The Ministry of corporate Affairs recently has issued the Companies (Auditor's Report) Order, 2020 on 25.02.2020, which is applicable for reporting on the financial statements of the companies for the financial year commencing on or after 1st April 2019 apparently to bring in line with The Companies Act, 2013. A visit to the circular will highlight the following.
1. The applicability Section 1:
By and large the same as prescribed in the earlier CARO, 2016.
2. Matters to be included in CARO Report Section 3
• The New CARO has 21 clauses as against 16 clauses in the earlier dispensation.
• The new classes are as follows:
1. Clause No (viii) on transactions not recorded in the books:
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;
2. Clause (xiv) on internal Audit:
(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;
3. Clause (xvii) on Cash Loss:
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;
4. Clause (Xviii) on resignation of Statutory Auditors:
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;
5. Clauses (xix) on Financial Ratios:
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;
6. Clause (xx) on CSR:
(a) whether, in respect of other than on- going 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 sub-section (5) of section 135 of the Companies Act, pursuant to any on -going project, has been transferred to special account in compliance with the provision of subsection (6) of section 135 of the said Act;
7. Clause (xxi) on Consolidated - Opinion remark: on companies included in Consolidated Financial statements:
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.
---Clauses (x) on initial public offer & preferential allotment:
Initial public offer Under Clause (ix) & preferential allotment under clause (xiv) on 2016CARO merged in Clause (x -a &b) of new CARO as detailed here under.
(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 non-compliance;
To sum up, six new clauses are added and two sub clauses of the old regime merged into one, whereby five clauses are added.
On Existing Clauses in CARO 2016:
In the existing Clauses there are many additions by sub- clauses to cover the modern days dictates based on The New Companies Act with the subsequent amendments, besides more so by stresses and anxieties faced, in real terms, by the accounting, auditing and investment communities in the recent past.
Further, by the dictates of time, certain clauses are either modified or enlarged to make them more meaningful and evocative.
The term 'opinion' has been used certain clauses:
If revisit the recent circular, the term 'opinion' has been used in two clauses:
• In clause no (ii)-(a) on Inventory: 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 in the books of accounts.
• In Clause no(xix) on Ratios: on the basis of the financial ratios ageing and expected dates of realization 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 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; 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;
MCA should address the following in consultation with ICAI:
The word 'opinion' is normally used with reference to audit Report, for the reason obvious, that is, Audit Report is based on 'true and fair view', not on true nor on correct view. Till date CARO Report has to say yes or no on correct position. Fair view is normally made when fair portion of the Report is based on estimates. This departure in the CARO Report may spell difficulty and trouble for auditing community, since it is nearly trespassing into 'true and fair' view corridor. This is to be addressed by MCA in consultation with Auditors.
Regarding the exiting clauses with additions/ modification of sub clauses are highlighted in the following table:
|
Sr.No |
Clause |
Head |
Additions/ Modification |
Details |
|
1 |
(i) (a) (A) |
Fixed Assets |
Modification- PP&E in the place of fixed assets |
To be in line with the Division1 and II of Schedule III |
|
(i) (a) (B) |
Do |
Additions. Report on intangible Assets |
On maintaining proper records showing full particulars of intangible assets |
|
|
(i) (b) |
Do |
Modification- PP&E |
To be in line with the Division1 and II of Schedule III |
|
|
(i) (c) |
Do |
Addition to the sub clause what is there in bracket |
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 theformat |
|
|
(i)(d) |
Addition on revaluation of assets. Modification PP&E |
whether the company has revalued its PP &E(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; |
||
|
(i) (e) |
Addition onBenamiTransction. Refer the revent Act the relevant Act |
whether any proceedings have been initiated or are pending against the company for holding any benamiproperty 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; |
||
|
2 |
(ii) (a) |
Invento-ry |
Modified— opinion Material |
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; |
|
(ii)-(b) |
Inventory- working capital limit |
Addition-- working capital limits in excess of five crore rupees |
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 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; |
|
|
3 |
(iii) (a) |
Additions- Investment Deleted U/S-- |
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,- |
|
|
(iii) (a) (A) |
Additions |
(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; |
||
|
(iii)(a) (B) |
Additions |
(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; |
||
|
(iii) (b) |
Modified |
(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; |
||
|
(iii) (c) |
Additions |
(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; |
||
|
(iii)-(d) |
Additions |
(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; |
||
|
(iii) (e) |
Additions |
