CARO: More than a Checklist

The Companies (Auditor’s Report) Order (CARO) has a long lineage in Indian corporate reporting. Its origins trace back to the Manufacturing and Other Companies (Auditor’s Report) Order, 1975 (MAOCARO 1975), later revised as MAOCARO 1988, both issued under Section 227(4A) of the Companies Act, 1956. This was superseded by CARO 2003 (amended in 2004) and, following the enactment of the new company law, by CARO 2015 and CARO 2016 issued under the Companies Act, 2013. The current framework, CARO 2020, was notified by the Ministry of Corporate Affairs vide Order dated 25 February 2020. Over five decades, the Order has evolved from a manufacturing-centric checklist into a comprehensive, twenty-one-clause reporting instrument.

CARO derives its legal authority from Section 143(11) of the Companies Act, 2013, which empowers the Central Government, after consultation with the National Financial Reporting Authority (NFRA), to direct that the auditor’s report of specified classes of companies shall include a statement on such matters as may be prescribed. The reporting under CARO 2020 is thus a statutory obligation that operates in addition to, and not in substitution of, the reporting required under Section 143(3). The Order applies to statutory audits of every company, including a foreign company, except those specifically excluded, namely:

• Special regulation companies: banking companies, insurance companies, companies licensed under Section 8, and one-person companies;
• Small companies: under the revised definition (effective 1^st  December 2025), a small company is one that is not a holding or subsidiary company and whose paid-up capital does not exceed ₹10 crore and turnover does not exceed ₹100 crore. With these enhanced limits, a large number of companies now qualify as small companies;
• Private companies (other than a holding or subsidiary of a public company) satisfying all the prescribed thresholds — paid-up capital together with reserves and surplus not exceeding ₹1 crore, total borrowings from banks or financial institutions not exceeding ₹1 crore at any time during the year, and total revenue not exceeding ₹10 crore during the year. This is popularly known as the 1-1-10 rule.

Considering the revised small-company definition, the exemption under the 1-1-10 rule will, in most cases, be of little practical consequence — except in a few specific situations (for example, a private company that is a subsidiary of another private company, which is excluded from the small-company definition yet may still qualify under the 1-1-10 rule).

The importance of the CARO report lies in the incremental, factual and often granular assurance it provides to stakeholders. By requiring the auditor to specifically comment on matters such as property, plant and equipment and title deeds of immovable property, physical verification of inventory, loans and investments under Sections 185 and 186, acceptance of deposits, maintenance of cost records, deposit of statutory dues, default in repayment to lenders, utilisation of borrowed funds, reporting of frauds, and compliance in respect of consolidated financial statements, CARO effectively functions as a structured red-flag mechanism.

Whether CARO is genuinely useful has always been a debated question. In principle, the Order compels the auditor to apply an independent mind to defined areas of statutory and operational compliance that might otherwise be glossed over, and it standardises disclosure across companies and audit firms. In practice, its utility is frequently diluted by mechanical, boilerplate and “yes/no” style responses that are reproduced year after year without adequate underlying audit evidence, by clause-wise reporting that merely restates what is already evident from the financial statements, and by a checklist mentality that treats CARO as a compliance formality rather than a reporting responsibility. When reduced to a template, the report adds length without adding insight. The Indian reporting framework — be it accounting standards or reporting on internal financial controls — has always been more subjective than objective-driven, and CARO reporting, being comparatively objective in nature, therefore does not fit neatly within that overall scheme.

The usefulness of the report can be meaningfully improved by shifting from mechanical compliance to substantive, exception-based reporting — where each clause response is demonstrably supported by audit evidence, and adverse or qualified remarks are stated clearly and with reasons. A similar mechanism is adopted by UK regulators, under which the auditor must report only if something is wrong on a prescribed list — so-called “reporting by exception.” Singapore (Companies Act, s.207), Malaysia (Companies Act 2016) and Australia (Corporations Act 2001) follow the same exception-reporting pattern.

Firm-level checklists backed by documented working papers, periodic training on recurring reporting errors flagged by the Financial Reporting Review Board (FRRB) and the Quality Review Board (QRB), and a conscious effort to report the exception rather than the rule, would collectively restore CARO to its intended purpose: a concise, reliable and decision-useful supplement to the auditor’s report.

Materiality

When reporting on matters specified in the CARO, the auditor should consider materiality. For example, when reporting on the repayment schedule of various loans granted by the company, the auditor examines the loan documentation of all large loans and conducts a test check, taking materiality into account.

