What does CARO 2020 Clause 3(i) cover?

Clause 3(i) of the Companies (Auditor's Report) Order, 2020 requires the statutory auditor to report on a company's property, plant and equipment (PP&E) and intangible assets. It has five sub-clauses covering: (a) whether proper records of PP&E and intangibles are maintained; (b) whether PP&E has been physically verified and how material discrepancies were dealt with; (c) whether title deeds of immovable property are held in the company's name; (d) whether assets were revalued and on what basis; and (e) whether any Benami proceedings are pending.

CARO 2020 Clause 3(i) — Fixed Asset Reporting

Q: What does Clause 3(i)(b) require on physical verification?

Clause 3(i)(b) requires the auditor to state whether the company's property, plant and equipment has been physically verified by management at reasonable intervals, and whether any material discrepancies were noticed on such verification — and if so, whether they have been properly dealt with in the books of account. A missing or unreconciled discrepancy is a common cause of an adverse remark under this sub-clause.

Q: What does Clause 3(i)(c) require on title deeds?

Clause 3(i)(c) requires the auditor to report whether the title deeds of all immovable properties (other than properties where the company is the lessee and the lease agreements are duly executed in its favour) are held in the name of the company. Where they are not, the order prescribes a disclosure format giving details of the property, its carrying value, and the period and reason it is not held in the company's name.

Q: What does Clause 3(i)(d) require on revaluation?

Clause 3(i)(d) requires the auditor to report whether the company has revalued its property, plant and equipment or intangible assets during the year, whether the revaluation is based on the valuation by a registered valuer, and to specify the amount of change where the change is 10% or more in the aggregate of the net carrying value of each class of assets.

Clause 3(i) of the Companies (Auditor's Report) Order, 2020 is the part of the statutory auditor's report dealing with property, plant and equipment (PP&E) and intangible assets. It has five sub-clauses — records, physical verification, title deeds, revaluation, and Benami proceedings — and the auditor must comment on each in the report.

The Five Sub-Clauses

Sub-clause	What the auditor reports on
3(i)(a)(A)	Whether the company maintains proper records of PP&E showing full particulars, including quantitative details and situation.
3(i)(a)(B)	Whether the company maintains proper records of intangible assets.
3(i)(b)	Whether PP&E has been physically verified by management at reasonable intervals, and whether material discrepancies were noticed and properly dealt with in the books.
3(i)(c)	Whether title deeds of immovable property are held in the company's name (with a prescribed disclosure where they are not).
3(i)(d)	Whether PP&E or intangibles were revalued, whether by a registered valuer, specifying the change where it is 10% or more of net carrying value of a class.
3(i)(e)	Whether any proceedings have been initiated or are pending against the company for holding benami property, and whether these are disclosed.

Records — 3(i)(a)

The company must keep a fixed asset register that shows full particulars of each item of property, plant and equipment — including quantitative details and the location (situation) of the asset — and proper records of intangible assets. A register that cannot identify and locate each asset is the typical trigger for an adverse comment here.

Physical Verification — 3(i)(b)

Management must physically verify PP&E at reasonable intervals. The auditor reports whether this was done, whether any material discrepancies were found, and — critically — whether those discrepancies were properly dealt with in the books of account. An unreconciled difference between the register and what is physically present, left uncorrected, is one of the most common causes of an adverse remark under Clause 3(i).

Title Deeds — 3(i)(c)

The auditor reports whether the title deeds of all immovable properties (other than properties leased to the company under duly executed lease agreements) are held in the company's name. Where any are not, the order prescribes a disclosure giving the property's description, its gross carrying value, the name of the holder, and the period and reason it is not held in the company's name.

Revaluation — 3(i)(d)

If the company has revalued its PP&E or intangible assets during the year, the auditor reports whether the revaluation is based on the valuation of a registered valuer, and specifies the amount of change where the change is 10% or more in the aggregate of the net carrying value of each class of assets.

Benami Proceedings — 3(i)(e)

The auditor reports 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 the rules made thereunder, and if so, whether the company has appropriately disclosed the details.

Frequently Asked Questions

What does Clause 3(i)(b) require on physical verification?

It requires the auditor to state whether PP&E has been physically verified by management at reasonable intervals, whether any material discrepancies were noticed, and — if so — whether they have been properly dealt with in the books. A missing or unreconciled discrepancy is a common cause of an adverse remark.

What does Clause 3(i)(c) require on title deeds?

It requires the auditor to report whether title deeds of all immovable properties (other than duly executed leases in the company's favour) are held in the company's name, with a prescribed disclosure format where they are not.

What does Clause 3(i)(d) require on revaluation?

It requires the auditor to report whether PP&E or intangibles were revalued during the year, whether the revaluation is based on a registered valuer's valuation, and to specify the change where it is 10% or more of the net carrying value of a class of assets.