A Detailed analysis on CARO 2020 Part-I

Last Updated On: March 9, 2022, 8:58 p.m.
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DETAILED ANALYSIS ON CARO 2020- PART I

MCA (Ministry of Corporate Affairs), in consultation with the NFRA (National Financial Reporting Authority) and by virtue of Section 143(11) of Companies Act, 2013 (Companies Act), has issued Companies (Auditor’s Report) Order, 2020 (CARO, 2020) on 25th February 2020 which supersedes Companies (Auditor’s Report) Order, 2016 (CARO, 2016).

The said order is applicable for reporting on financial statements of companies whose financial year commences on or after 1st April 2021.


Applicability The CARO 2020 is applicable to the same companies as the CARO 2016 was applicable to. There is no change inapplicability to categories of companies. Key Updates and points in applicability:- Change in definition of Small company as under section 2(85) of the companies act 2013:-

1. The limit of paid-up capital has been increased to two crores from fifty lakhs, and;

2. The limit of turnover has been increased to twenty crores from two crores. Provided that nothing in this clause shall apply to— holding company or a subsidiary company; company registered under section 8; or a company or body corporate governed by any special Act;”

Provided that nothing in this clause shall apply to—

  • holding company or a subsidiary company;
  • company registered under section 8;
  • or a company or body corporate governed by any special Act;”

 

What are the matters to be included in the auditor's report?

The matters to be included in the auditor’s report are specified in paragraph 3 of the Order. Paragraph 3 has twenty-one clauses in all.

Property, Plant & Equipment and Intangible Assets

(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;

(b) whether these properties, Plant and Equipment have 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 favor of the lessee) disclosed in the financial statements are held in the name of the company,

 

What are the key changes and Analysis?

1. The additional comment has to be made for intangible assets for its maintenance of proper records;

2. Declaration, whether all the immovable properties disclosed in the financial statements are held in the name of the reporting entity;

3. Special reporting for revaluation for 10% or more (upward & downward both) and whether revaluation is done by Registered valuer;

4. Revaluation (for reporting purposes) shall not include:-

  • Fair Valuation of PPE upon first-time adoption of Ind AS;
  • Remeasurements;
  • Changes to ROU assets due to lease modifications.

5. Disclosures for Benami properties and proceedings initiated or pending against the company.

 

Inventory:

(ii) (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;

(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 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;

 

What are the Key Changes and Analysis:-

1. The term ‘Materiality’ has been defined in CARO 2020 i.e. 10% or more, which was left to the auditor's judgment in CARO 2016;

2. Also, the auditor is responsible to comment on the appropriateness of coverage and procedure of such verification; Checking for deviations in quarterly statements filed by the company with banks and FIs w.r.t Working capital loan if the company has been sanctioned limit in excess of 5 Crores at any point in time. (utilization of funds is of no relevance)



 

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