CARO 2020: Enhance the quality of reporting

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To bring more transparency & faith in Financial statements of companies, the ministry of corporate affairs introduced a new set of Companies (Auditor’s Report) Order, 2020. The MCA has told Organizations (Auditor’s Report) Order, 2020 on 25th February 2020 (CARO 2020). This order replaces the earlier order under Companies (Auditor’s Report) Order, 2020.

CARO 2020 is a new format for the issue of audit reports in case of statutory audits of companies under Companies Act, 2013. It has incorporated extra-announcing necessities after consulting with the National Financial Revealing Power (NFRA). NFRA is an autonomous administrative body for controlling the audit and accounting profession in India. The aim of CARO 2020 is to reinforce the general quality of reporting by the corporate auditors. The order applies to all companies which were covered by CARO 2016. Accordingly, the order applies to all or any of the following businesses except the subsequent companies specifically excluded from its purview:

  • One-person company
  • Insurance companies
  • Companies registered for charitable purposes
  • Small companies (Companies with paid-up capital less than/equal to Rs 50 lakh and with a final reported turnover which is a smaller amount than/equal to Rs 2 crore)
  • Banking companies
  • the subsequent private companies also are exempt from the wants of CARO, 2020:

– Whose gross receipts or revenue (including revenue from discontinuing operations) is a smaller amount than or adequate to Rs 10 crore within the fiscal year

– Whose paid-up share capital plus reserves is a smaller amount than or adequate to Rs 1 crore as on the record date (i.e. usually at the end of the FY)

– Not a holding or subsidiary of a Public company

– Whose borrowings are less than or equal to Rs 1 crore at any time during the FY.

The new clauses of CARO 2020 show that the regulator’s expectations from the auditor are increasing significantly. This is also a key enabler for the Audit Committee to fulfill its responsibilities around reporting, compliance, and governance. Further, to guarantee cross-influence of work done by the internal auditor, CARO 2020 requires the legal inspector to think about the reports of the internal auditor, while playing out their audit work.

Given the COVID-19 circumstance, Finance Minister while reporting relief measures on 24 March 2020, has delayed the usage of CARO 2020 from the FY 2019-20 to 2020-21. This is a good measure and would provide companies additional time to gear up to meet the increased expectations of the auditors.

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