CARO 2020 reporting clauses — practical guide for auditors 2026

Introduction

The Companies (Auditor’s Report) Order, 2020 (CARO 2020) continues to be an important reporting framework for statutory auditors of applicable companies in India. CARO 2020 was originally notified by the Ministry of Corporate Affairs (MCA) and was subsequently amended to make it applicable from financial years commencing on or after 1 April 2021.

For auditors in 2026, CARO reporting requires more than simply completing a checklist. Each applicable clause should be supported by appropriate audit evidence, management information, reconciliations and working papers.

This practical guide explains the major CARO 2020 reporting areas and provides an audit-focused approach to handling them.

First Determine Whether CARO 2020 Applies

Before beginning clause-wise reporting, the auditor should establish whether CARO 2020 is applicable to the company.

The Order contains specific exclusions and exemptions. Therefore, the auditor should evaluate the company’s nature, constitution, activities and applicable exemption criteria before concluding on CARO applicability.

The applicability should be properly documented in the audit working papers.

Clause (i) — Property, Plant and Equipment and Intangible Assets

The auditor is required to report on matters relating to:

Maintenance of records of Property, Plant and Equipment (PPE)

Maintenance of records of intangible assets

Physical verification of PPE

Title deeds of immovable properties

Revaluation of PPE and intangible assets

Proceedings initiated or pending for holding benami property

Practical audit approach

The auditor should reconcile the fixed asset register with the general ledger and financial statements. Physical verification procedures should also be evaluated, including whether material discrepancies have been properly identified and adjusted.

For immovable properties, verify whether title deeds are held in the company’s name and identify cases where the title deeds are not held by the company.

Clause (ii) — Inventory and Working Capital

CARO requires reporting on:

Physical verification of inventory

Discrepancies identified during verification

Working capital limits exceeding the specified threshold

Whether quarterly statements submitted to banks or financial institutions agree with the books of account

Practical approach

Auditors should compare inventory records with physical verification reports and investigate material discrepancies.

Where working capital facilities exceed the prescribed threshold, the auditor should obtain the relevant quarterly statements submitted to lenders and reconcile them with the books.

Clause (iii) — Loans, Advances, Guarantees and Investments

This is one of the important CARO reporting areas.

The auditor should examine loans or advances in the nature of loans granted to subsidiaries, joint ventures, associates and other parties.

Key matters include:

Amount of loans or advances

Balance outstanding

Terms and conditions

Repayment schedule

Whether repayments are regular

Amounts overdue

Steps taken for recovery

Audit tip

Maintain a detailed party-wise schedule of loans and advances and reconcile it with the general ledger and confirmations.

Clause (iv) — Compliance With Sections 185 and 186

The auditor needs to consider whether applicable transactions relating to loans, investments, guarantees and securities comply with Sections 185 and 186 of the Companies Act, 2013.

The working papers should clearly document the basis of the auditor’s conclusion.

Clause (v) — Deposits

The auditor should verify whether the company has accepted deposits or amounts considered deposits and whether the relevant provisions of the Companies Act and related rules have been complied with.

Any non-compliance should be evaluated for appropriate reporting.

Clause (vi) — Cost Records

Where maintenance of cost records has been prescribed under Section 148(1), the auditor is required to report whether such accounts and records have been made and maintained.

The auditor should obtain management’s cost-record documentation and evaluate whether the records are maintained as required.

Clause (vii) — Statutory Dues

This clause covers reporting on undisputed and disputed statutory dues.

Auditors should review dues relating to areas such as:

GST

Income tax

Provident Fund

Employees’ State Insurance

Customs duty

Excise duty

Cess

Other applicable statutory dues

Particular attention should be given to outstanding statutory dues and disputes pending before appropriate authorities.

Practical procedure

Prepare a statutory dues reconciliation showing:

Opening balance + additions – payments ± adjustments = closing balance

This should be reconciled with the books and relevant statutory returns.

Clause (viii) — Unrecorded Income

The auditor should consider whether transactions previously unrecorded in the books have been surrendered or disclosed as income during tax assessments and whether such income has been properly recorded in the books.

Tax assessment orders, notices and management representations can be useful audit evidence in this area.

Clause (ix) — Borrowings and Repayment of Loans

The auditor should examine:

Default in repayment of loans or borrowings

Interest defaults

Whether the company has been declared a wilful defaulter

Utilisation of term loans

Funds obtained for short-term purposes but used for long-term purposes

Funds taken to meet obligations of subsidiaries, associates or joint ventures

Loans raised on pledge of securities of subsidiaries, associates or joint ventures

Bank confirmations and loan statements are important supporting documents.

Clause (x) — Issue of Securities

Where applicable, the auditor should report on money raised through:

Initial public offer

Further public offer

Preferential allotment

Private placement

The auditor should verify whether funds raised were used for the purposes for which they were raised.

