Chapter-5 CARO

Reporting Under CARO, 2020

In exercise of the powers conferred by section 143(11) of the Companies Act, 2013, the
Central Government, after consultation with the National Financial Reporting Authority
constituted under section 132 of the Companies Act, 2013, has issued the Companies
(Auditor’s Report) Order, 2020, (CARO, 20) dated 25th February 2020. Its applicability
is from FY 2020-21 onwards.
1. Applicability of Companies (Auditor Report) Order, 2020
The CARO, 2020 is an additional reporting requirement. The order applies to every
company including a foreign company as defined in clause (42) of section 2 of the
Companies Act, 2O13. However, the Order specifically exempts the following classes
of companies:

a banking company;

an insurance company;

a company licensed to operate u/s 8 of the Companies Act

a One-Person Company as defined in Sec. 2(62) of the Companies

Act

a Small Company as defined in Sec. 2(85) of the Companies Act; and

a private limited company, not being a subsidiary or holding of a public

company,

• having a Paid-up capital & Reserves & Surplus not more than ₹1 Cr. as on the
balance sheet date, and
• which does not have total borrowings exceeding ₹1 Cr. from any bank or financial
institution at any point of time during the financial year, and
• which does not have a total revenue as disclosed in Schedule III to the Companies
Act, 2013 (including revenue from discontinuing operations) exceeding ₹10 Cr.
during the financial year as per the financial statements.

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 Important points to be remembered while studying applicability of
CARO 2020
1. This order is an order on the auditor’s of the company.
2. CARO is not applicable to Audit Report of Consolidated Financial Statement.
3. CARO is applicable to Branch Auditor’s.
4. NBFC’s are not exempted from applicability of CARO.
5. Private Limited Companies are also not exempted from the purview of CARO.
6. While computing Paid up Share Capital for the applicability of CARO, the following
points must be kept in mind:
➢ To be exempt from applicability of CARO, a Private Limited Company should have
Paid up Capital and Reserves & Surplus not more than 1 crore as on Balance Sheet
Date.
➢ Paid up share capital includes Equity Share Capital and Preference Share Capital.
➢ Share application money is not considered part of capital.
➢ While calculating Paid up Capital, amount of calls unpaid should be deducted
therefrom, and amount originally Paid-up on Forfeited Shares should be added to
the figure of Paid-Up Capital.
Definitions of PSC:
a) Sec.2(64): “Paid –Up Capital” means aggregate amount of money credited as paid-
up is equivalent to the amount received as paid up in respect of Shares issued. It also
includes any amount credited as paid up in respect of shares of the Company.
b) ICAI Guidance Note: Paid –Up Share Capital means that part of the Subscribed
Share Capital for which consideration in Cash or otherwise has been received. This
includes Bonus Shares allotted by the Corporate Enterprises.
7. While computing Borrowings for the applicability of CARO , the following points must
be kept in mind:
➢ To be exempt from applicability of CARO, a Private Limited Company should
have Borrowings not more than 1 crore at any point of time during the Financial
Year.
➢ All types of Borrowings from Banks and Financial Institution are to be
considered . (Short Term, Long Term ,Overdraft facility, Cash Credit, Dues
in respect of credit card etc.)
➢ The term “Banks” includes Private Banks and Foreign Banks also as per
Banking Regulations Act, 1949.
➢ The term “Financial Institution” used in CARO includes a Scheduled Bank and
NBFC’s.

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 8.While computing Total Revenue for the applicability of CARO , the following
points must be kept in mind:
➢ To be exempt from applicability of CARO, a Private Limited Company should
have Revenue as per Schedule 3 not more than 10 crores at any time during the
Financial Year.
➢ The term “Revenue” shall include not only Sale of goods and services but also
include other incomes like sale of scrap, interest on investment etc.
➢ All sales returns are to be deducted from Sales for the purpose of CARO and Tax
Audit.
➢ Indirect Taxes are to be included in Revenue as Sales if inclusive method of
accounting are to be followed and not to be included if exclusive method of
accounting is followed. {If question is silent, assume that exclusive method of
accounting is followed.}
2. Auditor's report to contain matters specified in paragraphs 3 and 4 -
Every report made by the auditor u/s 143 of the Companies Act, 2013 on the accounts
of every company examined by him to which this Order applies for the financial years
commencing on or after 1st April 2020, shall contain the matters specified in
paragraphs 3 and 4, as may be applicable.
The Order shall not apply to the auditor’s report on consolidated financial statements
except Para 3(xxi).

