CARO 2020: Context and Applicability
The Companies (Auditor's Report) Order 2020, commonly known as CARO 2020, replaced CARO 2016 with significantly expanded reporting requirements. Effective for financial years commencing on or after 1 April 2021, CARO 2020 requires the statutory auditor to report on 21 distinct sub-clauses covering fixed assets, inventory, lending, compliance, and financial health indicators.
Who Must Report Under CARO 2020?
CARO 2020 applies to every company except:
- Banking companies — governed by separate RBI reporting requirements
- Insurance companies — governed by IRDAI requirements
- Section 8 companies (not-for-profit)
- One Person Companies with turnover not exceeding Rs. 2 crore in the preceding financial year
- Small companies as defined under Section 2(85) — paid-up capital not exceeding Rs. 4 crore AND turnover not exceeding Rs. 40 crore
- Private companies that are start-ups (as defined under DPIIT notification) for the first 5 years from incorporation, subject to certain conditions
Clause-by-Clause Guide
Clause (i): Property, Plant and Equipment (PPE)
(a) Whether the company maintains proper records showing full particulars, including quantitative details and situation of PPE and intangible assets.Data source: Fixed Asset Register (FAR). The auditor compares the FAR against the Balance Sheet PPE schedule and physical verification records.
Common issue for service companies: Many service companies have minimal PPE (computers, furniture, vehicles). The clause still applies — the auditor must verify that even a small FAR is properly maintained.
(b) Whether PPE have been physically verified by management at reasonable intervals. Whether material discrepancies were noticed and dealt with in the books.Data source: Physical verification report from management. The auditor reviews this report, not conducts the verification.
(c) Whether title deeds of immovable property are held in the name of the company. If not, provide details.Data source: Title deeds, property documents, land records. For leased properties (operating leases under Indian GAAP), this sub-clause is typically not applicable.
(d) Whether the company has revalued its PPE or intangible assets. If so, whether by a registered valuer and the frequency. (e) Whether any proceedings are pending against the company for holding benami property.Clause (ii): Inventory
(a) Whether physical verification of inventory has been conducted at reasonable intervals by the management. Whether discrepancies of 10% or more in aggregate for each class were dealt with in the books.Typically "not applicable" for: Pure service companies, IT companies, consultancies (no physical inventory).
Data source: Inventory valuation report, physical verification records, stock registers.
(b) Whether the company has been sanctioned working capital limits in excess of Rs. 5 crore from banks or financial institutions on the basis of security of current assets. If so, whether quarterly returns/statements filed are in agreement with books of account.This is a new clause in CARO 2020. Many companies with large working capital facilities are not aware of this requirement until the auditor raises it.
Clause (iii): Investments and Loans
(a) Whether the company has made investments in, provided security or granted loans/advances to parties covered under Section 185 and Section 186. Provide details. (b)-(f) Various sub-clauses covering terms and conditions, repayment schedules, overdue amounts, and whether loans were granted to related parties (as defined under Section 2(76)).Data source: Loan registers, board resolutions, investment registers, related party list, confirmations.
Common error: Not identifying related party loans that have been "dressed up" as regular transactions.
Clause (iv): Section 185 and 186 Compliance
Whether the company has complied with Sections 185 (loans to directors) and 186 (inter-corporate loans and investments). Details of non-compliance, if any.
Clause (v): Deposits
Whether the company has accepted deposits within the meaning of Sections 73 to 76 and the rules framed thereunder. If non-compliant, the nature of contraventions and amounts involved.
Data source: DPT-3 return, deposit registers, board resolutions.
Clause (vi): Maintenance of Cost Records
Whether the Central Government has prescribed maintenance of cost records under Section 148(1). If so, whether such accounts and records have been made and maintained.
Applicable primarily to manufacturing and mining companies. Most pure service companies are exempt. Check the Companies (Cost Records and Audit) Rules 2014 for the list of covered industries.
Clause (vii): Statutory Dues
(a) Whether the company is regular in depositing undisputed statutory dues (PF, ESI, income tax, GST, customs, excise, cess, etc.). (b) Details of disputed statutory dues that have not been deposited.Data source: GST returns, income tax records, PF/ESI challan records, assessment orders. This is one of the most data-intensive clauses.