Key consideration an auditor should keep in mind while reporting on CARO:

• In case CARO is not applicable to the Company, it is advisable that the auditor’s report include a statement giving an explanation that the order is not applicable to the Company. Below can be a draft how the reason can be framed:

“The provisions of the Companies (Auditor’s Report) Order, 2020 (“the Order”), issued by the Central Government of India in terms of sub-section (11) of Section 143 of the Companies Act, 2013, are not applicable to the Company, as the Company is neither (a) a subsidiary or holding company of a public company; (b) nor has paid-up capital together with reserves and surplus exceeding Rs.1 Crore as at the balance sheet date; (c) nor has total borrowings from banks and financial institutions exceeding Rs.1 Crore at any time during the year; and (d) nor has turnover for the year exceeding Rs.10 Crore.”

• Similarly, in case an auditor is unable to express any opinion on any clause, he is required to indicate in his report such a fact, together with the reasons as to why he is unable to express any opinion. The auditor is also required to give reasons for any unfavourable or qualified answer.
• Over-reliance on management representation letters: Management representation is intended to support audit evidence, whereas CARO reporting represents the auditor’s independent findings. It has been observed in many audit lapses that auditors relied excessively on management letters rather than carrying out independent verification. For instance, many a time the auditor does not ensure whether management has actually conducted physical verification of fixed assets or inventory. Many auditors simply rely on management’s letter of representation regarding physical verification and do not carry out independent checks on management’s working papers. Auditors should also insist on inter-departmental / inter-branch verification to achieve proper, independent and objective verification.
• Casual reporting: CARO reporting is not a mere copy-paste job from last year’s CARO report. We have often noticed that a CARO report is not given even though CARO has become applicable in the current year — simply because of a casual approach adopted while reporting. Recently, a CA was reportedly penalised by NFRA for casual CARO reporting: the auditor signed a clean CARO report even though the company had clear violations of Sections 185 and 73 of the Companies Act. The company had extended loans to entities in which directors had an indirect interest; no proper Board resolutions were passed under Section 185, and no disclosures were recorded under Section 184. On the deposit side, unsecured loans were taken from relatives of directors without compliance, and Form DPT-3 was not filed. The auditors had no documentation of any independent audit procedures performed on these matters.

Though CARO reporting may look routine, signing a CARO report today without independent verification and proper documentation is no longer acceptable.

• Align overall audit risk: While preparing an audit plan, we all identify key risk areas considering materiality levels and the assessment of internal control. Always align these risk areas while reporting under CARO. For instance, where related party transactions are a key risk area for an auditee, ensure that all relevant CARO reporting points concerning related party transactions are aligned with the overall audit plan. An audit plan in such a case should ensure: Board / members’ resolutions as applicable; compliance with Sections 185 and 186 of the Companies Act; the arm’s-length nature of transactions; related-party balance confirmations; any risk in recovery and provisioning, if required; compliance with the deposit rules under Section 73; complete disclosure of related-party transactions in the financial statements; and any non-cash transactions with the Board.
• Overall reconciliation with other reporting: Many a time it has been noticed that reporting errors arise from a lack of proper reconciliation with other reporting in the financial statements. It has been observed that CARO sometimes reports something different from the disclosures in other sections of the financial statements. Below are a few such items, which auditors should ensure are reconciled with the financial statements:

Reconciliation with other reporting and CARO Reporting:

Generally, most of the clauses in CARO are linked with other financial and tax-audit reporting. One has to ensure that all reporting is in sync and speaks to each other. I have tried to correlate each clause with other aspects of the financial statements, to enable the reader to ensure proper reconciliation:

