CARO Rules, 2020

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 INTRODUCTION
• The auditors of companies, in the eyes of the law, hold a
pivotal role in ensuring transparency, good governance,
and the protection of shareholders including the public
ones. To this effect, the Ministry of Corporate Affairs
established a reporting system known as the
Companies (Auditor’s Report) Order or CARO.
CARO, which was first introduced in 1988 as
MAOCARO, has undergone significant evolution, with
landmark revisions in 2003, 2004, and then in quick
succession more recently in 2015, 2016 and 2020.
These changes always aim to ensure that reporting
keeps pace with the changing business environment.
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 WHAT IS CARO
• In today’s dynamic business environment, it is essential
to have a clear understanding of the financial health of
an organization.
• The Companies Act 2013, introduced the Companies
(Auditor’s Report) Order (CARO), 2020 to ensure
transparency in financial reporting and enhance
corporate governance.
• The implementation of CARO is crucial for companies to
maintain their reputation, and trust among stakeholders
and fulfil legal requirements..

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 WHAT IS CARO
• CARO is an order issued by the Ministry of Corporate Affairs (MCA)
under Section 143(11) of the Companies Act, 2013. It requires
auditors to provide specific information in their audit report about the
company’s financial statements and other significant details. The
order aims to improve the quality of audits and provide
stakeholders with a better understanding of the financial
position of the company.
Applicability of CARO
• CARO applies to all companies except:
• Not-for-profit companies
• Banking Companies
• Insurance Companies
• One Person Companies
• Small Companies (as defined under the Companies Act, 2013)
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 CARO Rules, 2020
• The MCA has issued the Companies (Auditor’s Report)
Order, 2016 (CARO 2016), on 29th March 2016.

• This order has been issued in supersession of the

CARO, 2015 which was issued by MCA in supersession
of CARO 2003.

• CARO 2016 is applicable from FY 2015-16 and the

matters specified therein shall be included in each report
made by the auditor under Section 143 of the
Companies Act, 2013 on the account of every company
to which CARO 2016 applies. 5
 Applicability of CARO Rules, 2016 (1)
• The MCA has relaxed the applicability of CARO 2016 to
private companies by increasing applicability thresholds

• CARO 2016 will not apply to the auditor’s report on

consolidated financial statements

• CARO 2016 has enhanced the auditor’s reporting

requirements in certain areas, such as related party
transaction and managerial remuneration

• CARO 2016 should be complied by the statutory auditor of

every company on which it applies.
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 CARO,2020
• The Ministry of Corporate Affairs (MCA)
has announced a new format of statutory
audits of companies. The MCA has
notified Companies (Auditor’s Report)
Order, 2020 (CARO 2020) on 25 February
2020. The CARO 2020 replaces the earlier
order, i.e. Companies (Auditor’s Report)
Order, 2016.

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 INTRODUCTION TO CARO,2020
• CARO 2020 is a new format for the issue of audit reports
in case of statutory audits of companies under
Companies Act, 2013. CARO 2020 has included
additional reporting requirements after consultations
with the National Financial Reporting Authority
(NFRA). NFRA is an independent regulatory body for
regulating the audit and accounting profession in India.
• The aim of CARO 2020 is to enhance the overall quality
of reporting by the company auditors.
• CARO 2020 stands shoulder-to-shoulder with the
dynamic financial landscape of the era. Applicable from
the financial year 2021-22, it brings with it an increased
reporting responsibility compared to its predecessor
CARO 2016. 8
• Yet, the application of CARO 2020 is not created
equal for all business entities. Designated
companies, depending on the nature, size, and
industry, have different guidelines according to
the order. Thus, it becomes essential for
companies to finely and carefully examine these
guidelines while Filing their Annual Returns.

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 APPLICABILITY
• CARO 2020 is applicable for all statutory audits commencing on or
after 1 April 2021 corresponding to the financial year 2020-21. The
order is applicable to all companies which were covered by CARO
2016. Thus, CARO 2020 applies to all the companies currently,
including a foreign company. However, it does not apply to the
following companies:
• One person company.
• Small companies (Companies with paid up capital less than/equal to
Rs 4 crore and with a last reported turnover which is less than/equal
to Rs 40 crore).
• Banking companies.
• Companies registered for charitable purposes.
• Insurance companies.

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• The following private companies are also exempt from the
requirements of CARO, 2020: –
• Whose gross receipts or revenue (including revenue from
discontinuing operations) is less than or equal to Rs 10 crore in the
financial year.
• Whose paid up share capital plus reserves is less than or equal to
Rs 1 crore as on the balance sheet date (i.e. usually at the end of
the FY).
• Not a holding or subsidiary of a Public company.
• Whose borrowings is less than or equal to Rs 1 crore at any time
during the FY.

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• The auditor’s report (CARO 2020) shall include a
statement on the following matters, namely:

• Details of tangible and intangible assets.

• Details of inventory and working capital.
• Details of investments, any guarantee or security or
advances or loans given.
• Compliance in respect of a loan to directors.
• Compliance in respect of deposits accepted.
• Maintenance of costing records.
• Deposit of statutory liabilities.
• Unrecorded income. 12
• Default in repayment of borrowings.
• Funds raised and utilisation.
• Fraud and whistle-blower complaints.
• Compliance by a Nidhi.
• Compliance on transactions with related parties.
• Internal audit system.
• Non-cash dealings with directors.
• Registration under section 45-IA of RBI Act, 1934.
• Cash losses.

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 Comparative Analysis with CARO 2016
CARO 2020 brings significant changes compared to its predecessor, CARO
2016. It introduces additional reporting requirements, enhancing the level of
transparency and disclosure. In this section, we will compare the key
differences between CARO 2020 and CARO 2016:
• Increased Reporting Clauses: CARO 2020 consists of 21 clauses, while
CARO 2016 had only 16. The additional clauses in CARO 2020 cover a
wide range of areas, including fixed assets, inventory, loans and
advances, compliance with taxes, and more. These additional reporting
requirements provide greater insight into the financial health of the
company.
• Specific Reporting on Regulatory Compliance: CARO 2020 places
greater emphasis on reporting non-compliance with various laws and
regulations. Auditors are now required to specifically report instances of
non-compliance with tax laws, company law provisions, and other
applicable regulations. This helps in improving the overall compliance
culture within companies.
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• Enhanced Reporting on Internal Financial Controls: CARO 2020
requires auditors to report on the adequacy and operating
effectiveness of the company’s internal financial controls. This
reporting provides assurance on the reliability of financial reporting
and helps in identifying any weaknesses or gaps in the control
environment.
• Expanding Scope of Reporting: CARO 2020 expands the scope
of reporting by including additional areas such as loans granted,
investments made, related party transactions, and utilization of
funds raised through public issues or rights issues. This broader
scope enables stakeholders to have a comprehensive view of the
company’s financial activities.
• Disclosures on Fraud: CARO 2020 introduces the requirement for
auditors to report on any instances of fraud involving employees or
management that has a significant impact on the company. This
reporting helps in detecting and preventing fraudulent activities
within organizations.
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Thank You.

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