Comparative summary of CARO 2016 vs CARO 2020

Comparative summary of CARO 2016 vs CARO 2020 taxguru.in/company-law/comparative-summary-caro-2016-vs-caro-2020.html

Companies (Auditor’s Report) Order, 2020 The Companies Act, 2013 requires auditors of specified class of companies to include a statement in their reports on specific matters as prescribed in the Companies (Auditor’s Report) Order (CARO). In 2020, the Ministry of Corporate Affairs (MCA) issued a revised CARO (CARO 2020) which is applicable to a wide range of companies. CARO 2020 brings enhanced reporting requirements which will provide more accurate insights to the business of the Company. CARO 2020 is applicable for audits of financial years commencing on or after April 1, 2021.

CARO 2016 had a total of 16 clauses, whereas CARO 2020 has 21 clauses (50 including sub-clauses). Some of the important areas where reporting has been enhanced are: > material uncertainty around repayment of liabilities; > adequacy of internal audit; > whistle-blower system and reporting of frauds; > borrowings; > investments; > loans and advances and > reporting on matters relating to consolidated entities.

Many of the new reporting requirements require the auditor to apply the principles of professional judgement and materiality, rather than application of a pure objective test.

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While reporting requirements have been enhanced, the applicability of CARO 2020 remains similar to CARO 2016. Just like CARO 2016, CARO 2020 is applicable to every company including a foreign company as defined in clause (42) of section 2 of the Companies Act, 2013, except > a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949; > an insurance company as defined under the Insurance Act,1938; > a company licensed to operate under section 8 of the Companies Act; > a One Person Company as defined in clause (62) of section 2 of the Companies Act; > a small company as defined in clause (85) of section 2 of the Companies Act; and > a private limited company, if it meets all of the following conditions: It is not a subsidiary or holding company of a public company; Its paid-up capital and reserves and surplus do not exceed Rs. 1 crore as on the balance sheet date; Its total borrowings from any bank or financial institution do not exceed Rs. 1 crore at any point of time during the financial year and Its total revenue, as disclosed in Schedule III to the Companies Act, 2013 (including revenue from discontinued operations) does not exceed Rs. 10 crores during the financial year as per the financial statements.

A comparative summary of CARO 2016 vs CARO 2020 is tabulated below: Clause No.

CARO 2016

CARO 2020

Changes

3(i)

(a) whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets; (b) whether these fixed assets have been physically verified by the management at reasonable intervals;

(a) (A) whether the company is maintaining proper records showing full particulars, including quantitative details and situation of Property, Plant and Equipment; (B) whether the company is maintaining proper records showing full particulars of intangible assets;

1. In line with the changes made in accounting standard (AS-10) and reporting requirements under Schedule III, the term fixed assets has now been replaced with Property, Plant and Equipment and Intangible assets in CARO 2020.

2. A format has been specified in the order for reporting of immovable properties for which the title deeds are not held in the name of the Company.

Earlier no format was specified.

(b) whether these Property, Plant and Equipment have

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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; (c) whether the title deeds of immovable properties are held in the name of the company. If not, provide the details thereof;

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 (c) 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 the details thereof in the specified format (d) 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

3. In case of revaluation of PP&E (including ROU asset as per Ind AS 116) or intangible asset, the auditor has to verify: a. whether the revaluation is based on the valuation provided by registered valuer and also whether the provisions of section 247 of the Companies Act, 2013 including the corresponding rules thereto relating to valuation by registered valuers have been duly complied with; and b. if the amount of change is 10% or more of the total net carrying value of each class of PP&E or intangible asset, the amount of change needs to be specified.

This is a new subclause.

4. With respect to benami properties, the auditor has to verify whether any proceedings have been initiated against the Company by appropriate authority under the Benami Property Act and/ or any proceedings are pending with the appropriate authorities as on the balance sheet date for holding any benami property.

The reporting is not applicable where the notice is received by the Company as a beneficial owner.

For the purpose of reporting, appropriate disclosures in the financial statements would include nature of property, carrying value of the property in the books of accounts, status of proceedings before the relevant authority, consequential impact on the financial statements and/ or the liability that may arise in case the proceedings are decided against the company.

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3(ii)

whether physical verification of inventory has been conducted at reasonable intervals by the management and whether any material discrepancies were noticed and if so, whether they have been properly dealt with in the books of account

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

This is a new subclause.

