CARO 2020 Applicability – Companies Auditor’s Report Order

Table of Contents

1. Applicability of Companies (Auditor Report) Order, 2020
2. Matters to be included in Auditor’s Report

Check out Taxmann's Advanced Auditing & Professional Ethics (Audit) | Study Material which presents the subject matter in simple & concise language with the presentation in a tabular format. It also covers all past exam questions of ICAI until May 2023, RTPs & MTPs of ICAI and chapter-wise marks distribution, 760+ questions & case studies with hints are also covered along with every topic for easy understanding.

CA-Final | Nov. 2023 Exam

1. Applicability of Companies (Auditor Report) Order, 2020

1.1  Application of CARO, 2020

CARO, 2020 shall apply to every company including a foreign company as defined in Sec. 2(42) of the Companies Act, 2013, except:

(i) a banking company;

(ii) an insurance company;

(iii) a company licensed to operate u/s 8 of the Companies Act;

(iv) a One-Person Company as defined in Sec. 2(62) of the Companies Act and a Small Company as defined in Sec. 2(85) of the Companies Act; and

(v) a private limited company, not being a subsidiary or holding of a public company,

1. having a Paid-up capital & Reserves & Surplus not more than ₹1 Cr. as on the balance sheet date, and

2. which does not have total borrowings exceeding ₹1 Cr. from any bank or financial institution at any point of time during the financial year, and

3. which does not have a total revenue as disclosed in Schedule III to the Companies Act, 2013 (including revenue from discontinuing operations) exceeding ₹10 Cr. during the financial year as per the financial statements.

Every report made by the auditor u/s 143 of the Companies Act, 2013 on the accounts of every company examined by him to which this Order applies for the financial years commencing on or after 1^st April, 2021, shall contain the matters specified in paragraphs 3 and 4, as may be applicable.

The Order shall not apply to the auditor’s report on consolidated financial statements except Para 3(xxi).

Points to remember

(a) Provisions of CARO are equally applicable in case of branches also, because under sec. 143(8), a branch auditor has same duties as of company auditor.

(b) A company is covered under the definition of small company, it will remain exempted from the applicability of the Order even if it falls under any of the criteria specified for private company.

Note: As per Sec. 2(85) of Companies Act, 2013 read with Rule 2(1)(t) of the Companies (Specification of Definitions Details) Rules, 2014 as amended by Companies (Specification of definition details) Amendment Rules, 2022 w.e.f. 15.09.2022, small company means a company, other than a public company:

(i) paid-up share capital of which does not exceed ₹ 4 crore; and

(ii) turnover of which as per its last profit and loss account for the immediately preceding financial year does not exceed ₹ 40 crore.

(c) Paid up capital includes equity as well as preference.

(d) Amount originally paid up on forfeited shares should be added to the figure of paid up capital.

(e) Share Application money should not be considered as part of paid up capital.

(f) Reserves includes Capital reserves, revenue reserves as well as Revaluation Reserves.

(g) Credit Balance of Profit and Loss Account will form part of reserve.

(h) In case of debit balance of profit or loss, same shall be netted for computing reserves & surplus.

(i) Loans from banks and financial institutions are to be considered in aggregate. Financial Institutions will include NBFC.

(j) Loans may be in any form like term loan, demand loans, cash credit overdraft, export credit, bill purchased/discounted.

(k) Non fund-based credit facilities have devolved and have been converted into fund based credit facilities should also be considered as outstanding loan.

(l) Long term loans as well as short term loans, secured as well as unsecured will be considered.

(m) Outstanding dues in respect of credit cards will also be considered.

(n) Interest accrued as well as due does form part of outstanding loan, whereas interest accrued but not due is not considered as loan.

(o) Total revenue as disclosed in Schedule III comprises of Revenue from operations and Other Income.

(p) In respect of a company other than a finance company revenue from operations shall consists of revenue from

(i) Sale of products;

(ii) Sale of services; and

(iii) Other operating revenues, as reduced by Excise duty.

(q) In respect of a finance company, revenue from operations shall consists of revenue from

(i) Interest; and

(ii) Other financial services.

(r) Other income shall consist of the followings:

(i) Interest Income (in case of a company other than a finance company);

(ii) Dividend Income;

(iii) Net gain/loss on sale of investments;

(iv) Other non-operating income (net of expenses directly attributable to such income).

2. Matters to be included in Auditor’s Report

2.1 Property, Plant and Equipment [Para 3(i)]

2.1.1 Adequacy of Records

• Whether the company is maintaining proper records showing full particulars, including quantitative details and situation of Property, Plant and Equipment.
• Whether the company is maintaining proper records showing full particulars of intangible assets.

Points to Remember

The Order does not define as to what constitutes ‘proper records’. Thus, what constitutes proper records is a matter of professional judgment made by the auditor after considering the facts and circumstances of each case.

2.1.2 Physical verification

• 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.

Points to Remember

• What constitutes “reasonable intervals” depends upon the circumstances of each case.
• The factors to be taken into consideration in this regard include the number of assets, the nature of assets, the relative value of assets, difficulty in verification, situation and geographical spread of the location of the assets, etc.
• The management may decide about the periodicity of physical verification of fixed assets considering the above factors. While an annual verification may be reasonable, it may be impracticable to carry out the same in some cases. Even in such cases, the verification programme should be such that all assets are verified at least once in every three years.
• Where verification of all assets is not made during the year, it will be necessary for the auditor to report that fact, but if he is satisfied regarding the frequency of verification, he should also make a suitable comment to that effect.

