CA Institute revises Guidance Note on CARO 2020

The CA Institute has come out with a Revised Guidance Note for the Companies Auditors Report Order (CARO) 2020, which placed more onus on statutory auditors regarding fulfilling their professional responsibilities. 

The members of the Institute of Chartered Accountants of India (ICAI) are now required to go with the revised Guidance Note while issuing their report on CARO for the financial statements of Companies under the Companies Act 2013.

CARO 2020 is the overhauled auditor’s report to accompany companies’ balance sheets for the financial year commencing on or after April 1, 2021 (FY 21-22).

Under the Companies Act 2013, there has been three versions of CARO— which specifies the format of the auditor report on company financial statements—in 2015, 2016 and 2020.

The latest ICAI move to revise the Guidance Note (initially issued in 2020) comes primarily in the wake of the Government’s amendments made to Schedule III to the Companies Act, 2013 in  March 2021. 

Schedule III, as amended, requires various disclosures to be made by companies in their financial statements. Some of these disclosure requirements mirror the requirements in CARO 2020, such as title deeds of immovable properties, revaluation of property, plant and equipment and intangible assets, proceedings for holding benami property, borrowings from banks or financial institutions on the basis of security of current assets, granting loans/advances which are either repayable on demand or without specifying any terms or period of repayment, undisclosed income under the Income Tax Act, 1961 and company declared as wilful defaulter.

The other new elements of Schedule III included borrowings not used for the specific purpose for which borrowings were obtained, disclosure of certain ratios and details of corporate social responsibilities activities, etc.

“These requirements have been incorporated in Schedule III after the issuance of earlier guidance note on CARO.In light of aforesaid amendments, specific guidance has been included for the auditors in the CARO revised Guidance Note. Auditors should consider these additional discsloures in Schedule III to the Companies Act, 2013 while issuing their report on CARO”, Sanjeev Kumar, Chairman, Auditing and Assurance Standards Board (AASB) of ICAI told BusinessLine here.

Put simply, the Ministry of Corporate Affairs (MCA) had in the year 2020 issued a new CARO version that required an auditor to report a pre-identified list of areas and events. While the earlier version (in 2016) had 16 clauses, the new one issued in 2020 had 21 clauses.

Unlike CARO 2016, which required reporting on all fixed assets, the new requirements focus on property, plants, equipment and intangible assets. Reporting of proceedings under the Benami Transactions (Prohibition) Act, 1988 was also included.

In addition, the auditor must report on compliance if the company was sanctioned working capital limits above ₹5 crore or more from banks or financial institutions, and on investments in/providing of any guarantee or security/granting of any loans or advances to companies, firms, limited liability partnerships or any other parties. 

Auditors are also required to report on compliance with RBI directives and the provisions of the Companies Act, 2013, to deemed deposits; and transactions not recorded in the books of account surrendered or disclosed as income in the income tax proceedings. 

There is also a comprehensive reporting requirement for default in the repayment of loans/other borrowings or interest payment. Auditors also had to report on the treatment of whistle-blower complaints received by the company.

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