CARO 2020 Clause	What the Clause Requires	Correlation with the Financial Statements & Notes	Correlation with the Tax Audit (Form 3CD) & Other Reports / Records	Care to Take – The Consistency Check
Clause 3(i) – PPE, Intangibles, Title Deeds, Revaluation & Benami Property	Whether the title deeds of all immovable properties are held in the company’s name.	Ensure due reconciliation with the Schedule III disclosure and listing of properties where title deeds of immovable property are not held in the company’s name.	NA	Ensure the title-deed comment under (i)(c) mirrors the Schedule III disclosures.
Clause 3(ii) – Inventory & Bank Quarterly Returns	Requires reporting where working-capital limits above ₹5 crore are sanctioned against the security of current assets — whether the quarterly returns or statements filed with banks or financial institutions agree with the books of account.	The comment should reconcile with the borrowings note where facilities are secured against current assets. The management is also required to certify security as per books, and as per statement submitted with bank.	NA	The quarterly returns referred to under (ii)(b) must reconcile to the audited figures and to the drawing-power computation;
Clause 3(iii) – Loans, Advances, Guarantees & Security Given; Overdue Amounts.   Clause 3(iv) – Compliance with Sections 185 & 186	Requires reporting on investments made and loans, advances in the nature of loans, guarantees or security provided, whether the terms are prejudicial to the company, whether repayment schedules are stipulated and regular, amounts overdue for more than 90 days, loans renewed or fresh loans granted to settle earlier dues (evergreening), and loans granted repayable on demand or without any stipulation of terms.	Management need to certify in the financial statement, details of all Loans or advances in the nature of loans granted to promoters, directors, KMPs and the related parties. Auditor should ensure, the details provided reconciles with the audit report.   Further, companies are required to disclose all related-party transactions and outstanding balances. These should duly reconcile with the auditor’s report.	Auditor should ensure the reporting reconciles with the interest payment reported in clause 23 (payments to specified persons under Section 40A(2)(b)).   Further, one has to be careful with loans or advances that may be treated as deemed dividend under Section 2(22)(e) — a loan or advance by a closely held company to a shareholder holding a substantial interest, or to a concern in which such a shareholder is substantially interested. The erstwhile clause 36 of Form 3CD required reporting of Dividend Distribution Tax under Section 115-O; that clause has since been done away with following the abolition of DDT (Finance Act, 2020, w.e.f. AY 2021-22). Reporting of such deemed-dividend receipts now falls under clause 36A of Form 3CD.   Deemed dividend so determined also attracts TDS: the company must deduct tax under Section 194 (resident shareholder, at 10%) or Section 195 (non-resident shareholder), subject to the applicable threshold, and report it in Form 3CD clause 34 and the TDS return (Form 26Q / 27Q). As a dividend is not an item of expenditure, non-deduction does not trigger; instead, the company is treated as an assessee-in-default under Section 201, with interest under Section 201(1A). This TDS should, in turn, reconcile with the undisputed statutory dues (TDS) reported under CARO clause 3(vii).	Auditor should ensure the reporting reconciles with financial statement along with tax audit and directors report.
Clause 3(v) – Deposits (Sections 73 to 76)	Requires reporting on whether the company has complied with the provisions of Sections 73 to 76 (and the rules) in respect of deposits accepted.	The comment should reconcile with borrowings, unsecured loans, share-application money pending allotment.   Further, companies are required to disclose all related-party transactions and outstanding balances. Acceptance of loan being related party transaction, the details should reconcile with reporting if any under the said clause.	Ensure proper reconciliation with reporting under clause 31 of Form 3CD on the mode of acceptance of unsecured loans (Section 269SS).	Auditor should ensure proper reconciliation of all amount.
Clause 3(vi) – Cost Records (Section 148)	Requires reporting on whether the maintenance of cost records has been specified by the Central Government under Section 148(1) and, if so, whether such accounts and records have been made and maintained.	NA	Where a cost audit applies, auditor has to provide details of disqualification or Disagreement identified by cost auditor.	Confirm applicability product-wise and against the turnover thresholds; where records are required, verify that they are maintained and tie the position to the cost audit report.
