CARO 2020 Complete Guide: All 21 Clauses Explained for Auditors [2026]

The Companies (Auditor's Report) Order, 2020 (CARO 2020) is the most prescriptive reporting requirement imposed on statutory auditors of companies in India. Issued by the Ministry of Corporate Affairs under Section 143(11) of the Companies Act, 2013, CARO 2020 requires auditors to report on 21 specific matters covering a wide spectrum — from fixed assets and inventory to fraud reporting, going concern assessment, and CSR fund transfers.

CARO 2020 replaced CARO 2016 and became applicable for financial years commencing on or after April 1, 2021. It introduced several new reporting requirements (notably clauses on borrowing utilisation, going concern financial ratios, and consolidated CARO reporting) and expanded the scope of existing requirements.

This guide covers all 21 clauses with practical audit procedures, common findings, and documentation requirements. It is designed as an evergreen reference for audit teams performing statutory audits of companies to which CARO applies.

Applicability note: CARO 2020 applies to every company, including a foreign company as defined under Section 2(42) of the Companies Act, 2013, except: banking companies, insurance companies, Section 8 companies, one person companies, small companies, and private companies meeting all three conditions (paid-up capital not exceeding Rs 1 crore AND total borrowings not exceeding Rs 1 crore AND total revenue not exceeding Rs 10 crore).

Clause (i): Property, Plant and Equipment (PPE) and Intangible Assets

What It Requires

The auditor must report on:

(a) Whether the company is maintaining proper records showing full particulars, including quantitative details and situation, of PPE and intangible assets.
(b) Whether PPE have been physically verified by management at reasonable intervals and whether material discrepancies were noticed on such verification.
(c) Whether the title deeds of all immovable properties (other than self-constructed) disclosed in the financial statements are held in the name of the company. If not, provide details.
(d) Whether the company has revalued its PPE (including right-of-use assets) or intangible assets. If so, whether the revaluation is based on a valuation by a Registered Valuer and the amount of change.
(e) Whether any proceedings have been initiated or are pending against the company for holding benami property under the Benami Transactions (Prohibition) Act, 1988.

Practical Audit Steps

Obtain the fixed asset register and verify it contains description, quantity, location, identification number, date of acquisition, original cost, and accumulated depreciation.
Select a sample of PPE items and physically verify their existence and condition.
For immovable properties, inspect title deeds and verify the name on the title matches the company name. Track properties held in erstwhile names (pre-merger entities) separately.
If revaluation has been performed, obtain and review the Registered Valuer's report. Verify the valuer's registration with IBBI.
Make enquiries with management about benami property proceedings.

Common Findings

Fixed asset registers not updated for additions and disposals during the year.
Physical verification not conducted for assets at remote locations.
Title deeds of older properties still in the name of erstwhile entities post-merger or acquisition.
Revaluation performed without engaging a Registered Valuer as required under the Companies Act.

Documentation

Fixed asset register extracts, physical verification reports, title deed copies, valuer's report (if applicable), management representation on benami property.

Clause (ii): Inventory

What It Requires

(a) Whether physical verification of inventory has been conducted at reasonable intervals by management and whether material discrepancies were noticed.
(b) Whether the company has been sanctioned working capital limits exceeding Rs 5 crore from banks/financial institutions and whether quarterly returns/statements filed are in agreement with the books of account.

Practical Audit Steps

Review management's inventory count plans and procedures. Attend physical verification for material locations.
Compare book stock with physical stock and investigate material discrepancies (typically those exceeding 5-10% by value for individual items).
Obtain quarterly stock statements submitted to banks. Reconcile the figures in the statements with the company's books for each quarter.

Common Findings

Quarterly statements to banks inflated compared to books (to maintain drawing power).
Physical verification not covering all locations, particularly consignment stock or goods in transit.
Discrepancies identified but not investigated or adjusted.

Documentation

Inventory count observations, sample test count sheets, quarterly bank statement reconciliations, management explanations for variances.

Clause (iii): Loans, Investments, Guarantees, and Security

What It Requires

Whether the company has made investments in, provided any guarantee or security, or granted any loans or advances in the nature of loans (secured or unsecured) to companies, firms, LLPs, or other parties. If so:

(a) Details of aggregate amounts during the year and balance outstanding at year-end for each category.
(b) Whether the terms and conditions are prejudicial to the company's interest.
(c) Regularity of repayment of principal and interest.
(d) Whether any amount is overdue and details thereof.
(e) Whether any loan granted has fallen due but been renewed/extended or fresh loans granted to settle existing loans.
(f) Whether loans/advances have been granted to promoters or related parties (as defined in the Companies Act) — with aggregate amount and percentage to the total.

