Overview of CARO 2020
The Companies Auditor Report Order (CARO), 2020, issued under the Companies Act, 2013, mandates auditors to report specific financial and operational aspects of a company. It aims to enhance corporate transparency and governance by providing a structured framework for audit reports.
Applicability of CARO 2020
CARO 2020 applies to all companies, including foreign companies, except:
🚫 Exempted Companies:
1️⃣ Banking companies
2️⃣ Insurance companies
3️⃣ Charitable companies (Section 8 Companies)
4️⃣ One-Person Companies (OPCs)
5️⃣ Small Companies (as per Section 2(85): Paid-up share capital ≤ ₹4 crore & Turnover ≤ ₹40 crore)
6️⃣ Private Companies (not subsidiary/holding of a public company) that meet all the following conditions:
- Paid-up capital + reserves & surplus ≤ ₹1 crore
- Total borrowings ≤ ₹1 crore at any point during the financial year
- Total revenue ≤ ₹10 crore during the financial year
🔹 Applicability on Consolidated Financial Statements:
CARO does not apply to consolidated financial statements, except for Clause 3(xxi), which requires auditors to disclose any adverse remarks in standalone audit reports.
🔍 Detailed CARO Compliance & Reporting Checklist
1️⃣ Fixed Assets & Intangible Assets (Clause 3(i))
✔ Maintain an updated fixed asset register.
✔ Conduct physical verification and report discrepancies over 10% of book value.
✔ Verify ownership documents of immovable properties.
✔ Check whether assets have been revalued and disclose details.
✔ Ensure compliance with Ind AS 16 regarding depreciation and impairment.
🚨 Risk of Default:
- Non-disclosure of revaluation or impairment losses may lead to audit qualifications and penalties under Section 143(12).
2️⃣ Inventory & Working Capital (Clause 3(ii))
✔ Ensure physical verification of inventory at least once a year.
✔ Report any material discrepancies (>10%) in audit reports.
✔ Verify whether inventory is hypothecated against loans and reconcile figures.
✔ Ensure valuation of inventory follows Ind AS 2 (Inventory Accounting Standards).
🚨 Risk of Default:
- Incorrect inventory valuation can impact profitability reporting and lead to tax penalties.
3️⃣ Loans, Investments, Guarantees & Securities (Clause 3(iii))
🔹 Compliance with Section 186 (Loans & Investments by Companies):
✔ Companies cannot give loans, guarantees, or securities exceeding:
- 60% of paid-up capital, free reserves & securities premium or
- 100% of free reserves & securities premium, whichever is higher.
✔ Prior Board & Shareholder approval required for exceeding limits.
✔ Loans to subsidiaries/associate companies must be disclosed in financials.
✔ Ensure interest rates comply with RBI guidelines (not below the prevailing yield of 1-year, 3-year, or 10-year government securities).
🚨 Risk of Default:
- Violation of Section 186 can result in a fine up to ₹25 lakh for the company and ₹5 lakh for officers in default.
🔹 Compliance with Section 185 (Loan to Directors & Related Parties):
✔ Loans to directors, relatives, or firms in which directors hold interest are prohibited unless:
- Given to wholly-owned subsidiaries (with proper disclosures).
- The company provides a guarantee to its subsidiary, fulfilling conditions under Section 186.
🚨 Risk of Default:
- Violation of Section 185 can lead to imprisonment up to 6 months – 5 years and a fine up to ₹25 lakh.
4️⃣ Deposits (Clause 3(v))
✔ Verify compliance with Sections 73-76 before accepting deposits.
✔ File DPT-3 form annually for outstanding deposits/borrowings.
✔ Ensure unsecured loans from directors are disclosed correctly.
🚨 Risk of Default:
- Unapproved deposits can lead to imprisonment up to 7 years & fines up to ₹25 lakh under Section 76A.
5️⃣ Related Party Transactions (Clause 3(xiii))
🔹 Compliance with Section 188 (Related Party Transactions - RPTs):
✔ Board approval is mandatory for all RPTs.
✔ Shareholder approval required if transactions exceed:
- 10% of turnover or ₹1 crore, whichever is lower (for related party contracts).
✔ Transactions must be at arm’s length price (supported by Transfer Pricing documentation).
✔ File MGT-9 or AOC-2 for disclosures.
🚨 Risk of Default:
- Violation of Section 188 can make contracts void and attract penalties up to ₹5 lakh.
6️⃣ Default in Loan Repayment (Clause 3(ix))
✔ Report details of defaults on borrowings, lenders, and amounts overdue.
✔ Maintain loan repayment schedules and ensure timely EMI payments.
✔ Verify compliance with bank covenants (DSCR, debt-equity ratio).
🚨 Risk of Default:
- Loan defaults can result in NPA classification, credit rating downgrade, and lender scrutiny.
7️⃣ Internal Audit & Corporate Governance (Clause 3(xiv))
✔ Ensure independent internal audit mechanisms are in place.
✔ Maintain compliance with SOX (for foreign subsidiaries) or Companies Act norms.
✔ Address findings from internal audit reports in board meetings.
🚨 Risk of Default:
- Weak internal audit systems increase fraud risks and lead to financial mismanagement.
📌 Final Checklist to Ensure CARO 2020 Compliance
| Key Reporting Area | Compliance Action | Risk of Default |
|---|---|---|
| Fixed Assets | Physical verification, ownership docs | Misstatement leads to qualification |
| Inventory | Reconciliation, valuation as per Ind AS 2 | Manipulation attracts tax penalties |
| Loans & Advances | Compliance with Section 185, 186 | Non-compliance leads to ₹25 lakh penalty |
| Deposits | File DPT-3, comply with Sections 73-76 | Imprisonment up to 7 years |
| Statutory Dues | Ensure GST, TDS, PF, ESI are paid | Interest, penalties, and prosecution |
| Fraud Reporting | Report frauds under Section 143(12) | Auditor fined up to ₹5 lakh |
| RPTs | Board approval for RPTs under Section 188 | Transactions may be voided |
| Loan Repayment | No defaults on bank loans | Credit downgrade & NPA risk |
🚀 Conclusion
To avoid regulatory penalties, companies must implement a robust internal control system and maintain accurate financial records. Auditors must ensure complete compliance with CARO 2020, especially Sections 186, 188, and 185.
Please write to us on ca.sahuja@gmail.com or in comments if you need Checklist in Excel Format