(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

1. In addition to reporting whether the physical verification is conducted at reasonable intervals (what is reasonable is dependent on circumstances of each case), the auditor also has to report whether the coverage of such verification, methods and procedures adopted for such verification are appropriate, considering the size of the Company and nature of its business.

Furthermore, the auditor has to report whether a discrepancy of 10% or more arises in the value for any class of inventory and also whether the difference has been appropriately accounted for in the books of accounts. It is pertinent to note that the materiality threshold is not relevant here and as such a discrepancy of 10% or more in the value of any class of inventory would be reported, even if it is immaterial. Lastly, 10% should be applied on net basis i.e. after adjusting for excesses and shortfall within the class.

(b) whether 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

2. In case the Company has been sanctioned working capital limits (sanction includes 4/23

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

new sanctions during the year as well as limits renewed or due for renewal during the year) exceeding Rs. 5 crores on the security of current assets (thus all unsecured facilities and those sanctioned on the basis of security of other assets are not covered here), then auditor has to verify the quarterly returns submitted by the Company to the bank (for e.g., stock statement, book debt statement, ageing analysis of debtors, etc) and ensure that the same agree to the books of accounts. Any discrepancies in the same are to be appropriately reported. It is pertinent to note here that the limits are to be determined in reference to the sanction letter and would include both fund based and non-fundbased credit facilities.

Moreover, this subclause will be applicable even though the outstanding balance is less than Rs. 5 crores as at the balance sheet date (as the clause mentions sanctioned limit).

This is a new subclause.

3(iii)

whether the company has granted any loans, secured or unsecured to companies, firms, Limited Liability Partnerships or other parties covered in the register maintained under section 189 of the Companies Act, 2013. If so, (a) whether the terms and conditions of the grant of such loans

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

1. The scope of this clause has been increased to cover not only loans and advances, but investments made, guarantees and securities provided as well.

Moreover, in CARO 2016, loans and advances granted only to related parties were covered, however, CARO 2020 covers loans and advances granted to, investments made in and guarantees and securities provided to any enterprise as such, regardless whether it is a related party or not.

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are not prejudicial to the company’s interest; (b) whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular; (c) if the amount is overdue, state the total amount overdue for more than ninety days, and whether reasonable steps have been taken by the company for recovery of the principal and interest

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(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 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

2. Further, CARO 2020 requires the auditor to report the following details separately for Company’s subsidiaries, joint ventures and associates and for other parties-total amount of loans and advances granted and guarantees or securities provided during the year (loans and advances squared off during the year are also to be reported) and outstanding amount of the same as on the balance sheet date.

It is pertinent to note here that clause 3(iii)(a) is not applicable to Companies whose principal business is to give loans i.e.

NBFCs, financial institutions, etc.

3. Clause 3(iii)(e) requires the auditor to identify and report instances of evergreening of loans and advances and is applicable to all companies, except for companies whose principal business is to give loans, for e.g., NBFCs, financial institutions, etc. The auditor has to report aggregate amount of loans renewed or extended or settled by grant of fresh loans and the %age thereof to the total amount of loans and advances in the nature of loans (what is advance in the nature of loans is dependent on the circumstances of each case) granted during the year.

Reporting under this clause would also cover loans falling due as on the balance sheet date and which were renewed/ extended/ settled post the balance sheet date and before the date of audit report.

This is a new subclause.

4. CARO 2020 has introduced another new subclause which requires disclosure of gross 6/23

principal and payment of interest has been stipulated and whether the repayments or receipts are regular;

amount of loans or advances in the nature of loans which are either repayable on demand or do not specify any terms or period of repayment in the auditor’s report.

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

If a company has granted such loans, then specific disclosures would need to be provided for aggregate amount of such loans granted, %age thereof to total loans granted and loans granted to promoters and related parties as defined under relevant provisions of the Companies Act, 2013. For the purpose of reporting, related party relationship is to be evaluated for the entire year and not just as on the balance sheet date.

(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];

This is a new subclause.