Practical Audit Steps

Obtain a complete list of all loans granted, investments made, guarantees given, and security provided.
Verify board/committee approvals for each transaction.
Assess whether terms (interest rate, tenure, security) are at arm's length and not prejudicial.
Track repayment schedules and identify overdue amounts.
Specifically identify loans to promoters and related parties; calculate their proportion to total loans.
Examine whether any loans were evergreened (renewed to avoid default classification).

Common Findings

Loans to related parties at below-market interest rates without proper justification.
Evergreening of loans to promoter entities to avoid reporting defaults.
Inadequate documentation of board approvals for guarantees.

Clause (iv): Compliance with Sections 185 and 186

What It Requires

Whether the company has complied with the provisions of Sections 185 (loans to directors) and 186 (loans and investments by company) of the Companies Act.

Practical Audit Steps

Verify that no loans have been made to directors or persons in whom directors are interested, except as permitted under Section 185(2).
For Section 186, verify that aggregate loans, investments, guarantees, and security do not exceed the prescribed limits (60% of paid-up share capital, free reserves, and securities premium account, or 100% of free reserves and securities premium, whichever is more) without special resolution.
Check that the interest rate on loans under Section 186 is not lower than the prevailing yield on government securities closest in terms of maturity.

Common Findings

Loans to entities in which directors are interested without proper Section 185(2) compliance.
Section 186 limits breached due to cumulative effect of multiple transactions.
Special resolutions not obtained or not covering the specific transactions made.

Clause (v): Deposits

What It Requires

Whether the company has accepted deposits in contravention of the directives issued by the RBI, the provisions of Sections 73-76 of the Companies Act, and the Companies (Acceptance of Deposits) Rules, 2014. If so, whether the contravention has been regularised. Also, the amount involved and the nature of contravention.

Practical Audit Steps

Identify all deposits accepted during the year, including those from directors, members, and the public.
Verify compliance with deposit limits, return filing (DPT-3), creation of deposit repayment reserve, and interest rate ceilings.
Identify any amounts that qualify as "deemed deposits" (inter-corporate loans from non-eligible entities, for instance).

Common Findings

DPT-3 returns filed late or with incorrect information.
Amounts received from directors not covered by the director deposit exemption (applicable only if the director provides a declaration that the amount is not borrowed).
Deposit repayment reserve not maintained at 15% of deposits maturing during the year and the following year.

Clause (vi): Cost Records

What It Requires

Whether the Central Government has prescribed the maintenance of cost records under Section 148(1) of the Companies Act for the products/services of the company, and whether such accounts and records have been so made and maintained.

Practical Audit Steps

Determine whether the company's products or services fall under any of the industries specified in the Companies (Cost Records and Audit) Rules, 2014.
If applicable, verify that cost records are being maintained as prescribed.
Note: The auditor is required to report on whether records are maintained, not on their adequacy.

Common Findings

Companies unaware that their products fall under prescribed industries.
Cost records maintained but not updated regularly.

Clause (vii): Statutory Dues

Sub-clause (a): Regularity of Statutory Dues

Whether the company is regular in depositing undisputed statutory dues — including Goods and Services Tax, provident fund, employees' state insurance, income tax, sales tax, service tax, duty of customs, duty of excise, value added tax, cess, and any other statutory dues — with the appropriate authorities. If not, the extent of arrears with amounts and periods involved.

Sub-clause (b): Disputed Statutory Dues

Details of statutory dues that have not been deposited on account of disputes, along with the forum where the dispute is pending and the period to which the amount relates.

Practical Audit Steps

Obtain month-wise payment summaries for GST, TDS, TCS, PF, ESI, PT, and other applicable dues.
Verify payment dates against statutory due dates and identify delays.
Obtain details of all disputed demands with supporting orders and documentation of appeals.
For disputed amounts, verify the forum (CIT-Appeals, ITAT, Commissioner, Tribunal, High Court, Supreme Court) and confirm the amounts match the assessment/demand orders.