2.1.3 Title Deeds

• 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 details thereof in the below mentioned format:

*also indicate if in dispute.

Points to Remember

• The Order is silent as to what constitutes ‘title deeds’. In general, title deeds mean a legal deed or document constituting evidence of a right, especially to the legal ownership of the immovable property.
• Title deeds of the immovable property may be:

(a) Registered sale deed/transfer deed/conveyance deed, etc. of land, land & building together, etc. purchased, allotted, transferred by any person including any government, government authority/body/agency/corporation, etc. to the company.

(b) In case of leasehold land and land & buildings together, covered under the head fixed assets, the lease agreement duly registered with the appropriate authority.

2.1.4 Revaluation of Property, Plant and Equipment

• 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;

2.1.5 Proceedings for holding Benami Property

• 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 rules made thereunder,
• if so, whether the company has appropriately disclosed the details in its financial statements.

2.2 Inventories [Para 3(ii)]

(a) 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;

(b) whether during any point of time of the year, the company has been sanctioned working capital limits in excess of ₹5 crores, 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.

Points to Remember

• Physical verification of inventory is the responsibility of the management of the company which should verify all material items at least once in a year and more often in appropriate cases.
• What constitutes “reasonable intervals” depends on circumstances of each case. The periodicity of the physical verification of inventories depends upon the nature of inventories, their location and the feasibility of conducting a physical verification. The management of a company normally determines the periodicity of the physical verification of inventories considering these factors. Normally, wherever practicable, all the items of inventories should be verified by the management of the company at least once in a year.

2.3 Investments, Guarantee/Security, Loans or Advances [Para 3(iii)]

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-

(i) 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;

(ii) 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;

(b) 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;

(c) in respect of loans and advances in the nature of loans, whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular;

(d) if the amount is overdue, state the total amount overdue for more than 90 days, and whether reasonable steps have been taken by the company for recovery of the principal and interest;

(e) 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 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];

(f) 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 Sec. 2(76) of the Companies Act, 2013.

2.4 Compliance of provisions of Secs. 185 & 186 – Para 3(iv)

In respect of loans, investments, guarantees, and security whether provisions of sections 185 and 186 of the Companies Act, 2013 have been complied with. If not, provide details thereof.

Points to Remember

• For this purpose of ensuring compliance of sec. 185, the auditor should carry out the following procedures:

1. 1. Obtain from the management the details of the directors or any other person in whom the director is interested. He may also check the details of the persons covered under this clause from Form MBP-1 and from the Register maintained u/s 189 of the Act.
   2. Obtain and check the details of the transactions carried out with such persons, including of any guarantee given and security provided.
   3. Further examine the details to find out whether any of the transaction is attracting the provisions of section 185 of the Act.
   4. In case of transactions that are covered under the exceptions as provided under section 185, the auditor should obtain the necessary evidence in support of such exception.

• The auditor should report the nature of non-compliance of sec. 185, the maximum amount outstanding during the year and the amount outstanding as at the balance sheet date in respect of:

1. 1. the Directors; and
   2. persons in whom directors are interested (specify the relationship with the Director concerned).

• For this purpose of ensuring compliance of Sec. 186, the auditor should:

1. 1. Obtain the details of, loans given to any person or other body corporate, guarantee given or security provided in connection with a loan to any other body corporate or person and securities acquired of any other body corporate by way of subscription, purchase or otherwise, made during the year as well as the outstanding balances as at the beginning of the year.
   2. Check whether, at any point of time during the year in case of aforesaid transactions, the company has exceeded the limit of 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more. If it exceeds the limits specified above, whether prior approval by means of a special resolution passed at a general meeting has been obtained.
   3. Check whether the company has made investments through more than two layers of investment companies.
   4. Check whether the company has disclosed the full particulars of the loan given, investment made or guarantee given or security provided in the financial statement including the purpose for which the same is proposed to be utilized by the recipient.
   5. Check whether the company has passed the board resolution as prescribed and obtained the prior approval, wherever required, from the public financial institution concerned where any term loan is subsisting.
   6. Check whether rate of interest is not lower than the prevailing yield of one year, three-years, five years or ten years government security closest to the tenor of the loan granted.
   7. Check if the company is in default in the repayment of any deposits accepted or in payment of interest thereon, then the company is not allowed to give any loan or guarantee or any security or an acquisition till such default is subsisting.
   8. Check whether the company has maintained a register (as per Form MBP-2) in the manner as prescribed and also check the compliances of other provisions and relevant rules.

• Non-compliance of Sec. 186 may be reported incorporating following details:

2.5 Public Deposits [Para 3(v)]

• In respect of deposits accepted by the company or amounts which are deemed to be deposits, whether the directives issued by the RBI and the provisions of sections 73 to 76 or any other relevant provisions of the Companies Act and the rules framed 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?

Points to Remember

• It may be difficult for the auditor to ascertain that deposits accepted by the company are within the limits on each day of the accounting year. He would, therefore, be justified in making a reasonable test check to ensure that the company has not accepted deposits during the year in excess of the limits.
• In case where the auditor is of the view that any kind of contravention of sections 73 to 76 or any other relevant provisions of the Act or relevant rules or directives from Reserve Bank of India, if any, has taken place, the auditor should state in his report that the provisions of that section(s) and/or relevant rules, as the case may be, have not been complied with. The auditor should also report the nature of contraventions.