Tag: Audit Report

CARO 2020: Applicability, Exemptions and the 21 Clauses of the Companies (Auditor’s Report) Order

Posted on by CA Meet Dhrangadhariya

Last updated: 09 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • CARO 2020 is an Order under section 143(11) of the Companies Act, 2013 that adds 21 matters to the statutory auditor’s report, for financial years starting on or after 01/04/2019. It replaced CARO 2016.
  • It does not apply to banking and insurance companies, Section 8 companies, one person companies, small companies, and a small private company with paid-up capital and reserves up to Rs 1 crore, borrowings up to Rs 1 crore and revenue up to Rs 10 crore (that is not a subsidiary or holding company of a public company).
  • For consolidated financial statements only clause (xxi) applies.
  • Where an answer is unfavourable or qualified, the auditor must state the basis.

Section 143(11) of the Companies Act lets the Central Government direct that the auditor’s report of specified companies include a statement on matters it lists. The Companies (Auditor’s Report) Order, 2020 (CARO 2020) is that direction. It supersedes the 2016 Order and applies to auditor’s reports for financial years commencing on or after 01/04/2019.

Who is covered

CARO 2020 applies to every company including a foreign company, except:

  1. a banking company;
  2. an insurance company;
  3. a company licensed under section 8 of the Companies Act (Section 8 company);
  4. a One Person Company and a small company; and
  5. a private limited company, not being a subsidiary or holding company of a public company, which has all of these: paid-up capital and reserves and surplus of not more than Rs 1 crore at the balance sheet date; no borrowings above Rs 1 crore from any bank or financial institution at any time in the year; and total revenue (as disclosed in Schedule III, including discontinued operations) of not more than Rs 10 crore in the year.

The Order does not apply to the auditor’s report on consolidated financial statements, except clause (xxi).

What the auditor must report: the 21 clauses of paragraph 3

Clause Subject
(i) Property, plant and equipment and intangibles: proper records, physical verification, title deeds of immovable property held in the company’s name, revaluation by a registered valuer (change of 10% or more), benami proceedings
(ii) Inventory: physical verification and discrepancies of 10% or more per class; for working capital limits above Rs 5 crore on security of current assets, whether quarterly returns agree with the books
(iii) Investments, guarantees, security and loans: amounts, terms not prejudicial, repayment schedule, overdues above 90 days, renewals to settle overdues, loans repayable on demand or without terms and loans to promoters and related parties
(iv) Compliance with sections 185 and 186 on loans, investments, guarantees and security
(v) Deposits: compliance with RBI directions and sections 73 to 76 and orders of tribunals or courts
(vi) Cost records under section 148, where specified
(vii) Statutory dues (GST, PF, ESI, income-tax and others): regularity of deposit, arrears over six months, and disputed dues with the forum
(viii) Unrecorded transactions surrendered or disclosed as income in tax assessments
(ix) Borrowings: defaults to lenders (in the prescribed format), wilful defaulter status, end use of term loans, short term funds used for long term, funds taken for obligations of subsidiaries, associates or joint ventures, and loans raised on pledge of their securities
(x) Public issues and preferential allotments or private placements: use of funds and compliance with sections 42 and 62
(xi) Fraud: any fraud by or on the company, whether Form ADT-4 report under section 143(12) was filed, and whistle-blower complaints considered
(xii) Nidhi companies: net owned funds to deposits ratio of 1:20, ten per cent unencumbered term deposits, defaults on deposits
(xiii) Related party transactions: compliance with sections 177 and 188 and disclosure in the financial statements
(xiv) Internal audit system commensurate with the size and nature of business, and whether the internal auditors’ reports were considered
(xv) Non-cash transactions with directors or connected persons and section 192
(xvi) NBFC and housing finance activity: registration under section 45-IA of the RBI Act, activity without a certificate of registration, status as a Core Investment Company and number of CICs in the group
(xvii) Cash losses in the year and the preceding year
(xviii) Resignation of statutory auditors during the year and whether the issues raised by the outgoing auditor were considered
(xix) Whether the auditor believes no material uncertainty exists about the company meeting its liabilities as they fall due within one year of the balance sheet date
(xx) CSR: transfer of unspent amount to a Schedule VII fund within six months, and to a special account for an ongoing project (section 135(5) and (6))
(xxi) Consolidated statements: qualifications or adverse remarks in the CARO reports of the companies included, with details of each company and paragraph

Unfavourable or qualified answers

Where the answer to any matter in paragraph 3 is unfavourable or qualified, the report must also state the basis for that answer (paragraph 4).