Common Findings

GST payments delayed by a few days in multiple months.
Old disputed demands (pre-GST) not properly tracked or disclosed.
PF/ESI deposits delayed beyond the 15th of the following month.

Documentation

Month-wise statutory payment registers, challans, demand and assessment orders, appeal filings, management representations on completeness of disputes.

Clause (viii): Unrecorded Transactions

What It Requires

Whether any transactions not recorded in the books of account have been surrendered or disclosed as income during the year in the tax assessments under the Income Tax Act. If so, whether the previously unrecorded income has been properly recorded in the books during the year.

Practical Audit Steps

Obtain copies of all assessment orders and scrutiny notices received during the year.
Identify any income surrendered during survey (Section 133A), search (Section 132), or assessment proceedings.
Verify whether surrendered amounts have been recorded in the books and the nature of the income.

Common Findings

Income surrendered during search operations not recorded in regular books.
Surrendered income recorded as exceptional item without proper explanation.

Clause (ix): Default in Loan Repayment

What It Requires

(a) Whether the company has defaulted in repayment of loans or other borrowings or in the payment of interest thereon to any lender.
(b) Whether the company has been declared a wilful defaulter by any bank, financial institution, or other lender.
(c) Whether term loans were applied for the purpose for which they were obtained (and if not, details of amount and purpose of diversion).
(d) Whether funds raised on short-term basis have been utilised for long-term purposes.
(e) Whether the company has taken any funds from any entity to meet the obligations of its subsidiaries, associates, or joint ventures.
(f) Whether the company has raised loans on the pledge of securities held in its subsidiaries, JVs, or associate companies.

Practical Audit Steps

Obtain loan-wise repayment schedules and verify actual payment dates.
Obtain CRILC (Central Repository of Information on Large Credits) data or RBI default reports.
Review end-use monitoring reports and sanction letters. Trace term loan utilisation to the stated purpose.
Analyse whether short-term borrowings (working capital facilities) were used for capital expenditure or long-term investments.
Review inter-company fund flows for funds raised on behalf of group entities.

Common Findings

Technical defaults in interest payment dates (paid within grace period but after due date).
Term loan funds temporarily parked in mutual funds before utilisation — potentially treated as diversion.
Short-term funds used for capital expenditure in the absence of long-term financing.

Clause (x): IPO and Further Public Offer Proceeds

What It Requires

(a) Whether money raised by way of initial or further public offer (including debt instruments) were applied for the purposes for which they were raised.
(b) Whether the company has made any preferential allotment or private placement in compliance with Section 42 and 62 of the Companies Act and whether the amounts raised were used for the purposes for which the funds were raised.

Practical Audit Steps

Obtain the offer document (prospectus, offer letter) and identify stated use of proceeds.
Track actual utilisation against stated objects using the monitoring agency's reports (where applicable).
For private placements, verify compliance with Section 42 (private placement procedure) and Section 62 (further issue of share capital).

Clause (xi): Fraud Reporting

What It Requires

(a) Whether any fraud by the company or on the company has been noticed or reported during the year. If so, the nature and amount involved.
(b) Whether any report under Section 143(12) has been filed by the auditors in Form ADT-4 as prescribed under Rule 13 of the Companies (Audit and Auditors) Rules, 2014.
(c) Whether any whistle-blower complaints have been received during the year.

Practical Audit Steps

Enquire with management and those charged with governance about known or suspected frauds.
Review whistle-blower complaint registers and disposition records.
Assess whether any matters identified during audit procedures indicate fraud (SA 240 procedures).
Verify Form ADT-4 filings for any previously reported frauds.

Common Findings

Whistle-blower complaints received but not properly investigated or documented.
Minor employee frauds (petty cash, expense claims) not reported in CARO though they technically qualify.

Clause (xii): Nidhi Company

What It Requires

Whether the company is a Nidhi company and, if so, whether it has complied with the Net Owned Funds to Deposits ratio of 1:20, the 10% unencumbered term deposits requirement, and other Nidhi Rules requirements.

Practical Audit Steps

Confirm whether the company is registered as a Nidhi company under Section 406.
Verify NOF:Deposit ratio as at year-end.
Verify minimum membership requirements (200 members) and other Nidhi Rules.

Clause (xiii): Related Party Transactions

What It Requires

Whether all transactions with related parties are in compliance with Sections 177 and 188 of the Companies Act and whether details have been disclosed in the financial statements as required.