(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]; |
||
|
(iii) (f)- |
Additions |
(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 clause (76) of section 2 of the Companies Act, 2013; |
||
|
4 |
(iv) |
Provisions of Sec.185&186 of the Act |
No Change |
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; |
|
5 |
(v) |
Deposits accepted |
Deemed Deposits incuded |
Note the addition |
|
6 |
(vi) |
Cost records |
No Change |
Retained |
|
7 |
(vii)(a) |
Statuto-ry dues |
GST included |
Retained |
|
(vii) 9(b) |
DO |
Instead of maintaining names of particular statutory dues, statutory dues referred to the above clause mentioned for brevity |
||
|
8 |
(viii) |
Not record |
New Clause |
Pl. see on new clauses above |
|
9 |
(ix) (a) |
Repayment of loans etc |
Modified |
(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 format |
|
(ix) (b) |
Addition |
(b) whether the company is a declared wilful defaulter by any bank or financial institution or other lender |
||
|
(ix) (c) |
Ad dition |
(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 purpose for which it is used may be reported; |
||
|
(ix) (d) |
Addition |
(d) whether funds raised on short term basis have been utilised for long term purposes, if yes, the nature and amount to be indicated; |
||
|
(ix) (e) |
Addition |
(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; |
||
|
(ix) (f) |
Addition |
(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; |
||
|
10 |
(x) (a) |
initial public 0ffer |
No change |
Retained |
|
(x) (b) |
Preferential allotment |
Modified & shifted from(xiv) from earlier CARO |
Apart from Section 42, Section 62 of the Act included Clauses (x) on initial public offer & (iv) On Preferential allotment on 2017 CARO merged in Clause (x &b) of new CARO |
|
|
11 |
(xi) |
Fraud |
Earlier Caro Clause No .(x) |
Retaine6 |
|
(xi) (a) |
Addition |
(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; |
||
|
(xi) (c) |
Addition |
(c) whether the auditor has considered whistle-blower complaints, if any, received during the year by the company; |
||
|
12 |
(xii) (a) (b) |
Nidhi Co, |
No material change |
Two sub clauses inserted in the new |
|
(xii) © |
Addition |
(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 |
(xiii) |
Related Party |
No change |
Retained |
|
14 |
(xiv) (a)&bb) |
Internal Audit |
New-resurrected. |
Pl. see new clauses above |
|
15 |
(x) (v) |
Non- Cash - |
-transaction |
No Change |
|
16 |
(xvi) (a) |
RBI |
No Change |
|
|
(xvi)-(b) |
Addition |
(b) whether the company has conducted any Non-Banking Financial or Housing Finance activities without a valid Certificate of Registration (COR) from the Reserve Bank of India as per the Reserve Bank of India Act, 1934; |
||
|
(xvi) c |
Addition |
(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 fulfill the criteria of a CIC, and in case the company is an exempted or unregistered CIC, whether it continues to fulfill such criteria; |
||
|
(xvi) d |
Addition |
(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; |
||
|
17 |
(xvii) |
cash Loss |
New |
Pl. see new clauses above |
|
18 |
(xviii) |
Resignation of statutor |
New -y auditors |
Pl. see new clauses above |
|
19 |
(xix) |
Financial- |
-ratios New |
Pl. see new clauses above |
|
20 |
(xx) (a&b) |
CSR |
New |
Pl. see new clauses above |
|
21 |
(xxi) |
CFSs |
New |
Pl. see new clauses above |
Section 4: Reasons to be stated for unfavourable or qualified answers.-
(1) Where, in the auditor's report, the answer to any of the questions referred to in paragraph 3 is unfavourable or qualified, the auditor's report shall also state the basis for such unfavourable or qualified answer, as the case may be
(2) Where the auditor is unable to express any opinion on any specific matter his report should indicate such fact the reasons as to why it is not possible for him to give his opinion on the same
Conclusion:
A glance through of the above article highlight:
• Six new clauses are added and two sub clauses of the old regime merged into one, whereby five clauses in real terms added.
• Further, in the existing Clauses there are many additions by sub- clauses to cover the modern days dictates based on The New Companies Act with the subsequent amendments, besides more so by stresses and anxieties faced, in real terms, by the accounting, auditing and investment communities in the recent past.
• Besides, by the dictates of time, certain clauses are either modified or enlarged to make them more meaningful and evocative.
• In addition, If revisit the recent circular, the term 'opinion' has been used in two clauses- In clause no (ii)-(a) on Inventory and In Clause no(xiv) on Ratios: on the basis of the financial ratios .
• As spelt out earlier, the word 'opinion' is normally used with reference to audit Report, for the reason obvious, that is, Audit Report is based on 'true and fair view', neither on true nor on correct view. Till date CARO Report has to say yes or no on correct position. Fair view is normally made when fair portion of the Report is based on estimates. This departure in the CARO Report may spell difficulty and trouble for auditing community, since it is nearly trespassing into 'true and fair' view corridor. This is to be addressed by MCA in consultation with Auditors.
• Clause (xxi) on Consolidated - Opinion remark make on unnatural departure from the present approach to CARO as to report on companies included in Consolidated Financial statements on 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.
• To cover additional and loaded responsibility, there is a solid case for upward
- Revision in the audit fees. The Concerned authority and ICAI should look into it.
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