3. Matters to be included in the auditor's report

The auditor's report on the accounts of a company to which this Order applies shall
include a statement on the following matters, namely:-

Sr.no. Details
[Para 3(i)] Adequacy of (a) (A) whether the company is maintaining proper
Property, Plant Records records showing full particulars, including
and Equipment quantitative details and situation of Property, Plant
and Equipment.
(B) whether the company is maintaining proper
records showing full particulars of intangible assets;
Physical (b)whether these Property, Plant and Equipment
verification 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;

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 Title Deeds (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 format below:-

Description Gross Held in name of Whether Period held – Reason for

of property carrying promoter, indicate range, not being
value director or where held in name
their appropriate of company*
relative or
employee
- - - - - *also
indicate if in
dispute

Revaluation (d) whether the company has revalued its Property,

of Property, Plant and Equipment (including Right of Use assets)
Plant and or intangible assets or both during the year and, if
Equipment 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;
Proceedings (e)whether any proceedings have been initiated or
,if any are pending against the company for holding any
against the benami property under the Benami Transactions
company (Prohibition) Act, 1988 (45 of 1988) and rules made
for holding thereunder, if so,
Benami whether the company has appropriately disclosed
Property the details in its financial statements;

[Para 3(ii)] Physical (a) whether physical verification of inventory

Inventories Verification 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.

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 Working (b) whether during any point of time of the year,
Capital the company has been sanctioned working capital
Limit limits in excess of ₹5 crore, 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.
[Para 3(iii)] (iii)whether during the year the company has made
Investments, investments in, provided any guarantee or security
Guarantee / or granted any loans or advances in the nature of
Security, loans, secured or unsecured
Loans or , to companies, firms, Limited Liability Partnerships
Advances or any other parties, if so,-
(a)whether during the year the company has
provided loans or provided advances in 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
principal and payment of interest has been stipulated
and whether the repayments or receipts are regular;
(d) if the amount is overdue, state the total amount
overdue for more than ninety days, and whether

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 reasonable steps have been taken by the company
for recovery of the principal and interest.

(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];

(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.

Para 3(iv) (iv) in respect of loans, investments, guarantees, and

Compliance of security, whether provisions of sections 185 and
provisions of 186 of the Companies Act have been complied with,
Sec. 185 & 186 if not, provide the details thereof.

[Para 3(v)] (v) in respect of deposits accepted by the company

Public or amounts which are deemed to be deposits,
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;

[Para 3(vi)] Whether maintenance of cost records has been

Cost Records specified by the CG u/s 148(1) of the Companies

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 Act, 2013 and whether such accounts and records
have been so made and maintained.
[Para 3(vii)] (a) Whether the company is regular in depositing
Statutory Dues undisputed statutory dues including Goods and
Service Tax, provident fund, employees’ state
insurance, income-tax, 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 at the last day of the
financial year concerned for a period of more than
6 months from the date they became payable, shall
be indicated.
(b) Where statutory dues referred above 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).
Para 3(viii) (viii)whether any transactions not recorded in the
Unrecorded books of account have been surrendered or disclosed
Income 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;
Para 3(ix) (ix) (a) whether the company has defaulted in
Repayment of repayment of loans or other borrowings or in the
Dues. payment of interest thereon to any lender, if yes, the
period and the amount of default to be reported as
per the format below:-

Nature of borrowing, Name of lender* Amount Whether No. of Remarks,

including debt not principal days if any
securities paid on or delay
due interest or
date unpaid

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 *lender-wise
details to be
provided in case of
defaults to banks,
financial
institutions and
Government.

(b) whether the company is a declared wilful

defaulter by any bank or financial institution or
other lender;
(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;

(d) whether funds raised on short term basis have

been utilised for long term purposes, if yes, the
nature and amount to be indicated;

(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;

Para 3(x) Application (x)(a) whether moneys raised by way of initial

Application of of Money public offer or further public offer (including debt
Money raised raised by instruments) during the year were applied for the
by public issue public issue purposes for which those are raised, if not, the
and details together with delays or default and
preferential subsequent rectification, if any, as may be
allotment applicable, be reported;
Preferential (b) whether the company has made any preferential
allotment allotment or private placement of shares or
convertible debentures (fully, partially, or optionally
convertible) during the year and if so, whether the

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 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.

[Para 3(xi)] (xi)(a) whether any fraud by the company or any

Fraud 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 whistle-
blower complaints, if any, received during the year
by the company.

Para 3(xii) (xii)(a) whether the Nidhi Company has complied

Nidhi with the Net Owned Funds to Deposits in the ratio
Companies 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.
(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.
Para 3(xiii) (xiii)whether all transactions with the related parties
Transactions are in compliance with sections 177 and 188 of
with related Companies Act where applicable and the details
Parties have been disclosed in the financial statements, etc.,
as required by the applicable accounting standards;

Para 3(xiv) (xiv) (a) whether the company has an internal

Internal Audit audit system commensurate with the size and
System nature of its business.
(b) whether the reports of the Internal Auditors
for the period under audit were considered by the
statutory auditor;
Para 3(xv) (xv)whether the company has entered into any non-
Non cash cash transactions with directors or persons

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transactions connected with him and if so, whether the
with directors provisions of section 192 of Companies Act have
been complied with.