Practical Audit Steps

Obtain the complete list of related parties under both Ind AS 24 and the Companies Act (the definitions differ).
Verify that all transactions with related parties were approved by the Audit Committee (Section 177) and, where applicable, by the Board and shareholders (Section 188).
For transactions requiring ordinary resolution under Section 188, verify whether the related party abstained from voting.
Verify completeness and accuracy of related party disclosures in the financial statements.

Common Findings

Transactions with entities controlled by directors' relatives not identified as related party transactions.
Audit Committee approvals obtained retrospectively rather than prior to the transaction.
Arm's length pricing documentation inadequate for material related party transactions.

Clause (xiv): Internal Audit System

What It Requires

Whether the company has an internal audit system commensurate with the size and nature of its business. Whether reports of the internal auditor have been considered by the statutory auditor.

Practical Audit Steps

Assess whether the company is required to appoint an internal auditor under Section 138 and Rule 13 of the Companies (Accounts) Rules, 2014.
Evaluate the scope, competence, and independence of the internal audit function.
Review internal audit reports and assess whether significant findings have been addressed.
Consider the impact of internal audit findings on the statutory audit plan.

Common Findings

Internal audit scope not covering all material areas of operations.
Internal audit reports not presented to the Audit Committee regularly.
Observations repeated across quarters without remediation.

Clause (xv): Non-Cash Transactions with Directors

What It Requires

Whether the company has entered into any non-cash transactions with its directors or persons connected with them in contravention of Section 192 of the Companies Act.

Practical Audit Steps

Identify all transactions with directors and connected persons.
Specifically look for non-cash elements: asset transfers, swaps, arrangements involving property or assets rather than cash consideration.
Verify that any non-cash transactions comply with Section 192 requirements (special resolution approval).

Clause (xvi): RBI Registration for NBFCs

What It Requires

(a) Whether the company is required to be registered under Section 45-IA of the RBI Act and, if so, whether registration has been obtained.
(b) Whether the company has conducted NBFC activities without valid registration.
(c) Whether the company is a Core Investment Company (CIC) and whether it meets CIC criteria.

Practical Audit Steps

Assess whether the company's financial assets constitute 50% or more of total assets and income from financial assets constitutes 50% or more of gross income.
Verify RBI registration certificate.
For CICs, verify compliance with CIC norms (90% of net assets as investments in group companies, etc.).

For detailed guidance on NBFC audit procedures, see our NBFC Audit Automation guide.

Clause (xvii): Cash Losses

What It Requires

Whether the company has incurred cash losses in the financial year and in the immediately preceding financial year. If so, the amount.

Practical Audit Steps

Calculate cash loss: Net loss after tax, adjusted for non-cash items (depreciation, amortisation, provisions, impairment losses).
Repeat for the prior year.
If cash losses exist in both years, this is a going concern indicator that must be considered under SA 570.

Clause (xviii): Resignation of Statutory Auditor

What It Requires

Whether there has been any resignation of the statutory auditors during the year. If so, whether the auditor has taken into consideration the issues, objections, or concerns raised by the outgoing auditor.

Practical Audit Steps

Verify whether the predecessor auditor resigned (as opposed to completing their term).
If resignation occurred, obtain the resignation letter and any statement filed with the Registrar.
Document how the concerns raised by the outgoing auditor have been addressed in the current audit.

Clause (xix): Financial Ratios and Going Concern

What It Requires

Based on 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 of Directors and management plans, whether the auditor is of the opinion that no material uncertainty exists regarding the company's ability to meet its liabilities as they fall due within one year from the balance sheet date.

Practical Audit Steps

Compute key financial ratios: current ratio, debt-equity ratio, debt service coverage ratio, interest coverage ratio, return on equity, net profit margin, trade receivable/payable days.
Analyse ageing of receivables and payables — identify amounts overdue beyond normal credit terms.
Review management's cash flow projections for the next 12 months.
Assess the reasonableness of management's plans to address any identified financial stress.
Cross-reference with Clause (xvii) (cash losses) and Clause (ix) (loan defaults) findings.

Common Findings

Companies with eroded net worth and low current ratios without adequate management plans documented.
Cash flow projections overly optimistic and inconsistent with historical trends.
Material uncertainty exists but management unwilling to acknowledge it in the financial statements.

