CARO is the part of a company audit that is easiest to under-plan. Twenty-one clauses, each with its own trigger, several of which ask for a table rather than a yes.
Who reports, and who does not
The Order applies to every company, including a foreign company, except five kinds:
- a banking company;
- an insurance company;
- a company licensed to operate under section 8;
- a One Person Company and a small company; and
- a private limited company that satisfies all of the conditions below.
For that last exclusion, the Order asks four things at once. The company must not be a subsidiary or holding company of a public company; its paid up capital and reserves and surplus must be not more than one crore rupees as on the balance sheet date; its total borrowings from any bank or financial institution must not exceed one crore rupees at any point of time during the financial year; and its total revenue as disclosed in Schedule III, including revenue from discontinuing operations, must not exceed ten crore rupees during the financial year.
Three different measurement dates in one sentence. The capital test is at the balance sheet date, the borrowings test runs across the whole year, and the revenue test is for the year. A private company that touched a one crore rupee limit for a fortnight in July is inside CARO for that year, whatever its position at the year end.
The exclusion is cumulative. Failing any one of the four conditions brings the company back in.
Does CARO apply, and which clauses does the report carry?
The Order’s own exclusions and triggers. Judgement calls stay with the auditor.
CARO 2020 applies — all applicable clauses
Paragraph 4 also requires the basis for every unfavourable or qualified answer, and the reasons where an opinion cannot be expressed.
| Clause | Subject | What it asks | When |
|---|---|---|---|
| (i) | Property, plant and equipment, and intangible assets | Records, physical verification, title deeds not in the company's name, revaluation by a Registered Valuer where the change is 10% or more, and benami proceedings. | Every report |
| (ii) | Inventory and working capital limits | Physical verification and discrepancies of 10% or more for each class; and whether quarterly returns filed with lenders agree with the books. | (b) only where working capital limits in excess of five crore rupees were sanctioned at any point in the year on the security of current assets |
| (iii) | Investments, guarantees, security and loans | Amounts to subsidiaries, joint ventures and associates and to others; terms not prejudicial; repayment schedule; amounts overdue more than ninety days; evergreening; loans repayable on demand. | Where any such investment, guarantee, security or loan was made during the year |
| (iv) | Sections 185 and 186 | Compliance in respect of loans, investments, guarantees and security. | Where such transactions exist |
| (v) | Deposits | Compliance with the Reserve Bank's directions and sections 73 to 76, and any order passed. | Where deposits or deemed deposits were accepted |
| (vi) | Cost records | Whether maintenance is specified under section 148(1), and whether the records have been made and maintained. | Where specified by the Central Government |
| (vii) | Statutory dues | Regularity of undisputed dues and arrears outstanding more than six months; and dues unpaid on account of a dispute, with the forum. | Every report |
| (viii) | Surrendered or disclosed income | Transactions not recorded in the books that were surrendered or disclosed in tax assessments, and whether now recorded. | Every report |
| (ix) | Borrowings | Defaults lender-wise, wilful defaulter status, end use of term loans, short term funds used long term, funds for group obligations, and loans on pledge of group securities. | Every report |
| (x) | Money raised | Whether IPO or further public offer money was applied for its purpose; and compliance with sections 42 and 62 for preferential allotment or private placement. | Where money was raised during the year |
| (xi) | Fraud | Fraud by or on the company, whether Form ADT-4 was filed under section 143(12), and whether whistle-blower complaints were considered. | Every report |
| (xii) | Nidhi companies | Net Owned Funds to Deposits ratio, liability for deposits and unencumbered term deposits. | Nidhi companies only |
| (xiii) | Related party transactions | Compliance with sections 177 and 188, and disclosure as required by the applicable accounting standards. | Every report |
| (xiv) | Internal audit | Whether the system is commensurate with size and nature, and whether the internal auditors' reports were considered by the statutory auditor. | Every report |
| (xv) | Non-cash transactions | With directors or persons connected with them, and compliance with section 192. | Where such transactions exist |
| (xvi) | Reserve Bank registration | Registration under section 45-IA, activity without a Certificate of Registration, Core Investment Company criteria, and the number of CICs in the group. | Every report; the CIC parts where applicable |
| (xvii) | Cash losses | Whether incurred in the year and in the immediately preceding year, with amounts. | Every report |
| (xviii) | Resignation of the statutory auditors | Whether the incoming auditor considered the issues, objections or concerns raised by the outgoing auditor. | Where a resignation occurred during the year |
| (xix) | Ability to meet liabilities within one year | Whether, on ratios, ageing and management plans, no material uncertainty exists that the company can meet its existing liabilities as they fall due within one year of the balance sheet date. | Every report |
| (xx) | Unspent amount under section 135 | Unspent amounts transferred to a Schedule VII Fund within six months for other than ongoing projects, and to a special account for ongoing projects. | Where section 135 applies |
| (xxi) | CARO remarks in the consolidation | Whether the CARO reports of the companies consolidated carry qualifications or adverse remarks, with the companies and paragraph numbers. | The only clause reported on consolidated financial statements |
Companies (Auditor’s Report) Order, 2020 — paragraphs 1(2), 2, 3 and 4, as reproduced in ICAI’s Guidance Note on CARO 2020.
