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June 13, 2022

CARO 2020 Reporting : Disclosuers

by CA Shivam Jaiswal in MCA Circular

CARO 2020 Reporting : Disclosuers

Ministry of Corporate Affairs ‘MCA’ notifies Companies (Auditor’s Report) Order, 2020 (CARO 2020) which is applicable for audit of financial statements of eligible companies for the financial years commencing on or after the 1st April, 2020.

Applicability of CARO 2020

Accordingly CARO 2020 will be applicable to all the companies including foreign companies except banking company, insurance company, section 8 company, OPC [section 2(62)], small company [section 2(85)], certain private limited co. This order stated that every report of the auditor under Section 143 of Companies Act, 2013 must contain the matters stated in 21 clauses as specified under paragraphs 3 and accord reasons for unfavorable or qualified answer as stated in paragraph 4 of CARO 2020.

CARO 2020 will not be applied with respect to auditor’s report on Consolidated Financial Statements except clause (xxi) of paragraph 3 (Reporting requirements on qualifications or adverse remarks by the auditors in the CARO reports). The order 2020 elaborated on all the matters which are to be included in the auditor’s report.

1. Whether the company is maintaining proper records showing full particulars such as:

i. The quantitative detail and situation of property, plant, and equipment,

 ii. Physical verification of the property, plant, and equipment by the management at reasonable intervals,

iii. The details of the title deeds of the immovable properties held in the name of company,

iv. Revaluation of the property, plant, and equipment or intangible assets or both and if there is more than 10% of the change in the property, plant, and equipment or intangible assets,

2. Details of proceedings against the company on the holding of any Benami property.

3. Physical verifications of inventory by the management at reasonable intervals and proper treatment of any discrepancies of 10% or more found.

 4. Quarterly returns or statement filed by company having working capital limit more than 5 crore rupees with such banks or financial institution

 5. Details of the investments made by the company(except companies dealing in loans), security or guarantee given by the company,

6. Details of the payment pertaining to the undisputed statutory dues such as GST, provident Funds, Custom Duty, etc.

 7. Details of any default done by the company in making the repayment of the loan,

 8. Details of the funds raised by a company by the way of the Initial public offer,

9. Details of fraud done by the company, and many more.

10. The Auditor’s Report Order 2020 of any company is supposed to state the reasons for unfavorable or qualified answers.

1. Reporting requirements on Property, Plant, Equipment

(A) Whether the company maintains proper records showing full particulars, including quantitative details and situation of Property, Plant, and Equipment;

(B) Whether the company maintains proper records showing full particulars of intangible assets;

(b) Whether these Property, Plant, and Equipment have been physically verified by management at reasonable intervals; whether any material discrepancies were noticed on such verification.

(C) whether the title deeds of all immovable assets declared in the financial statements (other than properties where the company is the lessee and the lease agreements are fully completed in the lessee’s favour) are held in the firm’s name,

(d) whether the company revalued its Property, Plant and Equipment (including Right of Use assets), intangible assets, or both during the year, and if so, whether the revaluation was based on a Registered Valuer’s valuation; specify the amount of change, if the change in the aggregate of the net carrying value of each class of Property, Plant and Equipment or intangible assets is 10% or more;

(e) whether any proceedings under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and rules made thereunder have been initiated or are pending against the company for holding any benami property, and if so, whether the company has appropriately disclosed the details in its financial statements;

2. Reporting requirements on Inventory and Working Capital

(a) whether management has conducted physical inventory verification at reasonable intervals and whether, in the auditor’s opinion, the scope and procedure of such verification by management is appropriate; whether any discrepancies of 10% or more in the aggregate for each class of inventory have been noticed and, if so, whether they have been properly dealt with in the books of account;

(b) whether the company has received working capital limits in excess of five crore rupees, in aggregate, from banks or financial institutions on the basis of security of current assets at any point during the year; whether the quarterly returns or statements filed by the company with such banks or financial institutions are in agreement with the company’s books of account, if not, provide details;

