Here is a Detailed Disclosures of CARO 2020 Reporting

CARO 2020 is a new format for issuing audit reports for statutory audits of companies under the Companies Act 2013. CARO 2020 has included additional reporting requirements in consultation with the National Financial Reporting Authority (NFRA). NFRA is an independent regulatory body for regulating the auditing and accounting profession in India. The objective of CARO 2020 is to increase the overall quality of reporting by company auditors. This article discusses CARO 2020 reporting.

What is CARO?

CARO stands for Companies Auditor’s Report Order. The applicability of the CARO Report 2020 is for audits of the financial year 2021-2022 and beyond. The applicability of the CARO Report also depends on the type of companies, as there are certain types of companies that are not covered by the report, such as banking and insurance companies. For the applicability of the CARO report, some additional clauses have been added and some clauses from CARO 2016 are modified, although some of them are not changed.

Importance of CARO 2020

• CARO 2020 will introduce a new standard of transparency in reporting the health status of the audited company. Some of the new items contained in the auditor’s report will also facilitate the identification of early warning signals and timely reporting of fraud to the Reserve Bank of India.
• The new CARO will also require audited companies to better implement whistleblower policies in letter and spirit. Auditors are now charged with reviewing whistleblower complaint records and the extent of fact-finding conducted by audit committees. Companies will need to prepare to improve their procedures even when dealing with anonymous complaints, which in many cases have been ignored by companies.
• The new CARO report will also be a single integrated document for all stakeholders, and in particular regulators, for early identification of accidents, failures, and deficiencies in anticipation of compliance.
• From a global perspective, the changes as a whole can also be seen as an incentive to streamline the presentation of financial matters in the company in order to regain the confidence of investors and regulators.

CARO 2020 significantly increases the responsibility and burden of the auditor and auditing companies. As of the CARO 2020 notification date, the auditors have already completed the review of the financial statements for the 3 quarters of the financial year. As CARO 2020 will apply to audits from the 2019-2020 financial year onwards, it is likely to present some practical compliance issues with the new items. However, the benefits of new reporting would outweigh the additional compliance burden.

CARO 2020 Applicability

Implementation of CARO 2020 has been delayed to FY 2021-2022 due to unforeseen events of COVID-19. All companies involved in CARO 2016 are subject to the order. As a result, the order applies to all companies except the following:

• One Person Company.
• Insurance organization.
• Banking organization.
• Small organizations (companies with paid-up capital less than or equal to Rs 50 lakh and last reported turnover less than or equal to Rs 2 crore are eligible).
• Companies that are registered as charities.

The following private companies are also exempted from CARO, 2020 requirements:

• • whose gross receipts or income (including income from discontinued operations) in the financial year is less than or equivalent to Rs.10 crore;
  • whose paid-up share capital plus reserves as at the balance sheet date is less than or equal to Rs 1 crore (i.e. usually at the end of the fiscal year);
  • It is not a holding company or a subsidiary of a public company; and
  • Any time during the fiscal year whose loans are less than or equivalent to Rs.1 crore.

Key changes in CARO 2020

Property Plant and Equipment (PPE) reporting and intangible assets

Changes w.r.t in CARO, 2016

• CARO 2020 provides separate PPE reporting and intangible assets while the previous order included both under fixed assets.
• Reporting of deeds, where the company is an employer and where a lease agreement is in favor of the inspector has been suspended.
• Specific details are required when deeds are not in the name of a company.

New added clauses

• Accurate reporting of PPE reviews is required
• Direct reporting on any initiated/pending action against the Company for seizing ‘Benami assets’ under the Benami Transactions (Prohibition) Act, 1988.

Inventory Reporting: There have been significant changes in this clause. Initially, the auditor was required to report only if the asset verification had been carried out on time by management and if any material conflicts had been identified, and, if so, whether they had been properly handled in the literature.

The Auditor-General must now report on the following: –

• whether the installation and the physician certification process by management is appropriate or not
• whether there was a discrepancy of 10% or more in the measurement of each category of inventory has been noted and if so, whether it has been properly addressed in the literature.
• if at any time the company has approved operating limits of more than Rs 5 crore, banks or FI’s based on current asset security,

then the auditor must ensure that the quarterly returns/statements submitted by the company with those banks or FIs are consistent with the documents.

If the same does not match, the same details will be provided.

Loan Reporting, Investment, Guarantees, Bonds, and advances in the form of loans: Significant changes to clause 3 are that the reporting has been extended to include loans, investments, guarantees, securities, and advanced loans in the form of loans to any entity where the loan to parties only under section 189, was covered.

The new clauses include the following: –

• that the terms and conditions of the loan/investment/guarantees/securities/development do not affect the interest of the company
• concerning loans and natural development of the type of loan, whether the principal’s payment schedule and interest are set and whether payments or receipts are standard.
• additional loan report and development in the form of a renewed/extended or new loan provided for repayment of an existing loan
• additional credit report and developments in the form of loan repayments on-demand or without specifying any terms or conditions for repayment.
• additional statement of aggregate value during the year and balance due date balance in respect of loans or liabilities and guarantees or collateral to subsidiaries, joint ventures, and partners.