Para 3(xvi) (xvi) (a) whether the company is required to be

Registration. registered under section 45-IA of the Reserve Bank
with RBI of India Act, 1934 (2 of 1934) and if so, whether the
registration has been obtained.
(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.
(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.

Para 3(xvii) (xvii)whether the company has incurred cash losses

Cash Losses in the financial year and in the immediately
preceding financial year, if so, state the amount of
cash losses;
Para 3(xviii) (xviii)whether there has been any resignation of the
Considerations statutory auditors during the year, if so, whether the
of issues raised auditor has taken into consideration the issues,
by outgoing objections or concerns raised by the outgoing
auditor auditors;

Para 3(xix) (xix)on the basis of the financial ratios, ageing and
Existence of expected dates of realisation of financial assets and
Material payment of financial liabilities, other information
uncertainty as accompanying the financial statements, the auditor’s
knowledge of the Board of Directors and management
to company
plans, whether the auditor is of the opinion that no
ability to meet
material uncertainty exists as on the date of the audit
its liabilities 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;

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Para 3(xx) (xx) (a) whether, in respect of other than ongoing
Transfer of projects, the company has transferred unspent
unspent CSR amount to a Fund specified in Schedule VII to the
amount 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 ongoing project, has been
transferred to special account in compliance with the
provision of sub- section (6) of section 135 of the
said Act.

Para 3(xxi) (xxi)whether there have been any qualifications or

Qualifications adverse remarks by the respective auditors in the
or adverse Companies (Auditor's Report) Order (CARO)
remarks in reports of the companies included in the
CARO consolidated financial statements, if yes, indicate the
Reports of details of the companies and the paragraph numbers
group of the CARO report containing the qualifications or
companies adverse remarks.

4. Reasons to be stated for unfavourable or qualified answers-

(a) 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.

(b) Where the auditor is unable to express any opinion on any specified matter, his report
shall indicate such fact together with the reasons as to why it is not possible for him to give
his opinion on the same.

Questions on CARO 2020

1.Physical verification of only 30% (in value) of items of inventory has been conducted by the
company. The balance 70% will be conducted in next year due to lack of time and resources.

Reporting for Physical Verification of Inventory: clause (ii) of Para 3 of CARO, 2020 requires the
auditor to state in his report whether physical verification of inventory has been conducted at
reasonable interval by the management and whether, in the opinion of the auditor, the coverage and
procedure of such verification by the management is appropriate. What constitutes “reasonable
intervals” depends on circumstances of each case. The periodicity of the physical verification of
inventories depends upon the nature of inventories, their location and the feasibility of conducting
a physical verification. The management of a company normally determines the periodicity of the

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 physical verification of inventories considering these factors. Normally, wherever practicable, all the
items of inventories should be verified by the management of the company at least once in a year.
The auditor in order to satisfy himself about verification at reasonable intervals and about coverage
and procedures applied, should examine the adequacy of evidence and records of verification.

In the given case, the management conducted the physical verification of inventory only upon 30%
(in value) of the total inventory for the reason of lack of time and resources. The above requirement
of CARO, 2020 has not been fulfilled as such and the auditor should point out the specific areas
where he believes the procedures of inventory verification are inadequate and unreasonable. He may
also consider the impact on financial statements and report accordingly.

2. K Ltd. took a term loan from a nationalized bank in 2015 for ₹ 200 lakhs repayable in five
equal instalments of ₹ 40 lakhs from 31st March 2016 onwards. It repaid the loans due in 2016
& 2017, but defaulted in 2018, 2019 & 2020. As the auditor of K Ltd, what is your
responsibility assuming that company has sought reschedulement of loan?

Reporting for Default in Repayment of Dues: As per clause (ix) of Para 3 of CARO, 2020, the
auditor of a company has to report whether the Company has defaulted in repayment of loans or
other borrowings or in the payment of interest thereon to any lender, and if yes, the nature of
borrowing, name of lender , period and amount of default to be reported. The Auditor is also
required to report whether the company is a declared wilful defaulter by any bank or financial
institution or other lender. In this case, K Ltd. has defaulted in repayment of dues for three years.
Application for rescheduling will not change the default position. Hence, the auditor shall report in
his CARO report that the Company has defaulted in its repayment of dues to the bank to the extent
of ₹ 120 lakhs and evaluate its consequential impact on the audit report as well.

3. LM Ltd. had obtained a term loan of ₹ 300 lakhs from a bank for the construction of a
factory. Since there was a delay in the construction activities, the said funds were temporarily
invested in short term deposits.