Clause 3(vii) – Statutory Dues, Undisputed and Disputed	Requires reporting on whether the company is regular in depositing undisputed statutory dues (provident fund, ESI, income-tax, GST, customs duty, cess and other dues) and the extent of arrears outstanding for more than six months;   Also, disclosures are required for disputed dues, the amount involved and the forum where the dispute is pending.	Auditor should ensure, reporting reconciles with the disclosure under contingent liabilities especially disputed tax liabilities.   Further, undisputed tax liability duly accounted should result in deferred tax asset as tax liabilities are allowed on payment basis.	Tax auditor should ensure proper cross-check with clause 26 of Form 3CD (Section 43B), clause 20(b) and the Section 36(1)(va) position on employees’ PF / ESI, clause 34 (TDS compliance), clause 41 (demands and refunds under other laws).	An unpaid statutory due flagged here should flow into the Section 43B disallowance in clause 26 and give rise to a deferred tax asset. However, the employees’ share of PF / ESI, governed by Section 36(1)(va), results in a permanent disallowance if not deposited by the due date, and therefore gives rise to no deferred tax.
Clause 3(viii) – Income Surrendered or Disclosed in Tax Assessment, Not Recorded	Requires reporting on whether any transactions not recorded in the books have been surrendered or disclosed as income during an assessment under the Income-tax Act and whether they have been properly recorded in the books.	Auditor shall ensure the reporting reconciles similar reporting provided by schedule III disclosures.   The comment should also be assessed against prior-period or exceptional items.   Auditor shall also evaluate adequate disclosure in contingent liabilities if such tax liabilities are appealed further.	NA	Where surrendered income remains unrecorded, evaluate the impact on the current-tax provision, on deferred tax, and on whether a prior-period restatement under Ind AS 8 is required.
Clause 3(xiii) – Related Party Transactions	Requires reporting on whether all transactions with related parties comply with Sections 177 and 188 and whether the details have been disclosed in the financial statements as required by the applicable accounting standards.	The comment should agree with the related-party disclosures.	Cross-check with clause 23 of Form 3CD (payments to specified persons under Section 40A(2)(b)).	Report BOTH limbs — compliance with Sections 177 / 188 AND disclosure per the applicable accounting standard — and ensure the related-party list matches the clause 23 (40A(2)(b)) disclosure in the tax audit.
Clause 3(xv) – Non-Cash Transactions with Directors (Section 192)	Requires reporting on whether the company entered into non-cash transactions with its directors or persons connected with them and whether Section 192 was complied with.	Ties to the related-party and directors’ transaction disclosures.	Read together with the related-party disclosures in Form 3CD and the board approvals.	Reconcile any such transaction with the related-party disclosures and confirm the approvals required under Section 192.
Clause 3(xvii) – Cash Losses	Requires reporting on whether the company has incurred cash losses in the financial year and in the immediately preceding financial year, and the amounts of such cash losses.	The figure derives from the statement of profit and loss for both years and bears on the going-concern assessment.   Further, auditor shall evaluate going concern assumption for consistent losses.   Auditor, should also reconcile losses with deferred tax assets on carried forward losses if any.	Review statement of brought forward losses (as per Income Tax Act) and any implication on CARO reporting.	The cash-loss figure (the loss adjusted for non-cash items) must reconcile to the profit-and-loss statement and be read together with going concern and clause (xix).
Clause 3(xx) – Unspent CSR	Requires reporting on whether unspent CSR amounts (other than those relating to ongoing projects) have been transferred to a Schedule VII fund within the prescribed time, and whether amounts relating to ongoing projects have been transferred to a special account under Section 135(6).	The comment should reconcile with the provision for unspent CSR and the CSR disclosures required under Schedule III.	Auditor shall evaluate treatment in Form 3CD as CSR expenditure being generally not allowable under Section 37.	Clauses (xx)(a) and (b) must reconcile with the unspent-CSR provision, the transfer to the Schedule VII fund or the special account, and the Schedule III CSR note.

