Understanding the Impact of CARO 2020 on Auditing and Reporting
Introduction
The introduction of the Companies (Auditor’s Report) Order, 2020 (CARO 2020) has brought about significant changes in the auditing and reporting process. From an increased number of clauses to specific reporting requirements, CARO 2020 has reshaped the landscape of corporate audits. Let’s delve deeper into the practical issues and challenges associated with CARO 2020.
Overview of Caro 2020 Changes
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The Caro 2020 introduced several changes and impacted the auditing and reporting process in significant ways.
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The number of Clauses has increased from 21 to 47, with 27 Clauses pertaining to reporting on facts, 13 Clauses requiring a statement of fact and opinion, and 7 Clauses solely needing an opinion.
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The auditor now has to give opinions on specific items like the internal audit, loans critical to the company’s interest, and the going concern.
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It’s crucial to ensure consistency between the main audit report and the reporting in Caro 2020, as there are interconnected Clauses that can impact each other.
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Changes in Caro 2020 were influenced by regulatory feedback from entities such as RBI, SEBI, MCA, SFIO, and NFRA, indicating the need for careful review and compliance.
Critical Analysis of Key Clauses in the Karo 2020 Reporting
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The first critical clause is related to intangible assets, which requires the maintenance of proper records. This clause has no corresponding disclosure in schedule 3, so it is crucial to understand what constitutes ‘proper records’ for intangible assets.
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The second clause pertains to the title deed of immovable property. This clause also lacks a corresponding disclosure in schedule 3 and requires the auditor to indicate whether the property is held in the name of the company and if there are any disputes related to it.
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When discussing intangible assets, it’s important to note that the auditor needs to ensure proper documentation and understanding of what constitutes ‘proper records’ for intangibles, including cell-generated or developed assets.
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For immovable property, the auditor needs to ascertain whether it is held in the name of the company and if there are any disputes, offering a statement of fact without delving into legal ownership claims.
Key Points for Reporting on Loans and Investments
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The auditor is required to report on loans, investments, guarantees, and securities provided by the company.
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The reporting includes determining whether the transactions are prejudicial to the company’s interests.
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The term ‘advance in the nature of a loan’ is new in CARO 2020 and requires the auditor to identify and report on such advances in addition to loans.
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There is no corresponding disclosure in schedule 3, so the auditor is solely responsible for reporting on this.
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The reporting also applies to NBFCs, not just regular companies.
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For advances in the nature of a loan, the auditor needs to analyze the nature and period of the advances to determine if they qualify as quasi-loans or are prejudicial to the company’s interests.
Analysis of Key Points in the Original Text
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The first key point is about reporting on the year of transaction and providing clarity on the reporting timeline for transactions.
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The second key point emphasizes the need to evaluate the facts and circumstances at the time of granting a loan, rather than looking at subsequent changes in the company’s situation.
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The third key point discusses the factors to consider when determining if a loan is prejudicial to the interest of the company, such as the interest rate charged, security taken, and the repayment schedule.
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The fourth key point mentions the need for careful reporting under Section 143 1A, ensuring consistency in reporting between different clauses.
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The fifth key point highlights the importance of evaluating the stipulation of repayment schedule for loans, both outstanding and newly granted, and the disclosure of loans given without a repayment schedule.
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The sixth key point discusses the issue of loans being utilized for long-term purposes, especially when short-term funds are used, and the need to ensure consistency with related clauses.
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The seventh key point refers to the identification and reporting of undisclosed income, including the need to assess proper recording in the books of account and modification of audit procedures.
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The eighth key point pertains to identifying if the company has been classified as a willful defaulter and considerations for accurate reporting in such cases.
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The ninth key point involves reporting on funds utilized for meeting the obligations of subsidiaries, including the need to ensure interconnectivity with related clauses and disclosures.
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The tenth key point discusses the evaluation of the adequacy and effectiveness of internal audit, considering factors such as team size, reporting frequency, and level of reporting.
Understanding Key Points from the Discussion on Caro 2020
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Companies may not want third-party internal auditors to audit their payroll due to confidentiality issues.
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For service companies, the high cost of payroll needs to be included in internal audits as per Section 133(3) of the Companies Act, 2013.
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Internal audit reports must not just be a ‘ticking the box’ approach but should cover critical areas such as payroll.
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The correlation between the internal audit report and the Internal Financial Control (IFC) reporting needs to be diligently evaluated.
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Non-banking financial companies (NBFCs) need to report any non-compliance with the law and file exception reports with the Reserve Bank of India (RBI).
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Core Investment Companies (CICs) need to be identified and registered with the RBI if applicable.
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The resignation of auditors and material uncertainties regarding the going concern principle need to be reported by the auditor based on their evaluation.
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Critical aspects of fixed asset verification, loans, and advances need to be thoroughly evaluated and reported on as part of the audit.
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First-time adoption of Ind AS and the implications of revaluation also need to be carefully addressed and reported on as part of the audit.
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The main audit report should include detailed comments on any discrepancies in loan usage, particularly in cases where loans are being diverted for purposes other than intended.
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If the management fails to maintain mandatory registers, the auditor should advise them on the importance of compliance and documentation for future business activities and due diligence.
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The applicability of Caro to a company in a given year should be carefully assessed as it is a year-wise reporting requirement.
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Interest rates, especially in cases of related party transactions, need to be thoroughly evaluated for validity and business rationale behind the rates charged or received.
Conclusion
Understanding the key changes and challenges brought about by CARO 2020 is essential for auditors and companies alike. Adhering to the new reporting requirements and addressing practical issues can lead to more accurate and comprehensive audit reports, ensuring compliance with regulatory standards.