Dear Auditors, Get Ready for  New Reporting Requirements in case of Companies Audit

Companies (Auditor’s Report) Order, 2020 reporting pertaining to inventory: 

Note: CARO 2020 is applicable from 1st April 2021. This new Caro will require the new reporting of inventory and working capital.

The question that will form the part of the new Caro will include the following :

1.  Whether the management has carried out physical verification of inventory at reasonable intervals.

If so, details of coverage, procedure and frequency.

2. If any discrepancies of 10% or more in the aggregate for each class of inventory were noticed with the books and if so, whether they have been properly dealt with in the books of accounts.

3. Has the company, during any point of time of the year, sanctioned working capital limits in excess of five crore rupees, in aggregate, from banks or financial institutions on the basis of security of current assets.

4. Are the quarterly returns or statements filed by the company with financial institutions or banks in agreement with the books of account of the Company.

In case of non-agreement, details of such non-agreement have to be reported.

It may be noted that in the CARO 2016, Auditors were only required to report the following: 

1. Whether physical verification of the inventory has been made at regular intervals by the management, and during such verification if any material discrepancies were noticed whether the same have been properly accounted for.

2. Whether proper records of inwards and outwards of inventory has been maintained.

In short, for the new reporting is much more comprehensive and the onus on the auditor is very high to report the physical verification processes, discrepancies, variance with the quarterly stock statement, etc.