CARO 2020 – Complete Practical Handbook for Auditors and Companies

The Companies (Auditor’s Report) Order, 2020 (CARO 2020) significantly enhances the scope of reporting by auditors under section 143 of the Companies Act, 2013. It mandates detailed disclosures on a wide range of financial, operational, and compliance aspects, and directly impacts both the auditor’s approach and the assessee’s reporting and documentation framework.

This guide explains:

  • Which companies are covered and which are exempt from CARO 2020
  • The evolving definition and thresholds of “Small Company”
  • Specific conditions for private company exemptions
  • Clause-by-clause reporting requirements under paragraph 3 and paragraph 4 of CARO 2020
  • Key compliance aspects that management and auditors must evaluate
  • Important Foreign Contribution (Regulation) Act (FCRA) related conditions for entities seeking foreign funding

1. Applicability of CARO 2020

CARO 2020 applies to every company, including a foreign company as defined in section 2(42) of the Companies Act, 2013, unless expressly exempted.

1.1 Categories of Companies Exempt from CARO 2020

The following classes of companies are outside the scope of CARO 2020:

  1. Banking Companies

    • As defined in clause (c) of section 5 of the Banking Regulation Act, 1949.

  2. Insurance Companies

    • As defined under the Insurance Act, 1938.

  3. Section 8 Companies

    • Companies licensed under section 8 of the Companies Act, 2013.

  4. One Person Companies (OPC)

    • As defined in section 2(62) of the Companies Act, 2013.

  5. Small Companies

    • As defined in section 2(85) of the Companies Act, 2013, subject to the applicable thresholds explained below.

  6. Certain Private Companies

    • Private companies meeting specific financial limits and relationship criteria (discussed in section 1.3 below).

Note
For all non-exempt companies, auditors are mandatorily required to report on the matters specified in paragraphs 3 and 4 of CARO 2020, in addition to the statutory reporting under section 143.

1.2 Definition and Thresholds for “Small Company” – Section 2(85)

The classification of a “Small Company” under section 2(85) is based on both paid-up share capital and turnover limits, and these thresholds are changing with effect from 1 December 2025.

1.2.1 Thresholds up to 30 November 2025

Up to 30 November 2025, an entity qualifies as a Small Company if it simultaneously satisfies:

  • Paid-up Share Capital: Less than ₹4 crore; and
  • Turnover: Less than ₹40 crore.

However, regardless of the above financial limits, the following entities are always excluded from the definition of Small Company:

  • Holding companies
  • Subsidiary companies
  • Companies registered under section 8
  • Companies or bodies corporate governed by a special Act

1.2.2 Thresholds with effect from 1 December 2025

With effect from 1 December 2025, the revised classification criteria for a Small Company will be:

  • Paid-up Share Capital: Less than ₹10 crore; and
  • Turnover: Less than ₹100 crore.

Effective Date
The revised thresholds become operative from 1 December 2025, being the date notified in the Official Gazette. Assessing CARO applicability must therefore be aligned with the financial year and the applicable threshold in force.

1.3 Private Companies Exempt from CARO 2020

A private company that is not a subsidiary or holding company of a public company is exempt from CARO 2020 when it cumulatively satisfies all the criteria below on the relevant reporting date:

  1. Paid-up Share Capital and Reserves:

    • Aggregate paid-up share capital and reserves do not exceed Rs. 1 crore.

  2. Borrowings from Banks / Financial Institutions:

    • Total borrowings from banks or financial institutions at any time during the year are less than Rs. 1 crore.

  3. Total Revenue:

    • Total revenue (as presented in Schedule III to the Companies Act, 2013) for the financial year is less than Rs. 10 crore.

Where any of the above conditions is breached, CARO reporting becomes mandatory for that private company (subject to other exemptions such as Small Company status, if applicable).

2. Scope of the Auditor’s Report under CARO 2020

For all financial years beginning on or after 1 April 2019, every auditor’s report issued under section 143 for a company to which CARO 2020 applies must additionally cover the matters specified in paragraphs 3 and 4 of the Order.

Important
CARO 2020 does not apply to the auditor’s report on consolidated financial statements, except for clause (xxi) of paragraph 3, which specifically deals with reporting on qualifications/adverse remarks in the CARO reports of components forming part of the consolidation.

3. Detailed Clause-wise Reporting Requirements (Paragraph 3 of CARO 2020)

3.1 Clause 3(i): Property, Plant & Equipment and Intangible Assets

The auditor must comment on:

  1. Maintenance of Records

    • Whether the company maintains proper records showing:
      • Complete particulars, including quantitative details and location of Property, Plant and Equipment.
      • Full particulars of intangible assets.

  2. Physical Verification

    • Whether Property, Plant and Equipment have been physically verified by management at reasonable intervals.
    • Whether any material discrepancies were identified and, if so, whether these have been appropriately adjusted in the books.

  3. Title Deeds of Immovable Properties

    • Whether the title deeds of immovable properties (other than leased properties where lease deeds are properly executed in favour of the company as lessee) disclosed in the financial statements are held in the name of the company.

    • If not, the auditor must provide details in the prescribed format:

      • Description of property
      • Gross carrying value
      • Held in whose name
      • Whether the holder is a promoter, director, relative of promoter/director, or employee
      • Period for which property is held (with range, if appropriate)
      • Reason for not being in the company’s name, and whether the matter is disputed.

  4. Revaluation of Assets

    • Whether any revaluation of:
      • Property, Plant and Equipment (including Right of Use assets), or
      • Intangible assets
        has been carried out during the year.
    • If yes:
      • Whether a Registered Valuer has carried out the valuation.
      • The amount of change, where the revaluation results in a change of 10% or more in the aggregate net carrying value of each class of Property, Plant and Equipment or intangible assets.

  5. Benami Property Proceedings

    • Whether any proceedings have been initiated or are pending under the Benami Transactions (Prohibition) Act, 1988 and the rules made thereunder, for holding any benami property.
    • If yes, whether appropriate disclosures have been made in the financial statements.

3.2 Clause 3(ii): Inventory

The auditor is required to examine:

  1. Physical Verification of Inventory
    • Whether management has conducted physical verification of inventory at reasonable intervals.
    • Whether, in the auditor’s judgment:
      • The coverage of verification, and
      • The procedures adopted
        are appropriate.
    • Whether discrepancies of 10% or more, in aggregate, for each class of inventory were noticed and, if so, whether these have been correctly accounted for.