Common error: Not reporting disputed demands under appeal. Even if the company has filed an appeal and obtained a stay, the auditor must disclose the disputed amount, the forum where the dispute is pending, and the period to which it relates.
Clause (viii): Unrecorded Transactions
Whether any transactions not recorded in the books of account have been surrendered or disclosed as income during the year in tax assessments.
Clause (ix): Loan Defaults
(a) Whether the company has defaulted in repayment of loans or borrowings or payment of interest thereon to any lender. (b) Whether the company has been declared wilful defaulter by any bank, financial institution, or government. (c) Whether term loans were applied for the purpose for which they were obtained. (d) Whether funds raised on short-term basis have been used for long-term purposes. (e) Whether the company has taken any funds from entities/persons to meet the obligations of subsidiaries, associates, or joint ventures. (f) Whether the company has raised loans on the pledge of securities held in subsidiaries, joint ventures, or associates.Clause (x): IPO/Public Offer
(a) Whether money raised by way of initial public offer or further public offer (including debt instruments) has been applied for the purposes for which it was raised. (b) Whether the company has made any preferential allotment or private placement of shares or convertible debentures. If so, whether compliance with Section 42 and 62 has been maintained and whether the amounts raised have been used for the stated purposes.Clause (xi): Fraud Reporting
(a) Whether any fraud by the company or on the company has been noticed or reported during the year. Nature and amount. (b) Whether any report under Section 143(12) has been filed by the auditors in Form ADT-4 with the Central Government. (c) Whether the auditor has considered whistle-blower complaints received during the year.Clause (xii): Nidhi Company
Whether the company is a Nidhi Company. If so, various compliance requirements specific to Nidhi Companies.
Not applicable to most companies. Only relevant for Nidhi Companies registered under Section 406.Clause (xiii): Related Party Transactions
Whether all transactions with related parties are in compliance with Sections 177 and 188. Whether details have been disclosed as required by the applicable Accounting Standards.
Data source: Related party list, board resolutions, prior approvals, transaction registers.
Clause (xiv): Internal Audit
(a) Whether the company has an internal audit system commensurate with its size and nature of business. (b) Whether reports of internal auditors have been considered by the statutory auditor.Clause (xv): Non-Cash Transactions
Whether the company has entered into any non-cash transactions with directors or persons connected with directors. If so, whether compliance with Section 192 has been maintained.
Clause (xvi): Registration Requirements
(a) Whether the company is required to be registered under Section 45-IA of the RBI Act 1934 (i.e., whether it is an NBFC). If so, whether registration has been obtained. (b)-(d) Various sub-clauses covering CIC (Core Investment Company) requirements.Sub-clauses (xvii) through (xxi)
These cover:
- (xvii) Cash losses in the current and preceding financial year
- (xviii) Resignation of the statutory auditors and reasons
- (xix) Financial ratios, ageing and expected dates of realisation of assets, payment of liabilities — essentially whether the company can pay its debts as they become due (going concern assessment)
- (xx) CSR unspent amounts — transfer to special account or Fund
- (xxi) Consolidated CARO reporting for holding companies with subsidiaries/associates/JVs
Common Reporting Mistakes
- Blanket "Not Applicable" without basis — Each clause requires the auditor to examine whether it applies. Simply stating "Not Applicable" without documenting the basis (e.g., "The company has no inventory as it is a software services company") is insufficient.
- Incomplete Clause (vii) disclosures — Disputed statutory dues must include the amount, the nature of the dues, the period to which they relate, and the forum where the dispute is pending.
- Missing Clause (ix)(b) disclosure — Wilful defaulter status is sometimes not verified by the auditor. A simple search on the RBI/CRILC database can confirm.
- Clause (xxi) overlooked — For holding companies, the auditor must consider the CARO reports of subsidiaries, associates, and joint ventures. This requires coordination with component auditors.
How ThynkFile Supports CARO Preparation
ThynkFile generates a structured CARO template based on the company's profile, pre-populating data points that can be derived from the financial statements and supplementary inputs. The system identifies which clauses are likely applicable based on company type (manufacturing vs service, NBFC status, Nidhi Company status) and flags clauses that require auditor judgement versus those that are data-driven.The CARO annexure is part of the standard ROC filing package. While the auditor retains full responsibility for the professional opinions expressed in each clause, the structured template and pre-populated data reduce preparation time and ensure no clause is inadvertently omitted.