Term loan invested in short term deposits: As per clause (ix) of Para 3 of CARO, 2020, an auditor
needs to state in his report that whether the term loans were applied for the purpose for which the
loans were obtained.

In the present case, the proceeds of the term loan obtained by LM Ltd. have not been put to use for
construction activities and have been temporarily invested in short term deposit.

Here, the auditor should report the fact in his report that pending utilization of the term loan
for construction of a factory, the funds were temporarily used for the purpose other than the
purpose for which the loan was sanctioned, as per clause (ix) of Para 3 of CARO, 2020.

4. For the purpose of assessing applicability of CARO, what kind of loans need to be
considered?

Borrowings from banks or financial institutions can be long term or short term and are
normally in the form of term loans, demand loans, export credits, cash credits, overdraft
facilities, bills purchased or discounted. Outstanding balances of such borrowings should be
considered as borrowing outstanding for the purpose of computing the limit of rupees one
crore. Non-fund based credit facilities, to the extent such facilities have devolved and have
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 been converted into fund-based credit facilities, should also be considered as outstanding
borrowings. The figures of outstanding borrowing would also include the amount of bank
guarantees issued by the company where such guarantee(s) has (have) been invoked and
encashed or where, say, a letter of credit has been devolved on the company. In case of term
loans, interest accrued and due is considered as a borrowing whereas interest accrued but not
due is not considered as a borrowing. Further, in case the company enjoys a facility, say, a
cash credit facility, whose balance is fluctuating in nature, the Order would apply to the
company in case on any day during the financial year concerned, the amount outstanding in
the cash credit facility exceeds Rs. one crore as per books of the company along with other
borrowings. The aggregate borrowings disclosed in the financial statements would need to
be considered based on applicable generally accepted accounting principles in India (Ind
AS/ AS).

5.Whether CARO is Applicable to the auditor of consolidated financial statement?

Order shall not apply to the auditor’s report on consolidated financial statements except clause (xxi)
of paragraph 3.

6.What documents constitute title deed?

Following documents mainly constitute title deeds of the immovable property:-

(i) Registered sale deed / transfer deed / conveyance deed, etc. of land, land & building
together, etc. purchased, allotted, transferred by any person including any government,
government authority / body / agency/ corporation, etc. to the company.
(ii) In case of leasehold land and land & buildings together, covered under the head property,
plant and equipment (fixed assets), the lease agreement duly registered with the appropriate
authority.
7.Should the auditor examine the cost record in detail while reporting under CARO?

CARO does not require a detailed examination of Cost Records. The Auditor should, therefore,
conduct a general review of Cost Records to ensure that the records as prescribed are made and
maintained. The word "made" applies in respect of Cost Accounts, and the word "maintained" applies
in respect of Cost Records relating to Materials, Labour, Overheads, etc.

Question based on PPE Revaluation Para 3(i) (d)

8. Following is the information given for a Ceramics Ltd which is a listed company.

Trichy Plant Gross value-₹ 20 Lakhs

Depreciation for current year- ₹ 2 Lakhs

The company revalued its plant by Mr Sundaram who is a registered valuer under Companies
Act,2013 and he valued the plant at ₹ 25 Lakhs. Comment whether CARO reporting will be
required or not by the auditor.

As per Para 3 (i)(d) the auditor will check 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

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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.

Based on the above clause, Net carrying value of Plant = Gross Value of Plant- Depreciation

= 20-2 = 18 Lakhs

The revalued Value of plant is ₹ 25 Lakhs from 20 Lakhs i.e., ₹ 5 Lakhs which is more than 10
% of net carrying value of plant .( 18 Lakhs x 10% )= 1.8 Lakhs. Hence, the auditor will report
such change in valuation of plant.

Question based on Physical verification of inventory Para 3(ii)

9. Raheja Steel has following inventory items during FY 2019-20 .

Inventory item (Raw Book value (₹ in Lakhs) Physical Verification value (₹

Materials) in Lakhs)
Iron Ore 2 1.8
Limestone 3 2.5
Silica 1 1
Total 6 5.3

Is CARO reporting required as per CARO 2020?

As per Para 3 (ii) Inventories , 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.

Based on the above provisions, Since the discrepancy of ₹ 70000 (600000-530000)

exceed the 10 % of aggregate of the raw materials ( 600000 x 10% = 60,000) .The
reporting will be done under Para 3 (ii) by the auditor.

Question based on Internal Audit System Para 3(xiv)

10. The CFO of Sitara Limited which is a listed company, finds that there is a lot of
irregularities in the accounting records of the company. There is no internal audit
system in the company. Is the reporting required under CARO 2020?

As per Para 3 (xiv) Internal Audit System, whether the company has an internal audit
system commensurate with the size and nature of its business. Since the company doesn’t
have a proper internal audit system ,CARO reporting will be required under Para 3 (xiv).

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