3. Reporting requirements on Investment , Loans and Advances

If the company made any investments in, provided any guarantee or security for, or issued any loans or advances in the type of loans, secured or unsecured, to companies, firms, Limited Liability Partnerships, or any other parties during the year,-

(a) Whether the company has provided loans or advances in the nature of loans, or stood guarantee, or provided security to any other entity during the year [not applicable to companies whose principal business is to give loans], if so, 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 ventures, and associates;

 (B) the total amount of such loans or advances, as well as the balance outstanding at the balance sheet date, to parties other than subsidiaries, joint ventures, and associates throughout the year;

(b) whether the investments made, guarantees granted, security given, and terms and circumstances of all loans and advances in the type of loans and guarantees issued are not detrimental to the company’s interests;

(c) in the case of loans and advances in the character of loans, if a plan for principal repayment and interest payment has been established, as well as whether the repayments or receipts are on time;

(d) if the payment is past due, disclose the total amount that has been past due for more than ninety days and whether the corporation has taken reasonable steps to recover the principle and interest;

(e) whether any loan or advance in the nature of loan granted during the year has been renewed or extended, or fresh loans granted to settle the overdues of existing loans given to the same parties, and if so, specify the aggregate amount of such dues renewed or extended, or fresh loans granted to settle the overdues of existing loans given to the same parties; if so, specify the percentage of the aggregate to the total loans or advances in the nature of loans granted during the year

(f) whether the company has granted any loans or advances in the nature of loans repayable on demand or without specifying any terms or period of repayment, and if so, specify the aggregate amount, percentage of total loans granted, and aggregate amount of loans granted to Promoters and related parties as defined in clause (76) of section 2 of the Companies Act, 2013;

4. COMPLIANCE WITH SECTION 185 AND 186 PROVISIONS:

Whether the provisions of sections 185 and 186 of the Companies Act have been followed in relation to loans, investments, guarantees, and security, and if not, provide information;

5. Reporting requirements on Deposits

If an order has been passed by the Company Law Board, National Company Law Tribunal, or Reserve Bank of India in respect of deposits accepted by the company or amounts deemed to be deposits, whether the Reserve Bank of India’s directives 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 followed; if not, the nature of such contraventions be stated; if an order has been passed by the Company Law Board, National Company Law Tribunal,

6. Reporting requirements on Cost Records

whether the Central Government has specified the maintenance of cost records under paragraph (1) of section 148 of the Companies Act, and whether such accounts and records have been created and maintained accordingly;

7. Reporting requirements on Statutory Dues

(a) whether the company is regular in depositing undisputed statutory dues to the appropriate authorities, such as Goods and Services Tax, provident fund, employees’ state insurance, income-tax, sales-tax, service tax, duty of customs, duty of excise, value added tax, cess, and any other statutory dues; If not, the amount of outstanding statutory dues for a period of more than six months from the date they became payable as of the last day of the financial year concerned shall be noted;

(b) Where statutory dues referred to in subclause (a) have not been deposited due to a disagreement, the sums involved and the forum where the issue is ongoing must be stated (a mere representation to the concerned Department is not considered a dispute);

8. Reporting requirements on Unrecorded Income

whether any transactions not recorded in the books of account were surrendered or declared as income in tax assessments under the Income Tax Act, 1961 (43 of 1961) during the year, and, if so, whether the previously unrecorded income was properly entered in the books of account during the year;

9. Reporting requirements on Default in Payments

(a) whether the company has defaulted in the repayment of loans or other borrowings, or in the payment of interest on those borrowings to any lender,

(b) whether any bank, financial institution, or other lender has labelled the company a wilful defaulter;

(c) if term loans were utilised for the intended purpose for which they were received; if not, the amount of loan diverted and the purpose for which it was used may be reported;

(d) whether funds raised on a short-term basis were used for long-term purposes, and if so, what they were and how much they cost;

(e) whether the firm has received funds from any entity or person on behalf of or to pay the obligations of its subsidiaries, associates, or joint ventures, and if so, details of such transactions, including the nature of the transactions and the amount in each case;

(f) whether the firm has raised loans during the year on the security of securities held in its subsidiaries, joint ventures, or associate companies, and if so, provide information, as well as whether the company has defaulted on such loans raised;

