By Manish Sampat | Paresh Clerk | Vijay Maniar | Zubin Billimoria
Chartered Accountants
“CARO 2020 is applicable for the statutory
audit of financial statements for periods beginning on or after 1st
April, 2021. ICAI had issued a detailed Guidance Note (GN) on the same
in June, 2020. A module is also available on the ICAI Digital Learning
Hub. Schedule III was also recently amended inter alia to align the
reporting requirements under CARO 2020 by statutory auditors.
BCAJ is
pleased to bring you a clause-by-clause analysis via a series of
articles authored by four audit practitioners who have been auditors all
their lives. Each article will zoom into a clause or two and provide a
‘commentary’ on reporting issues and practices, views, and perspectives
to supplement the broad guidance covered by the GN. The purpose of this
series is to bring out practical nuances to the reader. The series will
cover only new clauses and modifications and exclude those already
covered by CARO 2016. We hope this will steer and support the readers
towards better understanding and reporting. –
Editor”
MODIFICATIONS / ADDITIONAL REPORTING REQUIREMENTS
The
clause on reporting in respect of fixed assets has been there in the
earlier versions, too. CARO 2020 has modified parts of the first clause
and added reporting requirements as given below:
Modifications
a. Change in the terminology to Property, Plant and Equipment (PPE) in line with Accounting Standards and Schedule III.
b. Separate reporting requirement on maintenance of proper records for Intangible Assets.
c.
No reporting required for non-availability of title deeds, where the
company is a lessee and the lease agreement is executed in favour of the
company.
d. In
cases where title deeds of immovable properties are not held in the
name of the company, additional details in a prescribed format as under
are required to be given:
|
Description of the property
|
Gross
carrying value
|
Held in
the name of
|
Whether
promoter, director, their relative or employee
|
Period
held –
indicate range where
appropriate
|
Reason
for not being held in the name of the company
(also
indicate if in dispute)
|
Additional reporting
a.
Whether the company has revalued its PPE (including Right of Use Assets)
or intangible assets or both during the year and, if so –
- whether the revaluation is based on valuation by a Registered Valuer, and
- if change is 10% or more in the aggregate of the net carrying value of each class of PPE or intangible assets.
b. Whether any proceedings have been initiated or are pending against the company for holding any benami property under the Benami Transactions (Prohibition) Act, 1988 and rules made thereunder; and if so, whether the company has appropriately disclosed the details in its financial statements.
SPECIFIC CONSIDERATIONS
Specific considerations to be kept in mind whilst reporting on the above changes are discussed under the following broad heads:
Additional disclosures under amended Schedule III
While reporting on these matters, the auditor will have to keep in mind the amended Schedule III disclosures as under:
a.
The auditor will have to ensure that there is no material inconsistency
between the financial statement disclosures and his reporting under the
Order. Disclosure of
changes in the aggregate net carrying value due to revaluation of each class of PPE and Intangible Assets by
10% or more in the aggregate and whether
revaluation is based on the valuation by a Registered Valuer as defined in Rule 2 of the Companies (Registered Valuer and Valuation) Rules, 2017.
b. The information as specified earlier in respect of title deeds of Immovable Properties not held in the name of the company, except that the
disclosure should be given in the aggregate for the following line
items in the Balance Sheet, separately for Land and Building, as against the description of each individual property as per the Order:
- PPE retired from active use and held for sale, non-current assets held for sale (Ind AS entities)
As disclosures under Schedule III are along the lines required to be given, it is imperative for the auditor to reconcile the information disclosed therein for completeness and accuracy.
c. In respect of proceedings initiated or pending in respect of benami property held, the following details are required to be disclosed:
i. Details of such property, including year of acquisition,
ii. Amount thereof,
iii. Details of beneficiaries,
iv. If held in the books, reference thereof to the item in the Balance Sheet,
v. If not held in the books, then the facts along with reasons thereof,
vi.
Where there are proceedings against the company as an abettor of the
transaction or as the transferor, details thereof shall be provided,
vii. Nature of proceedings, status thereof and company’s view of the same.
Practical challenges in reporting
The reporting requirements outlined above entail certain challenges which are discussed below:
a. In respect of properties owned jointly with others where the title deeds are not held in the name of the company, the above details are required to the extent of the company’s share.
b.
Similarly, if the company has changed its name, this will require
reporting under this clause till the new name is updated in the title
deed.
c. Identification of benami properties: The reporting on proceedings in respect of benami properties may pose challenges, especially if the properties are not reflected in the books.
In such cases, apart from the normal procedures like review of the
minutes, scrutiny of legal expenses, review of minutes of board of
directors, audit committee, risk management committee, other secretarial
records, listing of all pending litigations and also obtaining
management representation (which have been referred to in the Guidance
Note). The auditor may also obtain independent confirmation from the legal counsel as to whether any such proceedings, other than those in respect of properties reflected in the books are pending, as per SA 501 – Audit Evidence – Specific Considerations for Selected Items.
d. The reporting under this clause is required only in cases where proceedings are initiated or pending against the company as ‘benamidar’
and not otherwise. Hence, even if notice is received but no proceedings
have been initiated, reporting is not warranted. The reporting is
required by the auditor of the company holding any benami property but not as an auditor of the company which is the beneficial owner.
e. Compilation of data for Intangible Assets: Since the requirement for reporting on maintenance of records for intangible assets has been newly introduced, many companies may not have a proper inventory thereof, except the details of the payments made or expenses capitalised on an individual basis. This could pose challenges to prepare a comprehensive itemised listing of all intangible assets and reconciling the same with the books. It is imperative that in such cases a one-time exercise is undertaken
to reconstruct the records and the nature of documentary evidence like
licences, agreements, internal SOPs (for internally generated
intangibles) which is available is also specified. This would also
facilitate easy identification in future. Wherever required, an
appropriate management representation should be obtained regarding the completeness of the data.
f. Awareness of the legal requirements: There
are certain situations where the auditor would have to familiarise
himself with the legal requirements. These mainly pertain to the
following:
i. The provisions of the Benami Property Transactions Act, 1988 and the related Rules.
