Short Answer:
CARO 2020 applies to companies covered by the Order, including foreign companies, but specific categories are excluded. Certain private companies can also fall within the exemption if they satisfy all prescribed conditions relating to their paid-up capital and reserves and surplus, borrowings, revenue, and corporate relationship.
CARO 2020 at a Glance
What Is CARO 2020?
CARO stands for Companies (Auditor’s Report) Order. CARO 2020 prescribes additional matters that the statutory auditor must report on in the auditor’s report of an eligible company.
It is important to understand that CARO 2020 is not a separate audit.
Statutory Audit → Auditor examines the financial statements → Forms an audit opinion → Reports under the Companies Act → Additionally reports on CARO matters
When Did CARO 2020 Become Applicable?
CARO 2020 was originally notified in February 2020. Its commencement was subsequently deferred.
The MCA’s Companies (Auditor’s Report) Second Amendment Order, 2020, dated 17 December 2020, replaced 1 April 2020 with 1 April 2021 as the commencement date.
Therefore: CARO 2020 applies to financial years commencing on or after 1 April 2021. Accordingly, FY 2021-22 was the first financial year for which CARO 2020 became applicable.
CARO 2020 Applicability
CARO 2020 Exemption for Private Companies
A private limited company can fall within the exemption if it satisfies ALL of the following conditions:
- is not a subsidiary or holding company of a public company;
- has paid-up capital and reserves and surplus of not more than ₹1 crore as at the balance sheet date;
- has total borrowings from banks or financial institutions of not more than ₹1 crore at any point during the financial year; and
- has total revenue of not more than ₹10 crore during the financial year.
Key Takeaway:
CARO exemption is not based on one threshold alone. All prescribed conditions need to be satisfied for the exemption to apply.
Example
Consider ABC Private Limited:
Result: The company satisfies all conditions and can fall within the CARO exemption.
Now consider XYZ Private Limited:
Result: Because revenue exceeds the prescribed ₹10 crore limit, the company cannot rely on this exemption.
CARO 2020 Applicability Decision Process
CARO 2020 Clauses List
CARO 2020 Clause-wise Explanation
Clause 3(i): Property, Plant and Equipment & Intangible Assets
Requires reporting on whether the company maintains proper records of PPE and intangible assets, whether physical verification has been conducted at reasonable intervals, and whether material discrepancies have been properly dealt with. Also covers title deeds of immovable properties, revaluation, and benami property proceedings.
Clause 3(ii): Inventory and Working Capital
Focuses on physical verification of inventory, coverage and procedures, material discrepancies, and working-capital facilities. Introduces reporting on whether quarterly returns or statements submitted to lenders agree with the books of account where working-capital limits exceed ₹5 crore.
Clause 3(iii): Loans, Advances, Guarantees and Securities
Covers specified transactions involving loans, advances in the nature of loans, guarantees, securities and investments. The auditor considers amounts granted during the year, balances outstanding, repayment status, and overdue amounts.
Clause 3(iv): Loans, Investments, Guarantees and Securities
Considers whether applicable provisions of the Companies Act have been complied with in relation to specified loans, investments, guarantees and securities.
Clause 3(v): Deposits
Relates to deposits and amounts treated as deposits. The auditor reports on compliance with relevant provisions of the Companies Act and outstanding amounts requiring reporting.
Clause 3(vi): Cost Records
Where maintenance of cost records is prescribed under Section 148(1), the auditor reports on whether the prescribed cost records have been made and maintained. Relevant for companies in industries covered by cost-record requirements.
Clause 3(vii): Statutory Dues
Deals with statutory dues including GST, income tax, Provident Fund, ESI, customs duty, excise duty, and cess. The auditor considers whether the company is regular in depositing undisputed statutory dues and reports details regarding disputed dues.
Clause 3(viii): Unrecorded Income
Considers whether transactions not recorded in the books have been surrendered or disclosed as income during tax assessments and whether such previously unrecorded income has been properly recorded in the books.
Clause 3(ix): Borrowings
Covers defaults in repayment, wilful defaulter status, utilisation of term loans, short-term funds used for long-term purposes, funds raised to meet obligations of subsidiaries, and loans raised against pledged securities.
Clause 3(x): Public Offer and Private Placement
Reports on funds raised through initial public offers, further public offers, preferential allotments, and private placements. Considers whether funds were used for intended purposes and applicable compliance requirements.
Clause 3(xi): Fraud and Whistle-Blower Complaints
Requires reporting on whether fraud by or on the company has been noticed or reported, the nature and amount of fraud, whether reporting under Section 143(12) was required, and whether whistle-blower complaints were received and considered.
Clause 3(xii): Nidhi Companies
For Nidhi companies, reports on net owned funds, deposits, loans, ratios, and compliance with applicable Nidhi requirements.
Clause 3(xiii): Related-Party Transactions
Reports on whether specified transactions with related parties comply with applicable provisions of the Companies Act and whether required disclosures have been made, covering Board approvals, Audit Committee approvals, and financial statement disclosures.
Clause 3(xiv): Internal Audit System
Requires reporting on whether the company has an internal audit system commensurate with the size and nature of its business, and whether the reports of the internal auditors for the period under audit were considered by the statutory auditor.
What does “commensurate” mean?
The statutory auditor may consider factors such as the size of the internal audit function, nature of business, number of operating locations, decentralization of internal controls, scope of internal audit, qualifications of personnel, coverage and frequency of audits, and other internal-control mechanisms.
Clause 3(xv): Non-Cash Transactions
Covers specified non-cash transactions involving directors or persons connected with directors. Considers whether relevant provisions of Section 192 have been complied with.
