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April 4, 2022

Guidance Note on the Companies (Auditor’s Report) Order, 2020

by CA Shivam Jaiswal in Corporate Law, ICAI

Guidance Note on the Companies (Auditor’s Report) Order, 2020

The Institute of Chartered Accountants of India

The Ministry of Corporate Affairs (MCA) issued the Companies (Auditor’s Report) Order, 2020 (CARO 2020) in February 2020. CARO 2020 contains many new reporting requirements for auditors such as revaluation of property, plant and equipment (including right of use assets) or intangible assets, benami property, working capital limits on basis of security of current assets, granting loans or advances in the nature of loans which are either repayable on demand or without specifying any terms or period of repayment, undisclosed income, company declared as wilful defaulter, material uncertainty in meeting liabilities, CSR activities. The Auditing and Assurance Standards Board (AASB) of the ICAI has issued the “Guidance Note on the Companies (Auditor’s Report) Order, 2020” (Guidance Note on CARO 2020) in July 2020 to provide detailed guidance on various clauses of CARO 2020 and reporting requirements for auditors.

To ensure that the management of companies provide various disclosures which pertain to clauses of CARO 2020 especially the aforesaid new reporting requirements, the MCA has brought out corresponding amendments in Schedule III (Division I, Division II and Division III) to the Companies Act, 2013 vide its notification dated 24th March 2021 for preparation of the financial statements. In addition to the said amendments, various other disclosure requirements have also been added in Schedule III to the Companies Act, 2013.

The members may note that in light of the said amendments, a comprehensive revision of the Guidance Note on CARO 2020 is being initiated by AASB. In the interregnum, the members should read CARO 2020 in conjunction with the corresponding amendments made in Schedule III to the Companies Act, 2013 for presentation and disclosure requirements stated therein and perform the audit procedures accordingly.

Annexure to this Announcement summarises interplay of some of the clauses in CARO 2020 and consequential amendments to Schedule III to the Companies Act, 2013.