No changes have been made to clause iv which deals with reporting compliance with Sections 185 and 186.

Deposit Reporting: An additional report on the amounts considered as a deposit was also added by CARO 2020 to clear the ambiguity.

There was no change w.r.t. clause vi (Reporting on Cost Record)

Reporting on Statutory Dues: Amendment to drafting to include GST on the required statutory dues and disputes for all statutory dues are included.

Unrecorded Income Reporting: Clause 8 requires auditors to report whether previously unrecorded income has been refunded or disclosed as income during the year in the tax assessment under the Income Tax Act, 1961, duly recorded in the books during the year.

Repayment and Usage Borrowing Reporting:

The default interest payment is now included. Other information required is on the following: –

• whether the company is a bank, FI, or other lender that has been declared a non-payer
• If the loan is not included for the purpose for which it was obtained, the amount of the loan deviated, and the intended deviation will be disclosed.
• if short-term funds are used for long-term purposes, then the same type and amount will be shown.
• details of the loans to the holding company to fulfil the corporate business obligations will be disclosed.
• If the loan is increased during the year for the securities of its companies, your details will be disclosed and the details of the default if the company fails to repay the loan.

Reporting on money raised use of your shares: The additional requirements of Section 62 of the Companies Act must be complied with in the event of a preferential allotment or private placement.

Fraud Reporting: Additional clauses have been added, which require reporting: –

• any report under section 143 (12) of the Companies Act submitted by auditors on Form ADT-4 to the Central Government
• whether the auditor has considered reporting complaints, if any, received by the company during the year.

Nidhi Company Reporting: An additional clause is included, which requires reporting on the failure to pay interest on the deposit or refund period at any time and the details thereof.

There was no change w.r.t Section xiii relating to related party transaction reporting

Internal Audit Reporting: This clause requires auditors to report: –

• the company has an internal audit plan commensurate with the size and nature of its business
• The Internal Audit reports for the period under review have been reviewed by an official auditor

There was no change w.r.t clause xv clause relating to non-cash transaction reporting with directors

Reporting Registration under Section 45 IA of the RBI Act: Additional clauses have been added, which require reporting: –

• whether non-banking financial transactions or real estate transactions are performed without a valid registration certificate from the RBI
• whether the company is a Core Investment Company (CIC), it complies with the separation criteria set by the RBI
• if a group has more than one CIC as part of the Group, the number of CICs that are part of the Group will be disclosed.

Financial Loss Reporting: Clause xvii requires auditors to report whether a company has lost money in the financial year and the preceding financial year immediately and if so, the amount lost should be disclosed.

Auditor’s Resignation Report:

This new clause requires reporting on: –

• cancellation of official auditors during the year, if any
• of the issues, objections, or complaints raised by the outgoing auditors have been considered.

Financial Statement Reporting: A new clause has been inserted in CARO 2020, which requires the auditor to report on the uncertainty of assets. Disclosure is required if the auditor believes that the company can meet its current liabilities by the balance sheet date as they are payable within 1 year.

Reporting on CSR compliance: A new clause has been inserted in CARO 2020, which requires the auditor to report that the amount of unused CSR has been transferred to: –

• fund as set out in Schedule VII (where no specific project has been created or allocated), or
• Special bank account (related to any ongoing project)

Consolidated Financial Statement (CFS) Reporting: The previous order did not apply to the auditor’s report on the consolidated financial statements.

However, in terms of CARO 2020, it is necessary to disclose whether there have been qualifications or dissenting auditors in the CARO reports for companies included in the consolidated financial statements.

How CARO 2020 is different from CARO 2016?

Below are some important changes in CARO 2020 that seek to enforce a higher level of due diligence:

• Bring into the picture the details of CSR that were missing in CARO 2016 to give greater accountability to companies that did not take CSR seriously
• Going concern reporting is strengthened by adding an additional clause about the company’s ability to meet its obligations
• Consideration of prior auditor issues
• Separate reporting of negative cash losses visible in the statement of cash flows
• Activities carried out by NBFCs or HFCs without valid certificates
• Publishing information about the work of internal auditors
• Reporting of transactions not recorded in the books of accounts but submitted in income tax assessments
• Proper recognition of whistleblower complaints
• Stricter and more detailed disclosure of loans and borrowings
• Defining material discrepancies in inventory values ​​and OOPP values
• Compliance by companies that have been sanctioned working capital limits exceeding Rs. 5 crores.

Final words

CARO 2020 is expected to improve the overall quality of auditor reporting on companies’ financial statements. Under CARO 2020, companies will have to report all whistleblower complaints, which until now were called Benami complaints and were not disclosed to shareholders, to auditors. This would lead to greater transparency in the financial affairs of companies.