CARO is a set of extra matters that an auditor must report on when auditing certain companies. Its full name is the Companies (Auditor’s Report) Order. It forms part of the statutory audit—the audit required under company law.
For example, CARO may require the auditor to report on loan defaults, unpaid statutory dues, inventory records or fraud. The starting question is simple: does CARO apply to this company? Once that is settled, the auditor checks the relevant matters and reports the findings.
ICAI’s CARO 2020 Guidance Note explains how these requirements fit with section 143 of the Companies Act, 2013. If you are comparing audit requirements, also read tax audit versus statutory audit. A tax audit under section 44AB is a different requirement.
First, check whether the company is covered
CARO 2020 applies to audits of financial years beginning on or after 1 April 2021. ICAI confirms this in its 19 December 2020 announcement.
The order generally covers companies, including foreign companies within the Companies Act audit framework. Several categories are exempt. Check each exemption before using the private-company limits below.
| Company category | CARO position |
|---|---|
| Banking company | Exempt. |
| Insurance company | Exempt. |
| Company licensed under section 8 | Exempt. |
| One Person Company (OPC) | Exempt. |
| Small company | Exempt if it meets the Companies Act definition and prescribed limits applicable to the reporting date. |
| Other private limited company | May be exempt if it meets all the separate conditions below. |
The exemptions are listed in Guidance Note paragraphs 11 to 14. A company that qualifies for the small-company exemption remains exempt even if it fails the separate private-company borrowing test.
Do not use CARO’s ₹1 crore and ₹10 crore limits to decide whether an entity is a “small company”. That is a separate legal classification. Check the definition, exclusions and prescribed limits for the year being audited; do not copy an old limit from a historical guidance note.
The private-company exemption: all conditions must be met
| What to check | Condition for this exemption |
|---|---|
| Relationship with a public company | The private company must be neither a subsidiary nor a holding company of a public company. |
| Paid-up capital plus reserves and surplus | Not more than ₹1 crore at the balance sheet date. |
| Total borrowings from banks and financial institutions | Not more than ₹1 crore at any point during the financial year. |
| Total revenue shown under Schedule III | Not more than ₹10 crore during the year, including revenue from discontinuing operations. |
A holding company is a parent company; a subsidiary is a company it controls. Check the legal relationship, not just whether the names or owners look similar.
For the borrowing test, combine the amounts outstanding across banks and financial institutions. The limit is not ₹1 crore per lender. Check the highest combined amount during the year, not only the year-end balance. The detailed borrowing guidance is in paragraphs 22 and 23.
If any condition fails, this private-company exemption is unavailable. Before concluding that CARO applies, still check whether another exemption covers the company. The legal tests are in paragraph 1(2)(v) of the order.
Worked example: why a two-week borrowing peak matters
Hypothetical facts: ABC Private Limited has been checked and does not qualify for any of the category exemptions above, including the small-company exemption. It is neither a subsidiary nor a holding company of a public company.
Its paid-up capital plus reserves and surplus are ₹90 lakh at year-end. Total revenue under Schedule III is ₹8.4 crore, including any revenue from discontinuing operations.
Combined bank and financial-institution borrowings were ₹70 lakh at the start of the year. They rose to ₹1.15 crore for two weeks and then fell to ₹80 lakh by year-end.
| Test | Result |
|---|---|
| Capital plus reserves and surplus | ₹90 lakh is within the ₹1 crore limit. |
| Total revenue | ₹8.4 crore is within the ₹10 crore limit. |
| Highest combined bank/FI borrowing | ₹1.15 crore is ₹15 lakh above the ₹1 crore limit. |
| Another category exemption? | None, under the stated assumptions. |
Result: CARO applies to ABC’s standalone audit. The borrowing condition failed during the year. Reducing the balance to ₹80 lakh later does not undo that breach.
Support the conclusion with bank statements, loan schedules and a dated borrowing calculation. Keep the separate company-category assessment too. Without checking the other exemptions, the conclusion would be incomplete.
Now change one fact: suppose XYZ Private Limited separately qualifies as a small company for that reporting date. Its small-company exemption applies even if its borrowings cross CARO’s private-company limit. This is why the order of the checks matters.
What the auditor needs to check
CARO 2020 has 21 reporting areas. The main themes below help you organise the work; they do not replace the full wording of each clause.
- Assets and inventory: asset records, ownership documents, physical checks, revaluation, benami-property proceedings and stock statements given to lenders.
- Loans and use of funds: loans, guarantees, investments, compliance with sections 185 and 186, and whether borrowed money was used for its stated purpose.
- Dues and other compliance: public deposits, cost records, unpaid or disputed statutory dues, and income disclosed in tax proceedings that was not previously recorded in the books.
- Borrowings and capital raised: repayment defaults, wilful-defaulter status, use of public-issue proceeds and compliance for specified share issues.
- Fraud and governance: fraud by or on the company, whistle-blower complaints, related-party compliance, internal audit and non-cash transactions with directors.
- Other specific matters: Nidhi-company requirements, RBI registration, cash losses, auditor resignations, ability to meet liabilities, unspent CSR amounts and relevant CARO remarks in group reporting.
For group funding, be precise about what the clause asks. Paragraphs 3(ix)(e) and (f) cover funds taken to meet obligations of subsidiaries, associates or joint ventures, and loans raised against securities held in those entities. See ICAI’s explanation of these clauses.
Turn the applicable clauses into a working list. For each item, record the evidence needed, who will obtain it, what the evidence shows and the proposed report wording. An inventory-heavy company may need detailed stock and lender-statement checks. A group with several inter-company loans may need more work on loan terms and movement of funds.
If a branch auditor handles part of the work, obtain the CARO information needed for the company’s report. Guidance Note paragraphs 9 and 10 explain the branch-reporting responsibility.
The company’s own accounts and group accounts need different reporting
Standalone financial statements show the company’s own accounts. Consolidated financial statements combine the parent and the entities included in the group accounts.
The general CARO clauses are assessed for a covered company’s standalone audit. For consolidated statements, CARO has a specific requirement under paragraph 3(xxi): report the relevant qualifications or adverse remarks in the CARO reports of companies included in the consolidation. The proviso to paragraph 2 of the order sets out this distinction.
Prepare a list of those companies, whether CARO applies to each, the reports received and the affected clause numbers. Include relevant remarks from the parent’s own standalone CARO report when preparing the consolidated reporting. A missing report does not mean there are no adverse remarks. See Guidance Note paragraph 87.
What to keep before signing the report
Keep a short note showing the reporting date, company category, exemptions tested and the evidence supporting the decision. For the private-company exemption, include the capital calculation, revenue calculation and combined borrowing history.
Where CARO applies, link each relevant reporting clause to the audit work that supports it. Resolve missing evidence and conflicting explanations before finalising the wording.
A CARO report tells readers what the auditor found on the matters specified in the order. It does not promise that the business will remain healthy or that future losses cannot occur.