(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 7/23

amount, percentage thereof to the total loans granted, aggregate amount of loans granted to Promoters, related parties as defined in clause (76) of section 2 of the Companies Act, 2013 3(iv)

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

in respect of loans, investments, guarantees, and security, whether provisions of sections 185 and 186 of the Companies Act have been complied with, if not, provide the details thereof;

No change

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3(v)

in case, the company has accepted deposits, whether the directives issued by the Reserve Bank of India and the provisions of sections 73 to 76 or any other relevant provisions of the Companies Act, 2013 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?

in respect of deposits accepted by the company or amounts which are deemed to be deposits, whether the directives issued by the Reserve Bank of India 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 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

CARO 2020 has modified the reporting requirements relating to acceptance of deposits by a company and requires auditor to verify the compliance with RBI directives and provisions of the Companies Act, 2013 not just for deposits accepted by the Company, but also for deemed deposits.

Reference may be drawn to section 2(31) of the Act to identify amounts deemed to be deposits.

3(vi)

whether maintenance of cost records has been specified by the Central Government under sub-section (1) of section 148 of the Companies Act, 2013 and whether such accounts and records have been so made and maintained.

whether maintenance of cost records has been specified by the Central Government under sub section (1) of section 148 of the Companies Act, 2013 and whether such accounts and records have been so made and maintained

No change

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3(vii)

(a) whether the company is regular in depositing undisputed statutory dues including provident fund, employees’ state insurance, income tax, salestax, service tax, duty of customs, duty of excise, value added tax, cess and any other statutory dues to the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as on the last day of the financial year concerned for a period of more than six months from the date they became payable, shall be indicated; (b) where dues of income tax or sales tax or service tax or duty of customs or duty of excise or value added tax have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending shall be mentioned. (A mere representation to the concerned Department shall not be treated as a dispute).

(a) whether the company is regular in depositing undisputed statutory dues including Goods and Services Tax, provident fund, employees’ state insurance, incometax, sales tax, service tax, duty of customs, duty of excise, value added tax, cess and any other statutory dues to the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as on the last day of the financial year concerned for a period of more than six months from the date they became payable, shall be indicated; (b) where statutory dues referred to in sub-clause (a) have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending shall be mentioned (a mere representation to the concerned Department shall not be treated as a dispute)

No change, except for inclusion of Goods and Service Tax along with other statutory dues payable.

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3(viii)

No corresponding clause in CARO 2016

whether 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 (43 of 1961), if so, whether the previously unrecorded income has been properly recorded in the books of account during the year

CARO 2020 has introduced a new reporting requirement wherein an auditor should report whether there are any transactions which have not been recorded in the books of accounts of a company but have been surrendered or disclosed as income during the year in Income Tax assessments. If yes, then an auditor would also need to report whether the previously undisclosed income has now been properly recorded in the books of accounts during the year. It is pertinent to note that the clause mentions “surrendered or disclosed” which implies that the company must have voluntarily admitted to the addition of such income and as such additions made by income tax authorities would not be covered over here.

This is a new clause.

3(ix)

whether the company has defaulted in repayment of loans or borrowing to a financial institution, bank, Government or dues to debenture holders?

If yes, the period and the amount of default to be reported (in case of defaults to banks, financial institutions, and Government, lender wise details to be provided)

(a) whether the company has defaulted in repayment of loans or other borrowings or in the payment of interest thereon to any lender, if yes, the period and the amount of default to be reported as per the specified format; (b) whether the company is a declared wilful defaulter by any bank or financial institution or other lender;

1. CARO 2020 has increased the scope of reporting under this clause as against CARO 2016 and now the auditor has to report default in payment of interest in addition to default in repayment of loans to any lender (as against default in repayment to financial institution, bank and Government as was required in CARO 2016). Further, a specific format has been prescribed for reporting the defaults, which was not specified in CARO 2016.

2. CARO 2020 introduces a new reporting requirement relating to whether the company has been declared as a wilful defaulter by any bank, financial institution or other lender during the year under audit till the date of auditor’s report. The term

(c) whether term loans were applied for the purpose for which the loans were obtained; if not, the amount of loan so diverted and the

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purpose for which it is used may be reported;

‘wilful defaulter’ has to be understood with reference to the RBI circular thereon.

(d) whether funds raised on short term basis have been utilised for long term purposes, if yes, the nature and amount to be indicated;

This is a new subclause.

