CARO 2020: Applicability and Reporting Requirements

Short answer: The Companies (Auditor's Report) Order, 2020 (CARO 2020), issued by the Ministry of Corporate Affairs (MCA), mandates statutory auditors to report on specific financial, operational, and compliance matters. It applies to most Indian companies, including private limited ones meeting certain size criteria. Its purpose is to enhance transparency and corporate governance by providing stakeholders with a detailed view of the company's affairs beyond standard financial statements.

What is CARO 2020 and why is it important?

CARO 2020 is a legal order that supplements the main auditor's report for specific companies. Instead of just giving an opinion on whether financial statements present a 'true and fair' view, the auditor must also provide detailed comments on 21 specific clauses. This order is crucial because it acts as a checklist for auditors, forcing a deeper examination into areas prone to mismanagement, such as fixed assets, inventory, loans, and statutory compliance. For directors and founders, a clean CARO report is a sign of good corporate health, while qualifications or negative remarks can be a major red flag for investors, lenders, and regulators.

Which companies does CARO 2020 apply to?

CARO 2020 applies to every company registered under the Companies Act, 2013, including a foreign company as defined under section 2(42) of the Act. Unless a company falls into a specific exemption category, its statutory auditor is obligated to prepare a report under CARO 2020. This means the default assumption for any company, whether public or private, should be that CARO is applicable. The onus is on the company to prove it qualifies for an exemption.

Which companies are exempt from CARO 2020?

Certain types of companies are explicitly exempt from CARO 2020 due to their nature or size. The order does not apply to the auditor's report for a consolidated financial statement but does apply to the standalone financials of the holding and subsidiary companies if they individually meet the criteria.

The main exemptions are:

• A banking company as defined under the Banking Regulation Act, 1949.
• An insurance company as defined under the Insurance Act, 1938.
• A company licensed to operate under Section 8 of the Companies Act, 2013 (non-profit companies).
• A One Person Company (OPC).
• A "small company" as defined under Section 2(85) of the Companies Act, 2013.
• A private limited company that meets all three of the conditions listed below.

Private Company Exemption Checklist

For a private limited company (that is not a subsidiary or holding of a public company) to be exempt, it must satisfy ALL of the following conditions for the financial year under audit:

Condition	Threshold (Must be Less Than or Equal To)	Pass / Fail
Paid-up Share Capital + Reserves & Surplus (as on the Balance Sheet date)	₹1 Crore
Total Borrowings from all Banks & Financial Institutions (at any point during the financial year)	₹1 Crore
Total Revenue as per Schedule III (including revenue from discontinuing operations) (during the financial year)	₹10 Crore

If even one of these conditions is breached, CARO 2020 becomes applicable.

What are the key matters to be reported under CARO 2020?

Auditors must report on 21 specific clauses, providing a detailed commentary on the company's operations and compliance. Key reporting areas include:

1. Property, Plant, and Equipment (PPE) & Intangible Assets: Whether the company maintains proper records, including quantitative details and the situation of PPE. Also covers physical verification and title deeds of immovable properties.
2. Inventory: Whether physical verification of inventory has been conducted at reasonable intervals and if any material discrepancies were noticed.
3. Loans, Investments, Guarantees: Details of loans, investments, guarantees, or security provided by the company and whether the terms are not prejudicial to the company's interests.
4. Statutory Dues: Whether the company is regular in depositing undisputed statutory dues like GST, Provident Fund, Income Tax, etc. If not, the extent of the arrears must be reported.
5. Undisclosed Income: Whether any previously unrecorded income has been surrendered or disclosed during the year in tax assessments.
6. Default in Repayment: Whether the company has defaulted in the repayment of loans or other borrowings to any financial institution or bank.
7. Cash Losses: Reporting on any cash losses incurred in the financial year and the immediately preceding financial year.
8. Internal Audit System: Whether the company has an internal audit system commensurate with its size and nature of business.
9. Corporate Social Responsibility (CSR): Whether unspent CSR amounts have been transferred to the specified fund under Schedule VII.

How is CARO 2020 different from CARO 2016?

CARO 2020 significantly expands the scope and depth of reporting compared to its predecessor, CARO 2016. The changes reflect a greater regulatory focus on internal controls, fraud detection, and overall corporate governance.

Feature	CARO 2016	CARO 2020
Number of Clauses	16 Clauses	21 Clauses
Internal Audit	Basic reporting on the existence of a system.	Detailed reporting on whether the internal audit system is commensurate with the company's size and nature.
Whistle-blower Complaints	Not covered.	Auditor must report if they considered whistle-blower complaints received during the year.
Audit Trail	Not covered.	Now a reporting requirement in FY 2022-23 onwards (Rule 11(g)).
CSR Reporting	Not covered.	Specific clause on the transfer of unspent CSR funds.
Auditor's Opinion	No specific requirement.	Requires the auditor to state if they can provide an unmodified (clean) opinion based on their findings.
Title Deeds	Basic reporting.	Requires specific details of properties where title deeds are not in the company's name.