10. . Reporting requirements on Money Raised through Public Issue or others

(a) If funds raised through an initial public offering or a later public offering (including debt instruments) during the year were used for the purposes for which they were raised, and if not, the facts, including any delays or defaults and subsequent correction, if any, be disclosed;

(b) whether the company has made any preferential allotment or private placement of shares or convertible debentures (fully, partially, or optionally convertible) during the year, and if so, whether the requirements of sections 42 and 62 of the Companies Act, 2013 have been met and the funds raised have been used for the purposes for which they were raised; if not, provide details on the amount involved and nature of non-compliance;

11. . Reporting requirements on Fraud

(a) whether any fraud by the company or fraud on the company was observed or reported during the year, and if so, what kind of fraud it was and how much it cost;

(b) whether the auditors have filed a report with the Central Government in Form ADT-4 as required by sub-section (12) of section 143 of the Companies Act, as stipulated by rule 13 of the Companies (Audit and Auditors) Rules, 2014;

(c) whether the auditor has taken into account any whistleblower allegations received by the corporation during the year;

12. Reporting requirements on Nidhi Company

(a) whether the Nidhi Company has met the Net Owned Funds to Deposits ratio of 1:20 to meet the liability;

(b) whether the Nidhi Company is maintaining ten percent unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet the liability;

 (c) whether there has been any default in payment of interest on deposits or repayment thereof for any period and, if so, the details thereof;

13. Reporting requirements on Related Party Transaction

Whether all transactions with related parties, when relevant, are in line with sections 177 and 188 of the Companies Act and the facts have been reported in the financial statements, etc., as required by the applicable accounting standards;

14. . Reporting requirements on Internal Audit

(a) whether the company has an internal audit system that is appropriate for the size and type of its business;

(b) whether the statutory auditor evaluated the Internal Auditors’ reports for the period under audit;

15. Reporting requirements on Non -Cash Transaction

Whether the firm has engaged in any non-cash transactions with directors or others linked to them, and if so, whether the provisions of Section 192 of the Companies Act have been followed;

16. . Reporting requirements on RBI Directives

(a) whether the firm is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934 (2 of 1934), and, if so, whether it has done so;

(b) whether the company has engaged in any non-banking financial or housing finance operations without first obtaining a valid Certificate of Registration (CoR) from the Reserve Bank of India in accordance with the Reserve Bank of India Act, 1934;

(c) whether the company is a Core Investment Company (CIC) as defined by Reserve Bank of India regulations, and if so, whether it continues to meet the criteria of a CIC, and if not, whether it continues to meet the criteria of an exempted or unregistered CIC;

(d) whether the Group includes more than one CIC, and if so, how many CICs are included in the Group; if yes, how many CICs are included in the Group;

17. Reporting requirements on Cash Losses

whether the company had cash losses in the current financial year and the previous financial year, and if yes, how much money was lost;

18. Reporting requirements on Resignation of Auditors

Whether any statutory auditors resigned during the year, and if so, whether the new auditor has taken into account the criticisms, objections, or concerns highlighted by the outgoing auditors;

19. Reporting requirements on Economic Viability

based on financial ratios, ageing and expected dates of realisation and payment of financial assets and 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 of the date of the audit report that the company is capable of meeting its liabilities existing at the date of the balance sheet.

20.  Reporting requirements on CSR Related Obligation

(a) whether the company has transferred unspent funds to a Fund specified in Schedule VII to the Companies Act within six months of the financial year’s end, in accordance with the second proviso to sub-section (5) of section 135 of the said Act; (b) whether any amount remaining unspent under sub-section (5) of section 135 of the Companies Act, pursuant to any ongoing project, has been transferred to special acts.

21. Reporting requirements on Unfavourable Remark in Subsidiary /Associates Standalone CARO Report

If the respective auditors made any qualifications or adverse remarks in the Companies (Auditor’s Report) Order (CARO) reports of the companies included in the consolidated financial statements, list the companies and the paragraph numbers in the CARO report containing the qualifications or adverse remarks.

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