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Companies (Auditor's Report) Order 2020 (CARO)

Think of CARO 2020 (Companies (Auditor's Report) Order, 2020) as a mandatory checklist the auditor must tick off before signing the audit report of a company. Parliament noticed that the standard audit report was too generic — it didn't flag things like whether a company had clear title to its land, whether loans to directors were legal, or whether statutory dues were piling up. CARO fixes that by forcing the auditor to specifically comment on 21 matters, regardless of whether they found problems or not. Silence is not an option.

Who must comply? CARO applies to all companies except four categories — (1) Banking companies, (2) Insurance companies, (3) Section 8 companies (charitable/non-profit), and (4) One Person Companies (OPCs). Private limited companies also get an exemption if they satisfy all three size tests simultaneously: paid-up capital plus free reserves ≤ ₹1 crore, outstanding borrowings from banks/financial institutions ≤ ₹1 crore, and total revenue ≤ ₹10 crore in the financial year. Miss even one condition and CARO applies in full.

The 21 clauses cover areas the examiner loves to test. The highest-frequency ones: Clause (i) — PPE/fixed assets (title deeds, physical verification, revaluation, Benami assets); Clause (ii) — Inventory (physical verification by management, ≥10% discrepancy reporting); Clause (iii) — Loans given by the company (whether terms are prejudicial, overdue > 90 days); Clause (vii) — Statutory dues (PF, ESI, GST, TDS — whether deposited on time, arrears > 6 months); Clause (x) — End-use of funds raised (IPOs, term loans — whether used for stated purpose); Clause (xi) — Fraud (any fraud noticed on or by the company, and Section 143(12) whistle-blower reporting); Clause (xix) — Going concern doubts; Clause (xx) — CSR unspent amounts; and Clause (xxi) — Adverse remarks in subsidiary auditor reports (a new addition in CARO 2020). The CARO report is attached to but separate from the main audit report under SA 700. This is asked frequently as a 5-mark question — usually "list 5 matters covered under CARO 2020" or a scenario asking which clause applies.

📊 Worked example

Example 1 — Applicability Test

Setup: Rajesh & Co. Pvt. Ltd. has paid-up capital of ₹80 lakhs, free reserves of ₹30 lakhs, a working capital loan from SBI of ₹75 lakhs, and total revenue of ₹8 crore for FY 2024-25. Does CARO 2020 apply?

Working:

  • Test 1: Paid-up capital + free reserves = ₹80L + ₹30L = ₹1,10,00,000 → Exceeds ₹1 crore ❌
  • (Tests 2 and 3 need not be checked once Test 1 fails)

Answer: CARO 2020 applies because the company fails the first size test. All three tests must be satisfied simultaneously for the exemption. Even though revenue and borrowings are within limits, failing even one test removes the exemption.

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Example 2 — Clause (vii) Statutory Dues Reporting

Setup: During audit of Priya Motors Ltd. for FY 2024-25, CA Meera finds: GST of ₹12,50,000 due for April 2024 was paid in January 2025 (9 months late). TDS of ₹3,80,000 for Q3 FY 2024-25 was paid on time. Advance tax of ₹6,00,000 is still outstanding as on 31 March 2025 (overdue > 6 months). How should CA Meera report under CARO Clause (vii)?

Working:

  • GST ₹12,50,000: Paid late but paid before year-end → Report as delayed deposit, state nature, amount, period of delay
  • TDS ₹3,80,000: Paid on time → No adverse comment needed
  • Advance tax ₹6,00,000: Still outstanding on balance sheet date, overdue > 6 months → Must be specifically reported with forum (Assessing Officer), amount, and period outstanding

Answer: CA Meera must state in Clause (vii)(a) that statutory dues were not deposited regularly (citing GST delay), and under Clause (vii)(b) report advance tax of ₹6,00,000 as disputed/outstanding dues pending for more than 6 months.

⚠️ Common exam mistakes

  • Students say OPCs are covered by CARO — Wrong. OPCs are explicitly exempt. The four exempt categories are Banking companies, Insurance companies, Section 8 companies, and OPCs. Write all four in exams.
  • **Students apply the private company exemption if any one size test is met** — All three tests (capital+reserves ≤ ₹1Cr, borrowings ≤ ₹1Cr, revenue ≤ ₹10Cr) must be satisfied simultaneously. Failing even one means CARO applies fully.
  • Students confuse CARO report placement — The CARO report is not embedded inside the main audit report. It is a separate report annexed to the auditor's report. State this clearly in answers.
  • **Students only mention fraud by the company in Clause (xi)** — Clause (xi) covers fraud on the company (i.e., someone defrauding the company) and fraud by officers/employees of the company. Mention both directions.
  • Students list only 3-4 clauses when asked to "state matters covered" — Examiners typically want 5-6 specific clause topics with brief descriptions. Memorise the high-frequency ones: PPE, Inventory, Loans, Statutory Dues, Fraud, Going Concern, CSR, and the new Clause (xxi) on subsidiary auditor remarks.
📖 Reference: CARO 2020 — Institute of Chartered Accountants of India
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