Audit and certification · Audit and assurance
What is CARO 2020, and which companies does it apply to?
Short answer
The Companies (Auditor's Report) Order, 2020 requires the auditor to report on 21 specific matters, such as title deeds of property, inventory, loans given, statutory dues, defaults, use of funds raised, fraud, related parties and CSR. It applies to most companies, but not to banks, insurers, Section 8 companies, OPCs, small companies, or private companies below certain capital, borrowing and revenue limits.
Who is exempt
- Banking companies, insurance companies, Section 8 companies, OPCs and small companies.
- A private company that is not a holding or subsidiary of a public company, and whose:
- paid-up capital plus reserves and surplus did not exceed ₹1 crore;
- borrowings from banks or financial institutions did not exceed ₹1 crore at any time in the year; and
- total revenue did not exceed ₹10 crore.
All three conditions must be met for this exemption. CARO does not apply to consolidated financial statements, except clause 3(xxi) on qualifications in group companies' CARO reports.
The main matters reported
| Area | What the auditor reports |
|---|---|
| Property, plant and equipment | Records, physical verification, title deeds in the company's name, revaluation, benami proceedings |
| Inventory | Physical verification; whether quarterly returns to banks agree with the books, for working capital above ₹5 crore |
| Loans and investments | Loans, guarantees and advances given; compliance with sections 185 and 186 |
| Deposits | Compliance with the deposit rules |
| Statutory dues | Regular deposit of GST, PF, ESI, income tax and others; disputed dues not paid |
| Income | Unrecorded income surrendered in tax assessments |
| Borrowings | Defaults in repayment; wilful defaulter status; use of term loans and short-term funds for long-term purposes |
| Funds raised | Use of money from IPOs and preferential allotments |
| Fraud | Fraud noticed; whistle-blower complaints |
| Related parties | Compliance with sections 177 and 188 |
| Internal audit | Whether there is an internal audit system proportionate to the business |
| Others | Non-cash transactions with directors; RBI registration as an NBFC; cash losses; auditor resignation; ability to meet liabilities; unspent CSR |
Getting ready
Keep the fixed-asset register and title deeds, reconcile stock statements to the books every quarter, track statutory dues, and document related-party approvals. Most adverse CARO remarks come from these areas.
Legal basis
- Section 143(11), Companies Act, 2013
- Companies (Auditor's Report) Order, 2020
Official sources
Related questions
- What is the difference between a statutory audit, a tax audit and an internal audit?A statutory audit gives an independent opinion on whether the financial statements give a true and fair view; it is compulsory for every company. A...
- What is the auditor's report on internal financial controls, and which companies need it?Besides the opinion on the accounts, a company's auditor reports on whether the company has adequate internal financial controls over financial...
- What do qualified, adverse and disclaimer opinions in an audit report mean?An unmodified opinion says the financial statements give a true and fair view. A qualified opinion says they do, except for a matter that is material...