Two structural points people miss
Consolidated financial statements. Paragraph 2 carries a proviso: the Order does not apply to the auditor's report on consolidated financial statements except clause (xxi). So a consolidated report carries exactly one CARO clause, and it is the clause about the other auditors' CARO reports.
Paragraph 4 is not optional. Where the answer to any clause is unfavourable or qualified, the report must also state the basis for it. And where the auditor is unable to express an opinion on a matter, the report must indicate that fact together with the reasons why. A bare "no" is not a CARO answer.
What each clause actually asks
(i) Property, plant and equipment, and intangibles. Proper records for both — (a)(A) for PPE with quantitative details and situation, (a)(B) for intangible assets. Physical verification at reasonable intervals, and material discrepancies dealt with in the books. Then three sub-clauses added in 2020: (c) title deeds of all immovable property held in the company's name, and where they are not, a table with the description, gross carrying value, who holds them, whether that person is a promoter, director or their relative or employee, the period held and the reason — also indicating if in dispute; (d) revaluation during the year, whether it was by a Registered Valuer, and the amount of change if it is 10% or more in the aggregate of the net carrying value of each class; (e) benami proceedings initiated or pending, and whether disclosed.
(ii) Inventory and working capital limits. (a) Physical verification at reasonable intervals, the auditor's opinion on the coverage and procedure, and discrepancies of 10% or more in the aggregate for each class of inventory. (b) The clause that catches most companies: where at any point of time during the year the company was sanctioned working capital limits in excess of five crore rupees in aggregate from banks or financial institutions on the basis of security of current assets, whether the quarterly returns or statements filed with them agree with the books — and if not, the details.
(iii) Loans, investments, guarantees and security. Six sub-clauses covering investments in, guarantees or security provided to, and loans or advances in the nature of loans granted to companies, firms, Limited Liability Partnerships or any other parties. Aggregate amounts split between subsidiaries, joint ventures and associates and other parties; whether terms are prejudicial to the company's interest; whether a repayment schedule is stipulated and repayments are regular; the total amount overdue for more than ninety days and the steps taken; renewals, extensions or fresh loans to settle overdues of the same parties, with the percentage to total loans granted; and loans repayable on demand or without specifying any terms or period of repayment, with the amount granted to promoters and related parties.
(iv) Sections 185 and 186. Compliance in respect of loans, investments, guarantees and security.
(v) Deposits. Whether deposits or amounts deemed to be deposits comply with the directions of the Reserve Bank and the provisions of sections 73 to 76, and whether any order has been passed.
(vi) Cost records. Whether maintenance has been specified by the Central Government under section 148(1), and whether they have been made and maintained.
(vii) Statutory dues. (a) Regularity in depositing undisputed dues — Goods and Services Tax, provident fund, employees' state insurance, income-tax and the rest — and arrears outstanding for more than six months from the date they became payable. (b) Dues not deposited on account of a dispute, with the amounts and the forum. The Order adds a sentence worth reading to clients: a mere representation to the concerned Department shall not be treated as a dispute.
(viii) Surrendered income. Transactions not recorded in the books that were surrendered or disclosed as income in tax assessments under the Income Tax Act, 1961, and whether that income has now been properly recorded.
