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Companies (Auditor’s Report) Order 2020Clause 6 of CARO 202022 March 2021

Accounting & Auditing Knowledge Series

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Introduction:In addition to the main audit report reflecting opinion on True and Fair view of financials statement, Companies Act cast reporting responsibility on auditors for certain additional matters as well. A major part of such additional and specific reporting matters is listed in Companies (Auditor’s Report) Order 2016 (“CARO 2016”) and now in Companies (Auditor’s Report) Order 2020 (“CARO 2020”). While reporting under CARO 2020 was to be applicable from financial year 2019-2020 however same was first deferred to year 2020-2021 and again to year 2021-22 (period starting 1st April 2021).

CARO 2020 contains 21 clauses on which comments are required to be made by Auditors, on the basis of the audit of company’s records and policies. Considering that most of these are critical ones and are required to be complied with by company’s management, we thought it is appropriate to release a knowledge series that reflects our views on the same.

Note: It may be taken into consideration that reporting for financial year 2020-21 (April 2020 to March 2021) shall be made under CARO 2016 and CARO 2020 shall be applicable for period starting from 1st April 2021. Considering this we have given a comparative analysis of both with specific comments on changes in last part of this document.

Clause 6 of CARO 2020 [Paragraph 3(vi)]::

Clause 6 is related to the maintenance of cost records by a company. The reporting requirement under clause 5 is as follows:

a) Whether maintenance of cost records has been specified by the Central Government under sub-section (1) of section 148 of the Companies Act; and

b) Whether such accounts and records have been so made and maintained.

While the requirement seems to be straight forward, we discuss above in details so as to bring more clarity on compliances required by companies and management and our reporting responsibilities.

1) Cost Record

As per section 148, Central Government has issued Companies (Cost Records and Audit) Rules, 2014 specifying the requirements of maintenance of cost records. Accordingly,

❖ Cost records are to be maintained by specified class of companies. The class of companies are as listed in Rule 3 of Companies (Cost Records and Audit) Rules, 2014.

❖ The “Costs Records” is defined as records relating to utilisation of material or labour and other items of cost as applicable to the production of goods or provision of services.

❖ The cost records are to be maintained as per the Form CRA-1.

As per Companies Act, these records form part of “books of accounts” of the company within the meaning of 2(13) of the Act.

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2) Cost Audit

Central Government in line with section 148(2) of the Act read with Rule 4, has laid down the conditions wherein the companies covered by the Rules need to get their records audited. A cost auditor is required to submit his report in Form CRA-3 and the company is required to submit the audit report in Form CRA-4 on MCA portal within 30 days of the receipt of the report.

When cost audit is applicable, copy of cost audit report of the immediately preceding year should be shared with auditors. In case of any qualifications or comments in the costs audit report, appropriate response on addressing such qualification/comments should be provided to audit team.

3) Review of Cost Records and Accounts

Auditors are required to report whether Cost Accounts are made, and Costing Records are maintained. For this purpose, an auditor is required to conduct a general review of the cost records to ensure that the cost records are made and maintained. Company should share the following documents:

a) Cost records maintained in CRA-1

b) If the audit is applicable,

a. CRA-2: appointment of cost auditor

b. CRA-3: Cost Audit report

c. CRA-4: Filing of audit report with MCA.

c) List of books/records made and maintained.

4) Reporting

In case the cost records are not appropriately maintained or are prima facie incomplete, it will be necessary to comment suitably in the audit report. In such scenario, its effect on the financial statements also needs to be ascertained.

Comparison with Companies (Auditor’s Report) Order 2016 (CARO 2016)

There is no change in the reporting requirements in CARO 2020 as compared to CARO 2016.

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Utmost care has been taken to prepare the article and to cover all relevant aspects pertaining to Clause 6 of CARO 2020.

We trust, you will find the content of this publication useful. You may connect with the following team members if you wish to have any clarification regarding above. Feedback towards further improvisation of the publication or on topics requiring guidance shall be highly appreciated. It shall be our pleasure to respond to your queries and to consider your suggestions / feedback for future releases.

Thank You,

CA Manoj Sharma

Partner – Assurance & Risk Advisory

CA Ritesh Sharma

Partner, Bangalore

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