Though relevant extracts of current regulations are given in the ICAI
Guidance Note, the auditor will have to keep abreast with the changes
therein, if any.
ii. Identifying the list of promoters of the company and their relatives:
Promoter and Relative have not been defined under the Order. However,
amended Schedule III (for disclosures related to holder of title deeds)
states that both ‘Promoter’ and ‘Relative’ will be as defined under the Companies Act, 2013.
Though a few promoters could be traced to those named in the prospectus
or identified in the annual return, the auditor will have to rely on
secretarial and other records and / or management representation to
determine those who have control over affairs of the company directly or
indirectly, whether as a director or shareholder or otherwise, or in
accordance with whose advice, directions, or instructions the Board is
accustomed to act and can be considered as promoters. In case there is
no such party, even then a specific representation should be obtained.
iii.
Ascertaining whether the requirements under the Trade Mark, Copyright,
Patents, Designs and IT Acts as well as the licensing requirements under
telecom, aviation, pharma and other similar industries have been
complied with in respect of the Intangible Assets.
iv. Being aware of the laws dealing with registration of immovable properties, including those pertaining to specific states.
In case of doubt, the auditor should seek the views of the company’s legal counsel or their own expert. This will be in line with SA 500 – Audit Evidence regarding using the Managements’ Expert
(by assessing the complexity, materiality, risk, independence,
competence, capability and objectivity, amongst other matters) and SA
620 – Using the Work of an Auditors’ Expert (by assessing the
complexity, materiality, risk, adherence to quality procedures,
competence, capability and objectivity, amongst other matters),
respectively. In either case, the requirements of SA 250 – Consideration
of Laws and Regulations in an Audit of Financial Statements should be
complied with.
g. Business combinations and acquisitions: The following matters need to be considered in case of such situations:
i.
In case a company has acquired another entity and the same is merged in
terms of an approved scheme, immovable properties of the transferee
company are considered deemed to be transferred in the name of the
acquiring company. However, till the time the acquiring company complies
with local / state-specific procedures, including payment of stamp
duty, etc., it would not be actually transferred in the name of the
acquiring company and, hence, would require factual reporting.
ii. In case of business combination as per Ind AS 103, where the acquiring company has identified intangible assets acquired as
a part of the transaction, the nature, and basis, whether or not the
same is in the books of the transferor needs to be evaluated and
recorded. Further, for intangible assets recorded on consolidated
financial statements, though there is no requirement for reporting by
the auditor, as the Order is only applicable on standalone financial
statements, it would be a good practice for the company to separately
list them in the intangible asset register.
h. Revaluation:
As per the ICAI Guidance Note, this clause is applicable only to the
entity which adopts the revaluation model. Hence, fair valuation of PPE
on first-time adoption, acquisition of assets / business on slump sale
basis or under business combination, change in ROU asset due to lease
modification as per Ind AS 116, re-measurement due to changes in foreign
exchange rates, etc., will not require reporting under this clause.
Further, impairment of PPE accounted under cost model is outside the
purview of reporting.
In case an entity adopts the revaluation model for PPE and Intangible Assets, there could be two scenarios as under:
i. Valuation by an external valuer:
In such cases, the fact should be indicated and the auditor should
check the necessary documentation as to whether he is registered under
Rule 2 of the Valuation Rules specified earlier. In such cases, the
auditor needs to ensure that the management ensured that the principles
laid down in Ind AS 113 on Fair Valuation are adhered to by the valuer.
The auditor should keep in mind the requirements under SA 500 – Audit
Evidence regarding using the Managements’ Expert, indicated earlier.
ii. Internal valuation: The
Order does not seem to mandate that a company needs to get a valuation
done by an external valuer. In such cases, the auditor will have to
exercise a
greater degree of professional scepticism and review
the basis and assumptions for arriving at the revised fair value keeping
in mind the requirements of Ind AS 113 as indicated earlier,
irrespective of the accounting framework. The requirements under SA 540 –
Auditing Accounting Estimates, Including Fair Value Accounting
Estimates and Related Disclosures (covering the extent of use of market
specific inputs and their relevance, assessment of comparable
transactions, basis and justification of unobservable inputs, amongst
others) also need to be kept in mind. In case of any
doubt, the auditor should seek the
assistance of their own valuation expert keeping in mind the requirements under SA 620 – Using the Work of an Auditors’ Expert, discussed earlier.
CONCLUSION
The
above changes have cast onerous responsibilities on the auditors and in
many cases the auditors would need to go beyond what is stated in the
Order because the devil lies in the details!