Annexure

Sr. NoSummary of reporting requirements under CARO 2020Summary of disclosures requirements under Schedule III to the Companies Act, 2013Remarks
1Whether 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 prescribed details [Clause 3(i)(c)]Disclosure of details of title deeds of immovable properties (excluding leased properties) not held in the name of the company in the prescribed format.Disclose company’s share – if jointly held 
2Whether the company has revalued its property, plant and equipment (PPE) (including right of use assets) or intangible assets or both during the year,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 PPE or intangible assets [Clause 3(i)(d)]Disclosure           regarding revaluation of PPE/ intangible assets: Amount of change due to revaluation (if change is 10% or more in the aggregate of the net carrying value of each class of PPE/ intangible assets)Whether revaluation is based on valuation by a registered           valuer defined under the Companies Act, 2013 
Sr. NoSummary of reporting requirements under CARO 2020Summary of disclosures requirements under Schedule III to the Companies Act, 2013Remarks
3Whether any proceedings have been initiated/ 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. [Clause 3(i)(e)]Disclosure prescribed for proceeding            initiated/ pending for holding any benami property e.g.: Details of such property and amount thereofDetails of beneficiariesIf property is in the books, then reference to item in balance sheetIf property is not in the books, then the fact with reasonsDetails of proceedingsNature of proceedings, status of same and Company’s view 
4Whether 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 inIn case of borrowings from banks or financial institutions on the basis of security of current assets, disclose whether quarterly returns/ statements of current assets filed with banks or financial institutions agree with books of accounts, If not, adequately discloseCARO            2020 prescribes reporting            relating to            sanctioned working      capital limits in excess of five crore rupees, in         aggregate. However, disclosure requirements
Sr. NoSummary of reporting requirements under CARO 2020Summary of disclosures requirements under Schedule III to the Companies Act, 2013Remarks
 agreement with the books of account of the Company, if not, give details; [Clause 3(ii)(b)]summary of reconciliation and reasons of material discrepanciesunder Schedule III to the Companies Act, 2013 are not limited to working capital          but     cover all               borrowings. Further,            no monetary threshold         has been     prescribed under Schedule III to the Companies Act,    2013   while making            this disclosure.
5Whether 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 section 2(76) of the Companies Act, 2013 [Clause 3(iii)(f)]Disclosure to be provided in prescribed format where loans/ advances in the nature of loans are granted to promoters, directors, key managerial personnel and related parties, either severally or jointly with any other person, that are: Repayable on demand orWithout specifying any terms or repayment periodCARO               2020 additionally requires percentage of loan granted. Further, in Schedule III to the Companies   Act, 2013, loans and advances given to promoters, directors, KMP and other related parties are considered, whereas in CARO 2020, if loans and advances are given to other than related parties,
Sr. NoSummary of reporting requirements under CARO 2020Summary of disclosures requirements under Schedule III to the Companies Act, 2013Remarks
   these are also to be included.             So, reporting requirements          in CARO      2020     are wider as compared to Schedule III to the Companies   Act, 2013.
6Whether 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 account during the year [Clause 3(viii)]Details of transaction not recorded in the books of accounts that has been surrendered/ disclosed as income during the year in the tax assessments (e.g. search), unless there is immunity for disclosure under the schemeDisclose whether the previously unrecorded income and related assets have been properly recorded in the books of account during the year 
7Whether   the   company   is   a declared wilful defaulter by anyDisclose   following  if               the company    is               a     declared 
Sr. NoSummary of reporting requirements under CARO 2020Summary of disclosures requirements under Schedule III to the Companies Act, 2013Remarks
 bank or financial institution or other lender [Clause 3(ix)(b)]wilful defaulter by any bank/ financial institution / other lender: Date of declaration as wilful defaulterDetails of defaults (amount and nature of defaults) 
8Whether 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 may be reported [Clause 3(ix)(c)]Where borrowings from banks and financial institutions not used for the specific purpose for which it was taken at the balance sheet date – company to disclose details of where they have been usedCARO            2020 prescribes reporting on term loans    from   any party.     However, disclosures    under Schedule III to the Companies      Act, 2013     are                 not limited              to               term loans but cover all borrowings. Further, disclosures    under Schedule III to the Companies      Act, 2013   have   been prescribed only for borrowings     from banks             and financial institutions.
Sr. NoSummary of reporting requirements under CARO 2020Summary of disclosures requirements under Schedule III to the Companies Act, 2013Remarks
9On the basis of the financial ratios, ageing and expected dates of realisation 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 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 [Clause 3(xix)]Disclosure of certain ratios including current ratio, debt-equity ratio, debt service coverage ratio, 1capital to risk-weighted assets ratio 2Explain items included in numerator and denominator3Explain any change in the ratio by more than 25% as compared to previous yearCARO            2020 requires           the auditor              to comment           on material uncertainty         in payment            of liabilities on basis of    the    financial ratios   and       other prescribed matters. However, Schedule III to the Companies      Act, 2013        requires disclosure           of certain ratios.
10Whether, in respect of other than ongoing projects, the company has transferred unspent amount to a Fund specified in Schedule VII to the Companies Act, 2013 within a period of six monthsDetails of CSR activities including amount required to be spent, amount of expenditure incurred, shortfall, total of previous years shortfall, reason for shortfall, nature of CSRCARO            2020 requires      reporting of      unspent   CSR amount. However, disclosures prescribed    under Schedule III to the

1 As prescribed under Division III to Schedule III to the Companies Act, 2013.

2 Not prescribed under Division III to Schedule III to the Companies Act, 2013.

3 Not prescribed under Division III to Schedule III to the Companies Act, 2013.

Sr. NoSummary of reporting requirements under CARO 2020Summary of disclosures requirements under Schedule III to the Companies Act, 2013Remarks
 of the expiry of the financial year in compliance with second proviso to section 135(5) of the Companies Act, 2013 [Clause 3(xx)(a)] Whether any amount remaining unspent under section 135(5) of the Companies Act, 2013, pursuant to any ongoing project, has been transferred to special account in compliance with the provision of section 135(6) of the Companies Act, 2013 [Clause 3(xx)(b)]activities, details of related party              transactions, movements in provision made with respect to liability incurred by entering into a contractual obligationCompanies      Act, 2013 are wider as compared           to reporting requirements under          CARO 2020.

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