Worked example: CARO applicability for a Bengaluru startup

Let's assess if CARO 2020 applies to 'Innovate Bengaluru Pvt. Ltd.' for the financial year ending 31st March 2026.

Company Profile:

• A private limited company, not a subsidiary or holding of any public company.
• Recognised as a startup by DPIIT.

Financials for FY 2025-26:

• Paid-up Share Capital: ₹60 Lakhs
• Reserves & Surplus (as on 31-Mar-2026): ₹30 Lakhs
• Total Borrowings from Banks (peaked at ₹1.10 Crores in December 2025): ₹95 Lakhs as on 31-Mar-2026.
• Total Revenue (as per Schedule III): ₹9 Crores

Step-by-step analysis:

1. Check Basic Exemptions: The company is not a bank, insurance co, Section 8 co, OPC, or a 'small company'. It is a private limited company, so we must test the specific exemption criteria.

2. Test Condition 1 (Capital + Reserves):

   • Calculation: ₹60 Lakhs (Paid-up Capital) + ₹30 Lakhs (Reserves) = ₹90 Lakhs.
   • Result: ₹90 Lakhs is less than the ₹1 Crore threshold. The company passes this condition.

3. Test Condition 2 (Borrowings):

   • Rule: The test is for total borrowings at any point in time during the financial year.
   • Calculation: The company's borrowings reached ₹1.10 Crores in December 2025.
   • Result: ₹1.10 Crores is more than the ₹1 Crore threshold. The company fails this condition.

4. Test Condition 3 (Revenue):

   • Calculation: Total revenue is ₹9 Crores.
   • Result: ₹9 Crores is less than the ₹10 Crore threshold. The company passes this condition.

Conclusion: For a private company to be exempt, it must satisfy ALL three conditions. Since Innovate Bengaluru Pvt. Ltd. breached the borrowing limit of ₹1 Crore during the year, it fails to meet the exemption criteria. Therefore, CARO 2020 is applicable to the company for FY 2025-26, and its auditor must issue a CARO report.

Common mistakes

1. Assuming all private companies are exempt: This is the most frequent error. The size-based criteria are strict, and many growing startups cross the thresholds quickly.
2. Misinterpreting the borrowing threshold: The ₹1 Crore borrowing limit is not the year-end figure. If borrowings exceeded this amount even for a single day during the financial year, CARO applies.
3. Ignoring holding/subsidiary status: A private company that is a subsidiary or holding company of a public company is automatically subject to CARO, regardless of its size.
4. Incorrectly calculating 'Total Revenue': The threshold of ₹10 Crore refers to total revenue as per Schedule III of the Companies Act, which includes revenue from operations and other income.
5. Forgetting about 'Small Company' exemption: A company that qualifies as a 'small company' under Section 2(85) of the Companies Act is exempt, which is a separate test from the private company exemption criteria.

How SP & SC helps

Navigating corporate compliance, including the detailed requirements of CARO 2020, is critical for maintaining good governance and investor confidence. At SP & SC, our team of Chartered Accountants provides comprehensive support for annual company filings and statutory audits. We work with your management to review internal controls, verify records, and prepare the company for a smooth and compliant audit process, ensuring all CARO clauses are addressed proactively. Our goal is to help you achieve a clean audit report and stay compliant with all MCA regulations.

Frequently asked questions

Is CARO applicable to a One Person Company (OPC)?

No. Paragraph 1(iii) of the CARO 2020 order specifically exempts a One Person Company as defined under the Companies Act, 2013.

Does CARO 2020 apply to LLPs?

No. CARO 2020 is issued under the authority of the Companies Act, 2013, and is applicable only to companies. It does not apply to Limited Liability Partnerships (LLPs), which are governed by the LLP Act, 2008.

What happens if the auditor gives a negative or qualified remark in the CARO report?

A qualified or adverse remark in the CARO report highlights a material non-compliance, financial weakness, or control deficiency. This can negatively impact the company's ability to raise funds, secure loans, and may attract scrutiny from the Registrar of Companies (ROC) and other regulators.

Is CARO reporting part of the main audit report?

Yes, the CARO report is presented as an annexure to the main auditor's report. The main report will contain a reference to this annexure, making it an integral part of the statutory audit.

Get a fixed-fee quote

Ensure your company's statutory audit and CARO reporting are handled meticulously. Share your company's financial documents with us, and we will provide a written, fixed-fee quote for our audit and compliance services. We handle the entire process end-to-end, giving you peace of mind. Contact SP & SC or WhatsApp us at +91 90356 74566 today.