Clause 3(xvi): RBI Registration and Related Matters
Covers specified matters relating to registration under the RBI Act and certain financial activities. Applicability depends on the nature of the company’s business.
Clause 3(xvii): Cash Losses
Requires reporting on whether the company has incurred cash losses during the relevant financial year and the immediately preceding financial year.
Clause 3(xviii): Resignation of Statutory Auditor
Reports on whether there has been a resignation of statutory auditors during the year and whether the auditor has considered the issues, objections or concerns raised by the outgoing auditor.
Clause 3(xix): Ability to Meet Liabilities
Deals with whether material uncertainty exists regarding the company’s ability to meet liabilities falling due within the specified period from the balance-sheet date.
Clause 3(xx): Corporate Social Responsibility
Reports on specified requirements relating to unspent amounts under Section 135, including whether the relevant unspent CSR amount has been transferred to the appropriate fund or account within the prescribed framework.
Clause 3(xxi): Consolidated Financial Statements
Important: CARO 2020 generally does not apply to the auditor’s report on consolidated financial statements, except for the specific reporting requirement under Clause 3(xxi) relating to certain qualifications or adverse remarks in CARO reports of companies included in consolidated financial statements.
CARO 2020 Reporting Requirements
For companies that are covered, the next step is to identify the applicable clauses, plan appropriate audit procedures, collect supporting evidence, evaluate exceptions and document the basis for the final reporting. A structured audit program can help define the audit scope, procedures, evidence requirements, testing approach and reporting workflow.
Determine applicability
Identify relevant clauses
Obtain evidence
Evaluate exceptions
Obtain management responses
Determine reporting
Complete audit documentation
Finalise the report
CARO 2020 Compliance Checklist
Applicability
- ☐ Identify the company’s legal status
- ☐ Check CARO exclusions
- ☐ Determine whether the company is a private company
- ☐ Test all private-company exemption conditions
- ☐ Document the applicability conclusion
CARO Areas
- ☐ Property, Plant and Equipment
- ☐ Intangible assets
- ☐ Inventory
- ☐ Working-capital facilities
- ☐ Loans and advances
- ☐ Guarantees and securities
- ☐ Deposits
- ☐ Cost records
- ☐ Statutory dues
- ☐ Unrecorded income
- ☐ Borrowings
- ☐ Public offer/private placement
- ☐ Fraud
- ☐ Related-party transactions
- ☐ Internal audit
- ☐ Non-cash transactions
- ☐ RBI-related matters
- ☐ Cash losses
- ☐ Auditor resignation
- ☐ Liabilities/financial position
- ☐ CSR
- ☐ Consolidated financial statement reporting
Evidence
- ☐ Audit procedures documented
- ☐ Supporting evidence retained
- ☐ Exceptions recorded
- ☐ Management responses documented
- ☐ Corrective actions tracked where relevant
- ☐ Final conclusions reviewed
Practical Example: How CARO 2020 Works
Consider a manufacturing company with:
- ₹150 crore revenue
- Significant inventory
- Bank borrowings
- Multiple related-party transactions
- An internal audit function
- Outstanding statutory dues
Inventory
- Physical verification
- Discrepancies
- Working-capital reporting
Borrowings
- Repayment defaults
- Utilisation of funds
- Wilful defaulter considerations
Statutory Dues
- Outstanding dues
- Disputed amounts
Related Parties
- Compliance
- Approvals
- Disclosures
Internal Audit
- Existence of system
- Adequacy
- Consideration of reports
CARO findings can also feed into broader risk management and remediation processes, particularly where audit exceptions indicate recurring operational, financial or compliance risks.
CARO 2020 vs Statutory Audit
CARO 2020 forms part of statutory audit reporting, but it should not be confused with internal audit vs statutory audit, which have different objectives, responsibilities and reporting purposes.
CARO 2020 vs Internal Audit
Common CARO 2020 Mistakes
1. Assuming CARO applies to every company
CARO contains specific exclusions and private-company exemption conditions.
2. Assuming every private company is exempt
Private companies must test the prescribed conditions rather than relying on company type alone.
3. Using outdated applicability dates
CARO 2020 applies to financial years commencing on or after 1 April 2021.
4. Treating CARO as a separate audit
CARO is an additional reporting requirement for the statutory auditor.
5. Ignoring internal-audit reports
Where Clause 3(xiv) applies, the statutory auditor considers whether internal-audit reports were considered.
6. Not documenting non-applicability
If CARO does not apply, the basis for that conclusion should be clearly documented.
Why Audit Documentation Matters for CARO 2020
CARO reporting is ultimately evidence-driven. For example, if an auditor reports on inventory verification, the audit file should support:
A Risk and Control Matrix (RCM) can further connect identified risks with controls, testing procedures, ownership and supporting evidence.
For organizations managing recurring audits, evidence, findings and remediation activities, an internal audit management platform can centralize audit execution, evidence and follow-up.
Frequently Asked Questions
Conclusion
CARO 2020 is an important part of statutory audit reporting in India. It requires auditors of eligible companies to report on specific matters covering assets, inventory, loans, statutory dues, borrowings, fraud, related-party transactions, internal audit, CSR and other prescribed areas.
The first step is always to determine whether CARO 2020 applies. For companies that are covered, the next step is to identify the applicable clauses, plan appropriate audit procedures, collect supporting evidence, evaluate exceptions and document the basis for the final reporting.
The most effective approach is to treat CARO as part of the overall audit and evidence workflow, rather than as a reporting exercise performed only at the end of the engagement.
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