Clause (xx): CSR Fund Transfer

What It Requires

Whether the company has any unspent CSR amount under Section 135 of the Companies Act. If so, whether the unspent amount has been transferred to:

A Fund specified in Schedule VII within 6 months of the end of the financial year (for ongoing projects).
The Unspent CSR Account within 30 days of end of the financial year (for ongoing projects with remaining spending commitments).

Practical Audit Steps

Verify whether the company meets CSR applicability thresholds (net worth Rs 500 crore or more, turnover Rs 1,000 crore or more, or net profit Rs 5 crore or more during the immediately preceding financial year).
Calculate the CSR obligation (2% of average net profit of immediately preceding three financial years).
Verify actual CSR expenditure against the obligation.
For unspent amounts relating to ongoing projects, verify transfer to Unspent CSR Account within 30 days.
For unspent amounts not related to ongoing projects, verify transfer to a Fund specified in Schedule VII within 6 months.

Common Findings

Transfers to Unspent CSR Account made beyond the 30-day deadline.
CSR expenditure claimed but not qualifying under Schedule VII activities.
Ongoing project classification used to defer transfer to Schedule VII Fund.

Clause (xxi): Consolidated CARO Reporting

What It Requires

Whether there are any qualifications or adverse remarks by the respective auditors in the CARO reports of the companies included in the consolidated financial statements. If so, details of the companies and the qualifications/adverse remarks.

Practical Audit Steps

Obtain CARO reports from the auditors of all subsidiaries, associates, and joint ventures included in the consolidated financial statements.
Identify any qualifications, adverse remarks, or disclaimers in those CARO reports.
Compile a consolidated summary listing the company name, clause number, and nature of the qualification/adverse remark.
Assess the materiality of subsidiary CARO qualifications to the consolidated financial statements.

Common Findings

Subsidiary CARO reports not obtained or obtained after a significant delay.
Qualifications in subsidiary CARO reports related to statutory dues, related party transactions, or loan defaults not reflected in the parent's consolidated CARO reporting.

For firms auditing listed companies with complex group structures, audit automation platforms for listed companies can help manage the consolidation of subsidiary CARO data.

Documentation Best Practices Across All Clauses

Effective CARO documentation requires a structured approach:

Maintain a CARO working paper file. Create a dedicated section in your audit file with a separate working paper for each CARO clause. Each working paper should document: the procedures performed, evidence obtained, findings identified, management representations relied upon, and the reporting conclusion.

Link CARO findings to the main audit file. CARO procedures often overlap with substantive audit procedures. Cross-reference CARO working papers to the relevant sections of the main audit file to avoid duplication and ensure consistency.

Document negative reporting. Even where the CARO clause response is "not applicable" or "no adverse findings," document the basis for that conclusion. Inspection by NFRA or peer reviewers will examine whether the auditor had a reasonable basis for negative reporting — not just whether the final conclusion was correct.

Obtain specific management representations. For several CARO clauses (benami property, fraud awareness, wilful default status, unrecorded transactions), the auditor relies partly on management representations. Ensure the management representation letter specifically addresses each relevant CARO matter.

For a comprehensive approach to audit quality documentation, see our SQM 1 and EQCM Complete Guide.

Conclusion

CARO 2020 is more than a reporting checklist — it is a comprehensive examination of compliance, governance, and financial health that auditors must approach with rigour. Each of the 21 clauses demands specific procedures, targeted evidence gathering, and considered professional judgment.

The auditor who treats CARO as a last-minute, post-audit documentation exercise will produce poor-quality work and face regulatory risk. The auditor who integrates CARO procedures into the audit plan from the outset — designing tests that simultaneously address financial statement assertions and CARO reporting requirements — will produce efficient, high-quality work that withstands scrutiny.

With NFRA actively reviewing audit quality and expanding its inspection programme, the quality of CARO reporting is no longer just a matter of professional diligence. It is a matter of regulatory compliance where the consequences of inadequate work are tangible and severe.

This guide is intended as a starting reference. Each clause warrants deeper study in the context of specific industries and client circumstances. The fundamentals, however, remain constant: understand what the clause requires, design appropriate procedures, gather sufficient evidence, and document your work thoroughly.

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Topics

CARO 2020 clause by clause guideCompanies Auditor Report Order 2020CARO 2020 audit proceduresCARO reporting requirements auditorsCARO 2020 all clauses explained

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