(e) whether the company has taken any funds from any entity or person on account of or to meet the obligations of its subsidiaries, associates or joint ventures, if so, details thereof with nature of such transactions and the amount in each case; (f) whether the company has raised loans during the year on the pledge of securities held in its subsidiaries, joint ventures or associate companies, if so, give details thereof and also report if the company has defaulted in repayment of such loans raised

3. Another new reporting requirement under CARO 2020 pertains to whether the terms loans obtained by the company from bank, financial institution or any other person/ entity have been used for the purpose for which they were sanctioned. If the proceeds have been diverted, then the auditor has to report the amount of funds diverted and the purpose for which they were used. Diversion of funds is to be understood with reference to the RBI circular on wilful defaulters.

This is a new subclause.

4. Similar to clause 3(ix)(c), clause 3(ix)(d) requires the auditor to verify whether the short-term loans obtained by the company from banks, financial institution or any other person/ entity have been used for long term purposes or not.

If yes, then the amount of diversion along with the purpose for which they were used needs to be reported.

This is a new subclause.

5. CARO 2020 further requires the auditor to verify whether the company has obtained any funds (long term or short term) from any entity/ person during the year and thereafter granted the same as loans or advance in the nature of loans or invested the same in its subsidiaries, associates or joint ventures. If yes, then the auditor is required to provide the details along with the nature of such transactions and the amount in each case.

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Details are to be provided even if the funds have been repaid before the year end date.

This is a new subclause.

6.Under CARO 2020, an auditor is required to report whether the company has raised any loan from any lender during the year on specific pledge (and not general or residual charge) of the investment of the company in its subsidiaries, associates or joint ventures. If yes, then the auditor has to report the details of such loans and whether the company has defaulted in repayment of such loans or not. It is pertinent to note here that only new loans taken during the year are covered under this clause (even if repaid during the year). Thus, loans taken in earlier years and outstanding as on the balance sheet date would not be covered.

This is a new subclause.

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3(x)

whether moneys raised by way of initial public offer or further public offer (including debt instruments) and term loans were applied for the purposes for which those are raised.

If not, the details together with delays or default and subsequent rectification, if any, as may be applicable, be reported. whether the company has made any preferential allotment or private placement of shares or fully or partly convertible debentures during the year under review and if so, as to whether the requirement of section 42 of the Companies Act, 2013 have been complied with and the amount raised have been used for the purposes for which the funds were raised. If not, provide the details in respect of the amount involved and nature of noncompliance

(a) whether moneys raised by way of initial public offer or further public offer (including debt instruments) during the year were applied for the purposes for which those are raised, if not, the details together with delays or default and subsequent rectification, if any, as may be applicable, be reported (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 section 42 and section 62 of the Companies Act, 2013 have been complied with and the funds raised have been used for the purposes for which the funds were raised, if not, provide details in respect of amount involved and nature of noncompliance

CARO 2020 now covers private placement/ preferential allotment of optionally convertible debentures in addition to fully or partly convertible debentures.

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3(xi)

whether any fraud by the company or any fraud on the Company by its officers or employees has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated

(a) 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; (b) whether any report under sub section (12) of section 143 of the Companies Act has been filed by the auditors in Form ADT-4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central Government; (c) whether the auditor has considered whistleblower complaints, if any, received during the year by the company

1. CARO 2020 has increased the auditor’s reporting requirements relating to fraud.

Earlier, reporting on fraud on the Company was restricted to fraud by its “officers or employees”, however, the revised clause has removed this restriction and now fraud on the company by any person would be reported.

2. CARO 2020 additionally requires to auditor to state whether any report under section 143(12) of the Companies Act, 2013 (w.r.t. reporting of fraud committed in the Company by its officers or employees involving an amount of Rs. 1 crore or more to Central Government) has been filed by auditor (statutory auditor, cost auditor or secretarial auditor) during the year up to the date of audit report.

This is a new subclause.

3. CARO 2020 has introduced a new reporting requirement which requires an auditor to consider whistle-blower complaints, if any received during the year under audit.

The auditor should also check the compliance w.r.t. vigil mechanism under section 177 of the Companies Act, 2013 and SEBI Regulations, as may be applicable. It is pertinent to note here that the whistleblower complaints pertaining to earlier years are not to be considered for the purpose of reporting under this clause.

This is a new subclause.