Clause (xi) — Fraud and Whistle-Blower Complaints

The auditor should consider whether:

Fraud by the company or on the company has been noticed or reported

Any report under Section 143(12) has been filed

Whistle-blower complaints were received during the year

The auditor should document the procedures performed and management’s responses.

Clause (xii) — Nidhi Companies

For companies that are Nidhi companies, specific reporting requirements apply regarding compliance with the relevant provisions and ratios.

The auditor should first establish whether the entity falls within the definition and regulatory framework applicable to Nidhi companies.

Clause (xiii) — Related Party Transactions

The auditor should examine whether transactions with related parties comply with Sections 177 and 188 of the Companies Act, where applicable, and whether the required disclosures have been made in the financial statements.

The related-party register, Board minutes, contracts and financial statement disclosures should be cross-checked.

Clause (xiv) — Internal Audit

The auditor should consider:

Whether the company has an internal audit system commensurate with its size and nature of business

Whether internal audit reports were considered by the statutory auditor

A practical approach is to obtain the internal audit plan and reports and assess whether relevant observations have been appropriately considered during the statutory audit.

Clause (xv) — Non-Cash Transactions With Directors

The auditor should verify whether the company has entered into non-cash transactions with directors or persons connected with them and whether the applicable provisions have been complied with.

Clause (xvi) — Registration Under RBI Act

Where applicable, the auditor should examine whether the company is required to be registered under Section 45-IA of the Reserve Bank of India Act, 1934.

This clause is particularly relevant when the company’s activities involve financing, investment or lending.

Clause (xvii) — Cash Losses

The auditor is required to report whether the company has incurred cash losses in the current financial year and the immediately preceding financial year.

The calculation should be supported by a clearly documented working paper.

Clause (xviii) — Resignation of Statutory Auditors

Where the previous statutory auditor has resigned during the year, the incoming auditor should consider the issues, objections or concerns raised by the outgoing auditor and determine whether they have implications for the audit.

Communication with the previous auditor should be properly documented.

Clause (xix) — Ability to Meet Liabilities

This clause requires the auditor to consider whether material uncertainty exists regarding the company’s ability to meet liabilities falling due within one year from the balance sheet date.

The auditor should consider:

Current liabilities

Cash flows

Existing borrowings

Repayment schedules

Cash flow forecasts

Financial support available

Subsequent events

This assessment should be aligned with the auditor’s broader evaluation of going concern.

Clause (xx) — CSR Unspent Amount

Where CSR provisions apply, the auditor should examine whether unspent amounts relating to CSR have been transferred to the appropriate fund or special account within the prescribed time, as applicable.

CSR workings, Board records and bank statements should be reviewed.

Clause (xxi) — Consolidated Financial Statements

For consolidated financial statements, the auditor has additional reporting considerations relating to companies included in the consolidated financial statements that have adverse remarks or qualifications in their respective CARO reports.

The auditor should obtain and review the relevant component auditors’ reports and CARO reporting before finalising the consolidated CARO reporting.

Practical CARO 2020 Audit Checklist for 2026

A good CARO working paper should generally contain:

Area	Key Documents
PPE	Fixed asset register, title deeds, physical verification
Inventory	Stock records, physical verification reports
Loans	Loan schedules, confirmations, agreements
Statutory dues	GST/TDS/PF/ESI and tax reconciliations
Borrowings	Bank confirmations, loan statements
Related parties	Register, agreements, Board minutes
Fraud	Management representation, legal correspondence
Internal audit	Internal audit reports
Cash losses	Calculation and supporting schedules
Going concern	Cash-flow forecasts and repayment schedules
CSR	CSR computation and utilisation records
Consolidation	Component financials and CARO reports

Common CARO Reporting Mistakes

Auditors should avoid the following common issues:

Treating CARO as a simple checklist.

Reporting without maintaining sufficient audit evidence.

Failing to reconcile CARO information with the financial statements.

Not obtaining updated bank confirmations.

Ignoring statutory dues that are under dispute.

Not reviewing subsequent events for borrowings and defaults.

Using generic wording without considering the company’s actual circumstances.

Failing to document management’s explanations and the auditor’s independent verification.

Conclusion

CARO 2020 reporting should be approached as an evidence-based audit exercise rather than a compliance formality. For the 2026 audit cycle, auditors should begin clause-wise procedures early, establish clear documentation requirements and reconcile CARO information with the underlying books, statutory records and financial statements.

The original CARO framework and subsequent amendments should always be referred to when determining the applicable reporting requirements. The MCA’s 2020 amendment specifically shifted the applicability of CARO 2020 to financial years commencing on or after 1 April 2021.

Note: This article is intended as a practical professional guide and should be read together with the applicable provisions of the Companies Act, 2013, CARO 2020, subsequent amendments, and relevant professional guidance before finalising an audit report.