Practical points for companies

  • Keep documents ready for the clauses that need evidence: title deeds, stock count records, quarterly returns filed with banks, loan registers, statutory dues ageing, the list of related party transactions, the internal audit reports, and CSR bank account records.
  • The auditor will ask about any ADT-4 filing, resignation of the previous auditor, whistle-blower complaints and defaults to lenders, because these have their own clauses.
  • A company that is out of the Order because of the small private company exemption should test the three limits at each balance sheet date, because crossing any of them brings it under the Order for that year.
  • The clause numbers above follow the text of the Order. The ICAI has issued guidance notes and later clarifications on how to report; use the current ICAI guidance for the working papers.

Points to check

  • This post follows the text of the Order as published by the Ministry of Corporate Affairs. Amendments after that text, if any, were not reviewed.
  • The Order sits alongside section 143(3) reporting and Rule 11 of the Audit and Auditors Rules, which add their own items (such as the audit trail statement).

Frequently asked questions

What is CARO 2020?

The Companies (Auditor’s Report) Order, 2020, made by the Central Government under section 143(11) of the Companies Act, 2013 after consulting the NFRA. It requires the auditor’s report to include a statement on the matters in paragraph 3 of the Order.

From when does it apply?

To the auditor’s report for financial years commencing on or after 01/04/2019. It superseded the Companies (Auditor’s Report) Order, 2016.

Which companies are exempt?

Banking companies, insurance companies, Section 8 companies, one person companies, small companies, and a private company that is not a subsidiary or holding company of a public company and has paid-up capital and reserves of not more than Rs 1 crore, borrowings from banks and financial institutions of not more than Rs 1 crore at any time in the year, and total revenue of not more than Rs 10 crore.

Does CARO 2020 apply to consolidated financial statements?

Only clause (xxi), which asks for qualifications or adverse remarks in the CARO reports of the companies included in the consolidation.

What if the answer to a clause is unfavourable?

The auditor must state the basis for the unfavourable or qualified answer.

Does the Order cover a foreign company?

Yes. It applies to every company including a foreign company, except those listed in the exemptions.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Powers and Duties of a Statutory Auditor (Sections 143 to 147): Audit Report, Fraud Reporting, Prohibited Services and Penalties

Posted on by CA Meet Dhrangadhariya

Last updated: 09 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • An auditor has a right of access at all times to the books and vouchers and may ask officers for any information needed. The audit report must say whether the accounts give a true and fair view and whether the company has adequate internal financial controls with reference to financial statements.
  • The auditor must report suspected fraud by officers or employees: to the Central Government above the prescribed amount, otherwise to the audit committee or the Board.
  • An auditor cannot provide services such as bookkeeping, internal audit, financial information system design, actuarial, investment advisory, investment banking, outsourced financial services or management services.
  • For contravening sections 139, 143, 144 or 145 the fine is Rs 25,000 to Rs 5 lakh or four times the remuneration, whichever is less. Wilful deception can mean up to one year in prison and a fine of up to Rs 25 lakh.

The statutory auditor is appointed by the members to protect them, so the Companies Act, 2013 gives the auditor wide powers, a long list of things that the audit report must say, and strong penalties when those duties are not performed.

Powers (section 143(1))

  • A right of access at all times to the books of account and vouchers of the company, wherever they are kept.
  • The right to require from officers of the company any information and explanation needed for the audit.
  • A duty to inquire, among other matters, whether: loans and advances made against security are properly secured and not prejudicial to the company or its members; transactions represented only by book entries are prejudicial; shares, debentures or other securities (other than by an investment or banking company) were sold below their purchase price; loans and advances are shown as deposits; personal expenses are charged to revenue account; and, where shares are said to have been allotted for cash, cash was actually received.
  • The auditor of a holding company has access to the records of its subsidiaries and associate companies as far as consolidation requires.
  • The accounts of a branch office are audited either by the company’s auditor or by another qualified person appointed under section 139 (or, for a branch outside India, by a local qualified person).

What the audit report must contain (section 143(2) to (4))

The auditor reports to the members on the accounts and every financial statement laid before the company in general meeting, taking account of the Act, accounting and auditing standards and the matters required by rules or by an order under section 143(11) (such as CARO). The report states whether, to the best of the auditor’s information and knowledge, the accounts give a true and fair view of the state of affairs, profit or loss and cash flow for the year.

It must also state:

  1. whether all information and explanations needed were obtained, and if not, the details and effect;
  2. whether proper books of account have been kept, and proper returns received from branches not visited;
  3. how a separate branch auditor’s report was dealt with;
  4. whether the balance sheet and profit and loss account agree with the books and returns;
  5. whether the financial statements comply with the accounting standards;
  6. observations on financial transactions or matters with an adverse effect on the company’s functioning;
  7. whether any director is disqualified under section 164(2);
  8. any qualification, reservation or adverse remark on the maintenance of accounts;
  9. whether the company has adequate internal financial controls with reference to financial statements and the operating effectiveness of those controls; and
  10. such other matters as are prescribed.

