Introduction
1. The Central Government, in exercise of the powers conferred, under subsection (11) of section 143 of the Companies Act, 2013 (hereinafter referred to as “the Act”), issued the Companies (Auditor’s Report) Order, 2020, (CARO, 2020/ “the Order”) vide Order No. S.O. 849(E) dated 25th February 2020. CARO, 2020 contains certain matters on which the auditors of companies (except auditors of those categories of companies which are specifically exempted under the Order) have to make a statement in their audit report. The text of the CARO, 2020 is given in Appendix I to this Guidance Note.
2. This Order is in supersession of the earlier Order issued in 2016, viz., the Companies (Auditor’s Report) Order, 2016 (CARO 2016). Appendix II to this Guidance Note contains a clause-by-clause comparison of the reporting requirements of the Order and the erstwhile CARO 2016.
3. The purpose of this Guidance Note is to enable the members to comply with the reporting requirements of the Order. It should, however, be noted that the clarifications and explanations contained in this Guidance Note are not intended to be exhaustive and the auditors should exercise their professional judgment and experience on various matters on which they are required to report under the Order.
Appendix III to this Guidance Note contains the Definitions of various terms used in this Guidance Note. Appendix VI to this Guidance Note contains List of Important Sections/ Rules/ Regulations/ Statutes referred to in this Guidance Note.
General Provisions Regarding Auditor’s Report
4. The requirements of the Order are supplemental to the existing provisions of section 143 of the Act regarding the auditor’s report. In this regard the following points may be noted:
(i) the provisions of sub-sections (1), (2), & (3) of section 143 are applicable to all companies (other than clause (i) of sub-section (3)) while the Order exempts certain categories of companies from its application; and
(ii) the provisions of sub-section (1) require the auditor to make certain specific inquiries during the course of his audit. The auditor is, however, not required to report on any of the matters specified in the sub-section unless he has any special comments to make on the said matters. In other words, if he is satisfied with the results of his inquiries, he has no further duty to report that he is so satisfied. The Order, on the other hand, requires a statement on each of the matters specified therein, as applicable to the company.
5. Another question that arises is about the status of the Order vis a vis the directions given by the Comptroller and Auditor General of India under section 143(5) of the Act. In this regard, it may be noted that the Order is supplemental to the directions given by the Comptroller and Auditor General of India under section 143(5) in respect of government companies. These directions continue to be in force. Therefore, in respect of government companies, the matters specified in the Order will form part of the auditor’s report submitted to the members and the replies to the aforesaid questionnaire issued by the Comptroller and Auditor General of India will be governed by the requirements of section 143(5) of the Act.
6. The Order is not intended to limit the duties and responsibilities of auditors but only requires a statement to be included in the audit report in respect of the matters specified therein.
Applicability of the Order
Companies Covered by the Order
7. The Order applies to all companies except certain categories of companies specifically exempted from the application of the Order.
8. The Order also applies to foreign companies as defined in clause (42) of section 2 of the Act. According to the aforesaid section, a “foreign company” means:
“Any company or body corporate incorporated outside India which -
(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
(b) conducts any business activity in India in any other manner.”
9. In the case of a foreign company, wherever under any of the provisions of the Act, an audit under Chapter X of the Act is required to be carried out, the Order would be applicable.
10. The Order is also applicable to the audits of branch(es) of a company since sub-section 8 of section 143 of the Act read with Rule 12 of the Companies (Audit and Auditors) Rules, 2014 clearly specifies that a branch auditor has the same duties in respect of audit as the company’s auditor. It is, therefore, necessary that the report submitted by the branch auditor contains a statement on all the matters specified in the Order, as applicable to the company, except where the company is exempt from the applicability of the Order, to enable the company’s auditor to consider the same while complying with the provisions of the Order.
The Order is also applicable to the audits of project office / liaison office established by a company outside India, to whom the Order applies. In case the company has appointed separate auditors for the project office / liaison office, the auditor of the company should seek a report from the said auditors which contains a statement on all the matters specified in the Order, as applicable to the company, except where the company is exempt from the applicability of the Order.
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