Let’s dwell upon certain key reporting non-compliances:

The ICAI’s Financial Reporting Review Board reviews financial statements and auditors’ reports for compliance with accounting principles and disclosure requirements. Their study records the following non-compliances in CARO reporting:

Nature of Non-Compliance	Care an Auditor Should Take
Physical verification of Property Plant and Equipment.
The auditor has reported in the CARO report that “Property, Plant and Equipment (PPE) have been physically verified by the management during the year”.	Paragraph 3(i)(b) of CARO, 2016 requires the auditor to comment as to whether the physical verification of PPE was performed at reasonable intervals by the management.
Physical verification of Inventory.
The auditor has reported “As per the information and explanations given to us, the management has conducted physical verification of inventory at reasonable intervals during the year “wherever possible and required”, and the discrepancies noticed have been properly dealt with in the books	It was viewed that the stated wording is not appropriate, as it is creating ambiguity in the minds of readers.
Loan and Advances
The auditor reported as “According to the information given to us, the borrowers have been regular in the repayment of principal and interest on loans as stipulated.”	It was viewed that the expression ‘’According to the information given to us’’ may lead users of the financial statements to believe that the auditor has merely relied on the information provided by the management without carrying out any other appropriate audit procedures to verify the information as to whether the repayment of principal and interest on loans is regular or not.
Auditor reported as “In our opinion and according to the information and explanation given to us the company has complied with the provision of section 185 and 186 of the Act with respect to the investment made.”	It was noted from Note on Contingent Liabilities that the Company has issued “Guarantees on behalf of third parties”. It was further noted from CARO report that the auditor has reported compliances with section 185 and 186 of Companies Act, 2013 with respect to the investments made. However, the auditor has not reported on the compliances of these sections with respect to the “Guarantee or Security provided” as required by paragraph 3(iv) of CARO, 2016.
Auditor reported as  “In our opinion…., there are no loans given in respect of which provisions of section 185 of the Act are applicable and hence not commented upon. Further, being an infrastructure company, provision of section 186 of the Act is not applicable to the Company and hence not commented upon.”	The Board viewed that an infrastructure company is excluded from the provisions of section 186 except the provisions of section 186(1). In other words, the requirements of section 186(1) are applicable to infrastructure companies, and therefore, auditor should have given his comment on compliance with the provisions
Auditor reported as “In our opinion, in respect of loans, investments, guarantees and security the provisions of section 185 has been complied & section 186 has not been complied”	The auditor has, although, reported the fact that there has been non-compliance of section 186 of the Companies Act, 2013, however, the details of such non-compliance have not been reported
It was reported as “In our opinion…., the company has complied with the provisions of Section 185 and 186 of the Companies Act, 2013 in respect of grant of loans, making investments and providing guarantees and securities, as applicable”	The company has neither granted loans nor does it have any investments
Statutory Dues
“The company is regular in depositing with appropriate authorities undisputed statutory dues, including Provident Fund, Employees State Insurance, Income Tax, Sales Tax, service tax, duty of Custom, duty of excise, value added tax, cess and any other statutory dues applicable to it.”	It was noted from the financial statements that the company had neither paid any employee benefits nor made any contribution to provident fund or ESI. The auditor has reported that ‘’the company is regular in depositing statutory dues of provident fund, employees’ state insurance with appropriate authorities
Details of dues of Excise Duty, Service Tax and Customs Duty which have not been deposited as on March 20XX on account of disputes are given.	It was noted from Note on Contingent Liabilities that the company has disclosed claims against company with respect to Income Tax and Sales Tax matters. However, it was observed that the auditor has not given any reference under clause (vii)(b) of CARO, 2016, with respect to Income Tax and Sales Tax Matters. It was viewed that in case the amount has been deposited under protest, then such fact should have been disclosed by the auditor in his audit report as per paragraph 43(g) of the Guidance Note on CARO, 2016.
In our opinion, there are no material dues of the duty of customs, service tax, excise duty, Goods and Service Tax, VAT, which have not been deposited on account of dispute	Under the stated clause, the auditor has reported that there are “no material dues” which have not been deposited on account of dispute. Even minor amounts would be required to be reported in a manner so that the reader is able to understand the dispute and the amount involved therein
Borrowings
In our opinion and according to the information and explanations given to us, the Company has defaulted in repayment of dues to financial institutions, banks or debenture holders as on 31st March 20XX, details whereof is given herein below:	The auditor has reported principal amount outstanding and period of default for all the lenders in aggregate. It was viewed that if there were any defaults in repayment to any lender, then the auditor should have provided the required detail for each type of lender such as Banks, Financial Institutions and Government along with its period and amount of default.
Term loan
An Auditor reported as “The company did not raise any money by way of initial public offer or further public offer and term loans during the year. Accordingly, our comment on this clause is not required”	It was observed from the Cash flow Statement and Note on “Non-current Borrowings” that the company has obtained the additional long-term borrowings during the year.
Fraud
It was reported as “During the course of our examination… …. no fraud by the Company or on the Company by its officers or employees has been noticed or reported during the course of our audit”.	As per the reporting requirement, the auditor needs to report for the entire financial year and not just during course of audit.
Related Party Transaction
It was reported as “in our opinion…. all the transactions with the related parties are in compliance with the provisions of sections 177 and 188 of Companies Act, 2013 where applicable and the details have been disclosed in the financial statements as required under Accounting Standard (AS) 18, Related Party Disclosures specified under Section 133 of the Act, read with rule 7 of the Companies (Accounts) Rules, 2014.”	It was noted that the applicable accounting standard for the company is Indian Accounting Standard 24 (Ind AS 24), Related Party Disclosures, accordingly, the comment made by the auditor, referring to AS 18 instead of Ind AS 24, is not correct.

The FRRB’s findings, though minor in isolation, share one root issue: CARO is too often treated as a checklist to be cleared rather than a report to be discharged. Correcting that needs no new expertise — only the discipline to read each clause in full, tie every comment to evidence, reconcile it with the financial statements and the rest of the report, and state the exception plainly. Handled so, CARO stops padding the report and starts doing what Section 143(11) intended: strengthening the auditor’s opinion rather than merely accompanying it.

[The author can be reached at amit@dalaldoctor.com.]