Where any item is answered in the negative or with a qualification, the report must give the reasons.

Every auditor must comply with the auditing standards (section 143(9)); until the Central Government notifies standards on the recommendation of ICAI, the standards specified by ICAI are deemed to be the standards.

Reporting fraud (section 143(12) and (15))

If, in the course of duties, the auditor has reason to believe that an offence of fraud involving the prescribed amount is being or has been committed in the company by its officers or employees, the auditor reports it to the Central Government within the prescribed time and manner. For a fraud below the prescribed amount, the report goes to the audit committee (or to the Board, where there is no audit committee). The company must disclose such frauds, reported to the committee or Board but not to the Government, in the Board’s report. A report made in good faith is not a breach of any other duty (section 143(13)). The same section applies to cost accountants doing cost audit and company secretaries doing secretarial audit.

Penalty for failing to report: Rs 5 lakh in a listed company, and Rs 1 lakh in any other company. The prescribed amount, time and form are in the Companies (Audit and Auditors) Rules, 2014, so check the current figures there.

Services an auditor cannot render (section 144)

An auditor may provide other services only if the Board or audit committee approves them, and never these, directly or indirectly, to the company, its holding company or its subsidiary: accounting and bookkeeping; internal audit; design and implementation of any financial information system; actuarial services; investment advisory services; investment banking services; outsourced financial services; management services; and any other prescribed service. “Directly or indirectly” includes services through relatives, partners, a parent, subsidiary or associate entity, or any entity in which the auditor or a partner has significant influence or control, or whose name or brand is used. An auditor who renders any such service is also disqualified under section 141(3)(i).

Signing the report (section 145)

The auditor signs the report, and signs or certifies any other document of the company, in accordance with section 141(2) (only partners who are chartered accountants sign for a firm). Qualifications, observations or adverse comments on financial transactions in the report are read before the company in general meeting and open to inspection by any member.

Penalties (section 147)

Who and what Consequence
Company contravening sections 139 to 146 Fine of Rs 25,000 to Rs 5 lakh; every officer in default, Rs 10,000 to Rs 1 lakh
Auditor contravening section 139, 143, 144 or 145 Fine of Rs 25,000 to Rs 5 lakh, or four times the remuneration, whichever is less
Auditor acting knowingly or wilfully to deceive the company, shareholders, creditors or tax authorities Imprisonment up to one year and fine of Rs 50,000 to Rs 25 lakh, or eight times the remuneration, whichever is less
Auditor convicted under section 147(2) Refund of remuneration and damages for loss caused by incorrect or misleading statements in the audit report (to the company, statutory bodies, members or creditors)
Audit firm, where partners acted fraudulently The partners and the firm are jointly and severally liable; for criminal liability other than fine, only the partners concerned

The Tribunal can also direct a change of auditor where the auditor has acted fraudulently or colluded in fraud, and the auditor is barred from appointment for five years under section 140(5).

Points to check

  • The amount above which fraud goes to the Central Government, and the time and form of reporting, are set by the Rules and can change.
  • Listed companies and other classes face further reporting duties from the Companies (Auditor’s Report) Order and SEBI rules, which this post does not cover.
  • The text above follows the Companies Act as published on India Code, including its amendments up to the footnotes in that edition.

Frequently asked questions

What are the main powers of a company auditor?

A right of access at all times to the books of account and vouchers, wherever kept, the right to require information and explanations from officers, and, for a holding company’s auditor, access to the records of subsidiaries and associates for consolidation.

What must the audit report state?

Whether the accounts give a true and fair view, whether all information was obtained, whether proper books were kept, whether the balance sheet and profit and loss account agree with the books, whether the financial statements comply with accounting standards, adverse observations, director disqualification, qualifications on accounts and adequacy and operating effectiveness of internal financial controls.

Does the auditor have to report fraud?

Yes. If the auditor has reason to believe that an offence of fraud involving the prescribed amount is being or has been committed by officers or employees, it is reported to the Central Government. Smaller frauds are reported to the audit committee or the Board, and the company must disclose them in the Board’s report.

Which services is an auditor barred from providing?

Accounting and bookkeeping, internal audit, design and implementation of financial information systems, actuarial services, investment advisory, investment banking, outsourced financial services, management services and any other service prescribed, whether direct or indirect, to the company, its holding or its subsidiary.

What is the penalty if an auditor fails to report fraud?

A penalty of Rs 5 lakh for a listed company and Rs 1 lakh for any other company.

Can an auditor be held liable to refund fees?

Yes. On conviction under section 147(2) the auditor must refund the remuneration received and pay damages for loss caused by incorrect or misleading statements in the audit report.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.