Comparative summary of CARO 2016 & CARO 2020

CARO 2020 represents the Companies (Auditor’s Report) Order, 2020. Section 143 of the Companies Act, 2013 states that auditors are authorized to report on matters relating to CARO. The CARO is an order that sets out issues that are considered necessary by the Ministry of Corporate Affairs (MCA) that auditors are required to comment on in their audit report. This article will talk about the comparative summary of CARO 2016 vs. CARO 2020.

CARO 2016

On March 29, 2016, the MCA issued the Companies (Auditor’s Report) Order, 2016 (CARO 2016). This order replaces the Companies (Auditor’s Report) Order, 2015, and applies to financial statements of companies whose fiscal year begins on or after April 1, 2015.

Some important clauses of CARO 2016 include-

In the Audit Report, the following items must be shown :

Relevant Records: Does the company have appropriate records showing full details? The details must include the quantity and condition of the asset.

Practical Verification: Whether its fixed assets are guaranteed by management from time to time. These times may vary depending on the property. Were they in the same condition as stated in the bookkeeping and accounting, at the time of verification? If any material conflict was discovered, or if the same has been properly addressed, in the literature?

Deeds: Are title deeds of immovable property in the name of the company? If not, provide details.

The following items, relating to the company’s inventory, should be included in the Auditor’s Report.

That practical verification of inventory was made? It should be done periodically by management. And if there is a material conflict at the time of verification, is the same calculated?

Loan Offered by the Company: That the company has provided any loans (secured or unsecured) to any related parties included under Section 189 of the Companies Act, 2013. If so, check the following:

• Do the terms and conditions of lending not contradict the company’s interest?
• What if the payments are reasonable and do not expire?
• Whether the overdue value of more than 90 days been reported? And the steps were taken by the company to recover the value make sense?
• That the benefits or loans of directors meet the set criteria? The provisions under sections 185 and 186 must be complied with, in the case of loans, investments, and guarantees. If not, are the details provided?

• Whether the company accepts any deposit? If so, did they follow the RBI instructions outlined below:

• If the Directions/Orders issued by the Reserve Bank of India are complied with? 
• The provisions of Sections 73 to 76 and any other provisions of the Companies Act, 2013, as applicable.
• Any order passed by the NCLT, the Corporate Law Board (CLB), or any other court or tribunal.
• If there is a non-compliance, the type of violation should be reported.

• If the company has failed to repay loans from banks, government, creditors, etc. the amount and duration of non-payment should be reported.
• If any funds collected by the company through an IPO or other public benefits (including debt) are included for the purpose for which they were collected. Also, the auditor should report any delays and errors.
• If there is any fraud committed by the company or its employees during the year. If so, the type and amount involved should be reported.
• Whether the restrictions set out in the Companies Act 2013 of management have been complied with. If not, the amount involved and the steps to be taken must be reported.
• Compliance with the rules set out in the Companies Act 2013 on transactions with related organizations is complied with or not. Also, whether the same is properly disclosed in the financial statements or not.

Whether the company complies with the terms and conditions of the Companies Act 2013 regarding non-financial transactions with directors.

CARO 2020

A new model for statutory audits of companies has been introduced by the Ministry of Corporate Affairs (MCA). On February 25, 2020, the MCA published the Companies (Auditor’s Report) Order, 2020. (CARO 2020). The order (CARO 2020) supersedes the Companies (Auditor’s Report) Order, 2016, which was issued before. CARO 2020 is a new audit report format for statutory audits of companies conducted under the Companies Act, 2013. Following talks with the National Financial Reporting Authority, CARO 2020 now includes new reporting obligations (NFRA). The NFRA is an independent regulatory agency in India that oversees the audit and accounting professions. The goal of CARO 2020 is to improve the overall quality of business auditor reporting.

The following are some of the key changes in CARO 2020 that strive to secure a greater level of due diligence:

• Visiting the CSR details that were not in CARO 2016 to give more accountability to companies that did not take CSR seriously.
• Reporting is reinforced by adding a clause to the company’s ability to meet its liabilities
• Analysis of previous auditor issues
• Various reports of negative financial losses are reflected in the cash flow statement
• Activities performed by NBFCs or HFCs without valid certificates
• Disclosure of the work of internal auditors
• Reporting transactions not recorded in the books of account but provided for income tax analysis
• Giving proper recognition of the grievances of the wicked
• Strong and detailed disclosure of credit and development
• Explain the material differences in inventory prices and PPE prices
• Compliance with authorized companies with operating limits of more than Rs. 5 crores.

CARO 2020 vs. CARO 2016

Ministry of Corporate Affairs issued an order dated 25 February 2020 on Companies (Auditor’s Report) Order 2020 (CARO 2020). CARO 2020 operates on the same types of companies as CARO 2016. The key changes to the Audit Report requirements between CARO 2020 and CARO 2016 are as follows:

Final words

CARO was introduced further the MCA’s objective that financial statements of certain organizations should be accompanied by reports on specific material issues as described by the auditors. Auditors of the companies in which CARO operates are required to comment on the categories listed in the CARO order after performing the necessary audit procedures for validation. CARO 2020 has been replaced by CARO 2016.