(ix) Borrowings. Defaults in repayment to any lender, reported in the Order's own format, with lender-wise details for banks, financial institutions and Government; whether the company is a declared wilful defaulter; whether term loans were applied for the purpose obtained; whether short term funds were used for long term purposes; funds taken to meet the obligations of subsidiaries, associates or joint ventures; and loans raised on the pledge of securities held in them.
(x) Money raised. (a) IPO or further public offer, including debt instruments, applied for the purposes raised. (b) Preferential allotment or private placement of shares or convertible debentures, compliance with sections 42 and 62, and use of the funds.
(xi) Fraud. (a) Any fraud by the company or on the company noticed or reported during the year, with nature and amount. (b) Whether a report under section 143(12) has been filed in Form ADT-4 under rule 13. (c) Whether the auditor has considered whistle-blower complaints received during the year.
(xii) Nidhi companies. Net Owned Funds to Deposits ratio, liability for deposits, and maintenance of ten per cent unencumbered term deposits.
(xiii) Related parties. Compliance with sections 177 and 188 where applicable, and disclosure in the financial statements as required by the applicable accounting standards.
(xiv) Internal audit. (a) Whether there is an internal audit system commensurate with the size and nature of the business. (b) Whether the internal auditors' reports for the period were considered by the statutory auditor.
(xv) Non-cash transactions. With directors or persons connected with them, and compliance with section 192.
(xvi) Reserve Bank registration. Registration under section 45-IA where required; non-banking financial or housing finance activity without a valid Certificate of Registration; whether the company is a Core Investment Company and continues to fulfil the criteria; and how many CICs are in the group.
(xvii) Cash losses. Whether incurred in the financial year and in the immediately preceding financial year, with amounts.
(xviii) Resignation of the statutory auditors. And whether the incoming auditor has taken into consideration the issues, objections or concerns raised by the outgoing auditor.
(xix) Ability to meet liabilities. This one is frequently misdescribed as a going concern opinion. Read it: on the basis of the financial ratios, ageing and expected dates of realisation of financial assets and payment of financial liabilities, other information accompanying the financial statements and the auditor's knowledge of the Board and management plans, whether the auditor is of the opinion that no material uncertainty exists as on the date of the audit report that the company is capable of meeting its liabilities existing at the balance sheet date as and when they fall due within a period of one year from that date.
(xx) CSR. (a) Unspent amounts for other than ongoing projects transferred to a Schedule VII Fund within six months of the end of the financial year, under the second proviso to section 135(5). (b) Unspent amounts for ongoing projects transferred to a special account under section 135(6).
(xxi) The consolidated clause. Whether the CARO reports of the companies included in the consolidated financial statements carry qualifications or adverse remarks, with the details of the companies and the paragraph numbers.
Planning note
Four clauses depend on information nobody in the audit team holds by default: title deeds (i)(c), quarterly returns filed with lenders (ii)(b), the wilful defaulter position (ix)(b), and the CARO reports of every company consolidated (xxi). Each requires a request to somebody outside the finance team, and each is the sort of request that takes a fortnight. They belong in the first week of the engagement, not the last.
Questions this answers
Which companies are exempt from CARO 2020?
Banking companies, insurance companies, companies licensed under section 8, One Person Companies and small companies, and private limited companies that are not a subsidiary or holding company of a public company and meet the capital, borrowings and revenue tests.
What are the limits for the private company exemption under CARO 2020?
Paid up capital and reserves and surplus of not more than one crore rupees as on the balance sheet date, total borrowings from any bank or financial institution not exceeding one crore rupees at any point of time during the financial year, and total revenue not exceeding ten crore rupees during the financial year.
Does CARO apply to consolidated financial statements?
No, except clause (xxi), which asks whether the CARO reports of the companies included in the consolidation carry qualifications or adverse remarks, with the details and paragraph numbers.
When does clause (ii)(b) on quarterly returns apply?
Where at any point of time during the year the company was sanctioned working capital limits in excess of five crore rupees in aggregate from banks or financial institutions on the basis of security of current assets. The auditor reports whether the quarterly returns filed with them agree with the books.
Is clause (xix) a going concern opinion?
No. It asks whether, on the basis of financial ratios, ageing and other information, no material uncertainty exists as on the date of the audit report that the company is capable of meeting its existing liabilities as they fall due within a period of one year from the balance sheet date.