CARO 2020 Audit Reporting: Inventory Working Capital, Undisclosed Income & Financial Ratios

The Companies (Auditor’s Report) Order, 2020 (CARO 2020) significantly expanded the reporting responsibilities of statutory auditors in India. It transformed audit reporting from high-level sampling to forensic disclosures covering working capital usage, undisclosed income surrendered in tax surveys, and entity solvency.

1. Clause (ii): Inventory Verification & Quarterly Working Capital Disclosures

• Physical Verification (Clause ii(a)): The auditor must report whether physical verification of inventory was conducted by management at reasonable intervals and whether any discrepancies of 10% or more in aggregate for each class of inventory were noticed and properly dealt with in books of accounts.
• Quarterly Returns vs Books (Clause ii(b)): If the company has been sanctioned working capital limits exceeding ₹5 Crore from banks on the basis of security of current assets (Stock & Debtors), the auditor must explicitly verify whether the quarterly stock statements submitted to banks match the books of accounts. Any material variances must be tabulated in the audit report.

2. Clause (viii): Surrendered Income in Income Tax Assessments

The auditor must state whether any transactions not recorded in the books of account have been surrendered or disclosed as income during the year in Income Tax assessments, searches (Section 132), or surveys (Section 133A), and if so, whether the previously unrecorded income has been properly brought to book in financial statements.

3. Clause (xix): Material Uncertainty & Solvency Assessment

The auditor must report whether, based on:

• Financial ratios (Current Ratio, Debt-Equity Ratio, DSCR),
• Ageing and expected realization dates of financial assets and liabilities,
• Management plans and cash flow forecasts,

There exists any material uncertainty as of the date of the audit report that the company is not capable of meeting its liabilities falling due within a period of one year from the balance sheet date.

For statutory company audits, CARO 2020 compliance reports, and internal control reviews in Raipur and Odisha, contact Rabi Agrawal & Associates.