for which the loans were obtained; if not, the amount of loan so diverted and the purpose for which it is used would have to be reported.
13) The auditor is required to report as 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.
14) The auditor is to consider whistle-blower complaints received during the year by the Company in his audit.
15) The auditor is to report if 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 RBI Act.
16) The auditor is now required to indicate the details of the subsidiary companies and the sub-clauses’ number containing qualifications/adverse remarks by the respective auditors in the CARO reports of the companies included in the consolidated financial statements.
Now, the Companies (Auditor’s Report) Order, 2020 would come into effect from financial years commencing on or after April 1, 2021, according to a notification issued by the Ministry of Corporate Affairs (MCA). It is implementing the Company’s Law.
CSR related disclosure:
Disclosure has to be made on the unspent CSR fund associated with an identified ongoing project and its transfer to special account under Section 135(6). While CARO 2020 is already notified, the amendments brought about by the Companies (Amendment) Act, 2019 are yet to be notified. This is a clear attempt to strengthen the compliance regime for CSR.
Reporting & Disclosures Requirements under CARO 2020
- Details of Tangible and Intangible assets
- Details of inventory and working capital
- Details of investments, any guarantee or security or advances or loans given
- Compliance in respect of a loan to Directors
- Compliance in respect of deposits accepted…..and more.
If the auditor’s response is negative or unfavourable to any of the foregoing requirements in the event then the auditor’s report must disclose the basis for such an unfavourable or qualified response.
Similarly, in the event that the auditor is unable to express an opinion on a specific matter, the report must indicate this fact together with the reasons why it is not possible for the auditor to express an opinion on the matter.
Deleted Clause:
In CAR0 2016, reporting on whether managerial remuneration has been paid or provided in accordance with the requisite approvals mandated by the provisions of section 197 read with Schedule V to the Companies Act.
The clause is omitted from CARO 2020 as the same is already covered under main audit Report.
To remove duplication, reporting on compliance of provisions related to managerial remuneration has been removed as the same is already covered under main Audit Report.
q New Clauses added:
The CARO 2020 (should be called as CARO 2022 now) has deleted once clause and added new seven clauses as compared to CARO 2016. These new clauses deal with following:
- Transaction Not recorded in Books;
- Ability of Company to meet its Liabilities;
- CSR Transfer of Unspent Amount to Fund
- Statutory Auditor Resignation
- CFS : reference to negative remarks in Subsidiary CARO
- Internal Audit System (CARO 2003)
Cash Loss (CARO 2003)
There is no change in the applicability of CARO 2020 as compared to the CARO 2016. CARO 2020 shall be applicable to all those companies on which CARO, 2016 was applicable. CARO 2020 is not applicable on the consolidated financial statements like CARO 2016 except new clause (xxi). As per the new clause (xxi), any qualification or adverse remark mentioned by the respective auditors in CARO, indicate the details of the companies and the paragraph numbers of the CARO report containing the qualifications or adverse remarks.
Under this stricter framework, auditors are required to provide detailed disclosures about loan defaults, amount of cash losses
and immovable properties as well as other aspects about companies in their annual reports. CARO 2020 also requires the incoming auditor in place of resigned auditor to evaluate the issues, objections or concerns raised by the outgoing auditors.
CARO 2020 follows the same format of provisions like its predecessors, with additions to the list of reporting items and modifying disclosure expectations in a few cases increase the auditor's responsibility and scope of work with respect to auditor's report.
XBRL - eXtensible Business Reporting Language
XBRL is a language for e-communication of financial and business data for business reporting. It is a standardized communication language in electronic form to express report or file a financial statement by Companies.
The XBRL wave started in India in late 2007 when the Institute of Chartered Accounts of India, the premier accounting and statutory body, realised the critical role of Digital Business Reporting in the arena of regulatory reporting and the optimum advantage that it enjoyed in levelling the playing field.
However, XBRL is only a method of presentation or reporting. It does not attempt to make any changes in the content to be reported. eXtensible Business Reporting Language (XBRL) is a freely available global framework of accounting standards used for exchanging business information. XBRL is based on XML coding and is a standardized way of transmitting financial records around the world.
Applicability of XBRL filing
Class of Companies those are required to file their financial statements and other documents as mentioned under section 137 of the Companies Act, 2013 with the Registrar of Companies (ROC) in MCA e-form AOC-4 XBRL:
- All companies listed in the stock exchange in India and their Indian subsidiaries.
- All companies with a turnover of Rs. 100 crores or more
- All companies with a paid up capital of Rs. 5 crores or more
- All the companies which are required to prepare their financial statements in accordance with the Companies (Indian Accounting Standards) rules, 2015.