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3(xii)

(a) whether the Nidhi Company has complied with the Net Owned Funds to Deposits in the ratio of 1: 20 to meet out the liability (b) whether the Nidhi Company is maintaining ten per cent unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability

1: 20 to meet out the liability (b) whether the Nidhi Company is maintaining ten per cent unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out 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

the company has defaulted in payment of interest on deposits or repayment thereof.

If yes, then the auditor has to report the following details: 1. Nature of default; 2. Amount of default; 3. Period of default; 4. Number of persons to whom there was default in payments and 5. Any other detail, if necessary.

This is a new subclause.

3(xiii)

whether all transactions with the related parties are in compliance with sections 177 and 188 of Companies Act, 2013 where applicable and the details have been disclosed in the Financial Statements etc., as required by the applicable accounting standards

whether all transactions with the related parties are in compliance with sections 177 and 188 of Companies Act where applicable and the details have been disclosed in the financial statements, etc., as required by the applicable accounting standards

No change.

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3(xiv)

No corresponding clause in CARO 2016

(a) whether the company has an internal audit system commensurate with the size and nature of its business; (b) whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor

CARO 2020 introduces a new reporting requirement whereby an auditor has to verify whether the company has an internal audit system/ department and whether the same is adequate considering the size and nature of its business. The auditor also has to verify the compliance w.r.t. section 138 0f the Companies Act, 2013 relating to internal audit.

Furthermore, an auditor has to obtain and verify the reports of such internal audit for the period under audit and has to independently evaluate the impact of the observation on the financial statements.

This is a new clause.

3(xv)

whether the company has entered into any non-cash transactions with directors or persons connected with him and if so, whether the provisions of section 192 of Companies Act, 2013 have been complied with

whether the company has entered into any non-cash transactions with directors or persons connected with him and if so, whether the provisions of section 192 of Companies Act have been complied with

No change.

3(xvi)

whether the company is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934 and if so, whether the registration has been obtained

(a) whether the company is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934 (2 of 1934) and if so, whether the registration has been obtained (b) whether the company has conducted any NonBanking Financial or Housing Finance activities without a valid Certificate of

CARO 2020 has introduced new reporting requirements for NBFCs, HFCs and CICs with a view to ensure greater scrutiny, transparency in operations and safeguarding the interests of those who undertake transactions with them.

Unlike CARO 2016, CARO 2020 requires an auditor to report: a. Whether the company is required to be registered as NBFC/ HFC/CIC?

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Registration (CoR) from the Reserve Bank of India as per the Reserve Bank of India Act, 1934; (c) whether the company is a Core Investment Company (CIC) as defined in the regulations made by the Reserve Bank of India, if so, whether it continues to fulfil the criteria of a CIC, and in case the company is an exempted or unregistered CIC, whether it continues to fulfil such criteria; (d) whether the Group has more than one CIC as part of the Group, if yes, indicate the number of CICs which are part of the Group

b. Whether the company has conducted any NBF or HF activity without a valid CoR from RBI? c. In case the company is not registered as CIC/ not required to register as CIC, whether the company continues to fulfil the criteria for unregistered/ exempted CICs? d. In case of companies in a group (for e.g., holdingsubsidiary, joint venture, associate, related parties) whether there are more than 1 CIC in the group?

In order to evaluate the above, the auditor would examine the activities carried on by the company and the RBI circulars and directions relating to NBFCs, HFCs and CICs. The auditor would also verify the financial statements of the company to determine the various threshold limits specified in the RBI circulars for registration as NBFC, HFC, CIC (viz, financial assets, income there from, investments, net owned funds, etc).

Any discrepancy is to be appropriately reported by the auditor under this clause.

Additionally, the auditor may report any non-compliance w.r.t. any of the applicable provisions by NBFC, HFC, CIC to RBI in the form of an exception report in terms of NBFCs Auditor’s Report (Reserve Bank) Directions, 2016.

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3(xvii)

No corresponding clause in CARO 2016

whether the company has incurred cash losses in the financial year and in the immediately preceding financial year, if so, state the amount of cash losses

CARO 2020 has introduced another new reporting requirement which requires an auditor to comment on whether the company has incurred any cash losses in the year under audit and in the immediately preceding financial year. If yes, then the auditor has to state the amount of such cash losses. It is pertinent to note here that for the purpose of determining cash losses, cash flow (outflow) from operating activities is not to be considered as items such as interest income, interest expenses are also relevant for determining cash losses. Cash losses (if any) are to be determined by adjusting all non-cash expenditure (such as depreciation and amortisation expense, foreign exchange loss, etc) from Net Profit/ Loss after tax as per the Statement of Profit and Loss.

