## CARO 2020: Introduction, Applicability, and Exclusions

### What is CARO?

The Companies (Auditor's Report) Order, 2020 (CARO 2020) is issued under Section 143(11) of the Companies Act, 2013. It requires statutory auditors to include a separate structured report (in addition to the main audit report) addressing specific matters.

The CARO report is a sub-set of the overall Auditor's Report (AR) on the Financial Statements (FS).

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### Applicability

CARO 2020 applies to all companies, including foreign companies, unless specifically excluded.

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### Excluded Companies — Mnemonic: BIPS

Letter	Category	Exclusion Condition
B	Banking Companies	Always excluded
I	Insurance Companies	Always excluded
P	Private Limited Companies	ALL THREE conditions must be met simultaneously (see below)
S	Section 8 Companies, Small Companies, One Person Companies	Always excluded

#### Private Limited Company Exclusion — Three Simultaneous Conditions

Condition	Limit
Paid-up Share Capital + Reserves	≤ ₹1 crore (as at balance sheet date)
Outstanding loans from banks/FIs	≤ ₹1 crore (at any point during the year)
Revenue (Turnover)	≤ ₹10 crore

> If even one condition is not met, CARO applies to that private company.

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### Additional Rules

Rule	Detail
Date for status	Company's status is determined as on the balance sheet date
Holding–Subsidiary link	If CARO applies to a holding company → it also applies to all its subsidiaries
Consolidated FS	CARO does not apply to Consolidated Financial Statements, except Clause (xxi)
Adverse remarks	The holding company's auditor report must indicate which companies in the consolidated FS have CARO reports with qualifications or adverse remarks

Worked example

### Example 1

Example 1 – Pvt Ltd exclusion test

Magnolia Pvt Ltd has: Paid-up capital ₹60 lakh + Reserves ₹50 lakh = ₹1.1 crore; Bank loan outstanding ₹80 lakh; Revenue ₹8 crore.

Is CARO applicable?

Answer: Yes. Although the bank loan (₹80L < ₹1Cr) and revenue (₹8Cr < ₹10Cr) conditions are satisfied, the PUSC + Reserves = ₹1.1 crore exceeds ₹1 crore. Since all three conditions are not met simultaneously, CARO 2020 applies to Magnolia Pvt Ltd.

### Example 2

Example 2 – Consolidated FS

XYZ Ltd is the holding company. CARO applies to it. The auditor is preparing consolidated financial statements. Must CARO apply to the consolidated statements?

Answer: CARO does not apply to consolidated financial statements, except for Clause (xxi). However, the auditor's report on the consolidated FS must identify any subsidiaries/associates whose individual CARO reports contain qualifications or adverse remarks.

### Example 3

Example 3 – Section 8 vs private company

ABC Foundation is incorporated as a company under Section 8 of the Companies Act. Its turnover is ₹50 crore. Is CARO applicable?

Answer: No. Section 8 companies are always excluded under BIPS, irrespective of their turnover or financial size.

⚠️ Common exam mistakes

Applying the Pvt Ltd exclusion if only one or two conditions are met — all three conditions must be satisfied simultaneously.
Checking PUSC + Reserves on any date other than the balance sheet date — status is always checked as on the balance sheet date.
Forgetting that CARO applies to subsidiaries automatically if the holding company is covered — students often miss this linkage.
Thinking CARO never applies to Consolidated FS — it does not apply, except for Clause (xxi) which specifically deals with the consolidated report.
Treating 'Small Companies' as separate from 'S' in BIPS — Section 8, Small Companies, and One Person Companies are all grouped under the 'S' exclusion.

Reference: Section 143(11) – Companies Act, 2013 — Companies (Auditor's Report) Order, 2020; Companies Act, 2013

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CARO 2020 – Introduction, Applicability, and Exclusions

Worked example

⚠️ Common exam mistakes