CARO 2016: How Is the audit report applicable to companies?

Last Updated at: Sep 07, 2020
CARO 2016_
The Companies (Auditor’s Report) Order, 2020 (Caro 2020) will be applicable for audit of financial statements of eligible companies for financial years commencing on and after April 1, 2019, and would be applicable to all those companies on which Caro 2016 was applicable.
Recently, the MCA has issued the 2020 version of CARO. While CARO-2016 had 16 clauses, CARO-2020 has 21 clauses. Unlike CARO-2016, the new requirements focus on plants, property, intangible assets and equipment.

What is CARO 2016?

CARO 2016 (Companies Auditor’s Report Order) is an order issued by the MCA (Ministry of Corporate Affairs). As per CARO 2016, company auditors are to include specific items in his/her report with respect to certain companies. The specific items included in CARO 2016 appears under section 143 of the Companies Act, 2013. CARDO 2016 was issued by MCA on 29 March 2016, to supersede CARDO 2015. CARDO 2015 was used for reports on companies whose financial year commences on or after April 1, 2015. Now CARDO 2016 is applicable to these companies.

Explain how CARO 2016 is applicable to companies?

CARO 2016 applies to all companies, as well as foreign companies –

as per section 2, clause (42) of the companies Act 2013; which defines a foreign company as an organisation established outside India with;

  1. An Indian office run by the company or through a business agent, with an actual physical office or a digital office, or
  2. Running business operations in India, in other different ways.

CARO is not applicable to the following companies;

(a)Financial/banking institutions as defined under Section 5 (c) of the Banking Regulation Act, 1949. 

(b) The company authorized to function with a charitable objective as per section 8 of the companies Act 2013

(c) Insurance companies as defined under the Insurance Act 1938. 

(d) A one-person company (OPC) or a one-member company as defined under clause (62) of Section 2 of the Companies Act 2013 

(e) Small companies as defined under Section 2 (85) of the Companies Act, 2013.

  1. Any company other than a public company with: 
  • A maximum of Rs. 50 lakhs as paid-up share capital unless a higher amount has been prescribed (or approved) which does not exceed Rs. 5 crores. 
  • Yearly turnover as per profit and loss statement does not exceed Rs. 2 crores unless a higher amount has been prescribed (or approved), which does not exceed Rs. 20 crores.

2. However, the following companies will not be classified as a small company:  

  • A business enterprise registered under Section of the Companies Act, 2013.
  • A holding or a subsidiary company. 
  • Any business or corporate governed by any special act.

What are the rules for applicability for CARO 2016?

Fixed Assets:

(a)Physical verification of fixed assets by top management at regular intervals.

(b)In case of discrepancies, verify if necessary changes have been made in the books of account. 

(c)Management of proper records with all details and status updates for all fixed assets owned by the company


(a) If management conducts physical verification of inventory at reasonable intervals.

(b) Material discrepancies are noted on verification and recorded in the books of account 

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These include any and all loans (secured and unsecured) given by the company to other firms, organizations, businesses, LLPs, and others covered in the registered maintained under Section 189 of the Companies Act, 2013. In which case, it should be ascertained

(a) If conditions and terms of loan repayment are not detrimental to the company’s interest. 

(b) If the time period for repayment of principal and interest has been stipulated with regular repayments and receipts.

(c) If repayment is overdue, total amount overdue and total amount overdue in the last 90 days and whether efforts have been made to recover the principal amount.


Acceptance of deposits requires the company to comply with the following directives issued by the Reserve Bank of India;

(a)Provisions of Sections 73,74,75 and 76 of the Companies Act, 2013 (or other sections as per relevance) and their rules.

(b) Acceptance of deposits approved by the company law board (CLB), the National company law tribunal (NCLT) or the RBI or any other body of law.

(c) Non-compliance with directives will require the auditor to report all contraventions.

Loan to director and investments by the company: 

Compliance with the provisions of Sections 185 and 186 of the Companies Act, 2013 for the issue of loans, security, or guarantees and investments by the company. If the requirement is not met details regarding the loans and investments are to be provided.

Cost Records 

Maintenance of cost records under sec 148(1) of the Companies Act, 2013 as per the instructions of the Central Government.

Loan repayment

In case the company has not repaid its loans or borrowings to banks/financial institutions or other entities, the auditor will report the time period and total unpaid amount.

Statutory Dues 

(a) Regular deposits of statutory dues such as Provident Fund, Employees State Insurance fund, income tax, sales tax, service tax, etc with the respective regulatory bodies. In case the deposits are not regular, the auditor will indicate in his/her report the outstanding amount of deposits on the last day of the financial year over a period of 6 months to the date from the first date of payment.

(b) If statutory dues such as income, sales, service or duties have not been deposited due to disputes, then the auditor will report the total pending deposits and the forum where the dispute is pending.

Reporting of Fraud

The auditor needs to report any kind of fraud activities perpetrated by the company or its employees, its nature and the amount involved in the fraud.

Managerial remuneration

The auditor verifies that paid managerial remuneration is in lieu of approvals, as per the provision of Section 197 read with Schedule 5 to the Companies Act, 2013. In case if unapproved, the auditor needs to report the amount of remuneration and the procedure to acquire a refund on the same.

IPO and further public offers 

The auditor reports funds raised through initial public offer and further public offer, and application for term loans for the same. If not the auditor reports defaults, delays, and rectification.

Nidhi Company

The auditor needs to report if the Nidhi has complied with the deposit of net owned fund in 1:20 ratio, to meet out the liability, as well as the maintenance of 10% unencumbered term deposits as per the Nidhi rules 2014

Related Party Transaction 

The auditor ensures related party transactions comply with Section 177 and 188 of the Companies Act, 2013. These transactions appear in various financial statements, as per the standard practices of accounting.

Non-cash Transactions

In case the company has engaged with the Director for non-cash transactions (or people associated with him), the auditor needs to verify if the company has complied with Section 192 of Companies Act, 2013.

Preferential allotment of shares

The auditor needs to ensure if the company has made a preferential allotment of shares or debentures as per Section 42 of the Companies Act, 2013, for the same financial year that the auditor is reviewing. The auditor verifies funds raised for a cause are used for the same. If not, the auditor will report the funds used for other causes and the type of non-compliance with respect to the preferential allotment of shares or debentures.

Registration under RBI Act 1934 

The auditor verifies if the company has to register under Section 45 IA of the Reserve Bank of India Act, 1934. In which case, the auditor checks on how to obtain the registration.