This is a new clause.

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3(xviii)

No corresponding clause in CARO 2016

whether there has been any resignation of the statutory auditors during the year, if so, whether the auditor has taken into consideration the issues, objections or concerns raised by the outgoing auditors

Another new reporting requirement in CARO 2020 requires an auditor appointed during the year to fill in a casual vacancy caused by resignation of auditor to report whether the newly appointed auditor has considered the issues, objections or concerns raised by the outgoing auditor (s).

An auditor is also required to check compliance with the relevant provisions of Companies Act, 2013 and that under any other Act/prescribed by any other Authority, as may be applicable (for e.g., LODR

by SEBI for listed companies).

It is pertinent to note here that reporting under this clause is not applicable in case of change of auditor(s) on account of mandatory rotation as prescribed under the Companies Act, 2013.

This is a new clause.

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3(xix)

No corresponding clause in CARO 2016

on 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.

CARO 2020 has introduced another new reporting requirement whereby an auditor has to comment on the company’s ability to meet its liabilities existing as on the balance sheet date as and when they fall due within a period of one year from the balance sheet date. This is to be assessed based on the analysis of financial ratios, ageing statements and expected dates of realisation of financial assets and financial liabilities, other information (for e.g., Director’s report) and auditor’s knowledge of the company and management plans.

It is to be noted here that, ‘liabilities falling due within a period of one year’ and ‘current liabilities’ are not the same. The auditor has to apply the test of material uncertainty w.r.t. settlement of liabilities (existing as on the balance sheet date) as on the date of audit report, thus any material development post the balance sheet date but before the date of audit report is also to be considered.

This is a new clause.

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3(xx)

No corresponding clause in CARO 2016

(a) whether, in respect of other than ongoing projects, the company has transferred unspent amount to a Fund specified in Schedule VII to the Companies Act within a period of six months of the expiry of the financial year in compliance with second proviso to sub-section (5) of section 135 of the said Act; (b) whether any amount remaining unspent under subsection (5) of section 135 of the Companies Act, pursuant to any ongoing project, has been transferred to special account in compliance with the provision of subsection (6) of section 135 of the said Act

Pursuant to the amendments made by MCA to section 135 of the Companies Act, 2013 and the Companies (CSR Policy) Rules, 2014, CARO 2020 has introduced a new reporting requirement wherein an auditor has to comment on the following: a. For on-going CSR projects: whether the company has transferred the unspent CSR amount to a special account within a period of 30 days from the end of financial year as per section 135(6) of the Companies Act, 2013; b. For other than on-going CSR projects: whether the company has transferred the unspent CSR amount to a fund specified in Schedule VII to the Companies Act, 2013 within a period of six months from the end of financial year in compliance with the provisions of section 135(5) of the Companies Act, 2013.

The auditor has to check the compliance with the provisions of section 135 of the Companies Act, 2013 (for transfer of funds and utilisation thereof) and discrepancy, if any (for current or for previous financial years), is to be reported in the audit report.

This is a new clause.

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3(xxi)

No corresponding clause in CARO 2016

whether there have been any qualifications or adverse remarks by the respective auditors in the Companies (Auditor’s Report) Order (CARO) reports of the companies included in the consolidated financial statements, if yes, indicate the details of the companies and the paragraph numbers of the CARO report containing the qualifications or adverse remarks

CARO 2020 has introduced another new reporting requirement whereby an auditor has to comment whether there are any qualifications/ adverse remarks in the CARO reports of the companies included in the CFS (for e.g., subsidiary company, joint venture) by their respective auditors. If yes, then the auditor has to provide details of such companies and the paragraph/ clause numbers of the respective CARO report containing such qualification/ adverse remarks. Whether any comment is in the nature of qualification or adverse remark is to be construed by the principal auditor using professional judgement and experience.

It is important to note here that reporting requirements of CARO 2020 are not applicable to auditor’s report on CFS, except reporting on qualifications for those entities included in CFS to whom CARO 2020 is applicable.

This is a new clause.

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