When does CARO 2020 actually apply to a company, and which companies are exempt from its reporting requirements? Understanding the applicability of the Companies (Auditor’s Report) Order, 2020 is important for companies and auditors because CARO introduces specific reporting requirements that go beyond the basic audit opinion on financial statements.
CARO 2020 applies to a wide range of companies, including foreign companies, but certain categories are specifically excluded from its applicability. For private companies, exemption is available only when prescribed conditions relating to capital, borrowings and total revenue are satisfied.
Let us understand the applicability of CARO 2020, the companies covered, the exemptions available and the key conditions that need to be checked.
What Is CARO 2020?
The Companies (Auditor’s Report) Order, 2020, commonly known as CARO 2020, is an order issued under the Companies Act, 2013 that requires auditors to report on specified matters in addition to expressing their opinion on the financial statements.
The Order was originally issued in 2020, but its applicability was deferred by one year. CARO 2020 became applicable for financial years commencing on or after 1 April 2021, meaning it applies from FY 2021–22 onwards.
Under CARO 2020, the auditor is required to report on various matters such as Property, Plant and Equipment, intangible assets, inventories, loans and advances, statutory dues, disputed liabilities, borrowings, fraud, related-party transactions, internal audit, cash losses and other specified areas.
Therefore, determining whether CARO applies is an important part of the audit process.
Which Companies Are Covered Under CARO 2020?
CARO 2020 generally applies to every company, including a foreign company, unless the company falls within one of the specific exemptions prescribed under the Order.
This means the applicability of CARO is not restricted only to large companies or listed entities. Many unlisted public companies and private companies may also fall within its scope depending on their status and financial conditions.
The first step is therefore to identify whether the company belongs to any of the categories specifically excluded from CARO.
Companies Exempt From CARO 2020
CARO 2020 does not apply to certain categories of companies. These include banking companies, insurance companies, companies licensed under Section 8 of the Companies Act, One Person Companies and small companies.
A specific exemption is also available to certain private limited companies, but this exemption is subject to multiple conditions being satisfied simultaneously.
Banking Companies
Banking companies are outside the scope of CARO 2020. Their financial reporting and audit requirements are governed by the applicable banking laws and regulatory framework.
Insurance Companies
Insurance companies are also specifically excluded from the applicability of CARO 2020.
Section 8 Companies
Companies licensed under Section 8 of the Companies Act, 2013 are exempt from CARO 2020. These companies are generally established for charitable, social, educational or other specified purposes and operate under a separate regulatory framework.
One Person Companies
A One Person Company, or OPC, is specifically excluded from CARO 2020.
Small Companies
Small companies, as defined under the Companies Act, 2013, are also outside the scope of CARO 2020.
It is important to determine whether the company qualifies as a small company under the applicable provisions because this exemption operates independently of the separate exemption available to qualifying private limited companies.
Exemption for Certain Private Limited Companies
One of the most important areas of CARO applicability is the exemption available to certain private limited companies.
For the specific private-company exemption, the company must also not be a subsidiary or holding company of a public company, in addition to satisfying the prescribed capital, borrowing and revenue conditions.
The company must satisfy all the prescribed conditions. These include the following:
Paid-Up Capital and Reserves and Surplus
The company's paid-up capital and reserves and surplus must not exceed ₹1 crore as on the balance sheet date.
This condition is evaluated with reference to the financial position of the company as reflected on the balance sheet date.
Borrowings
The company must not have total borrowings exceeding ₹1 crore from any bank or financial institution at any point during the financial year.
This is important because the test is not restricted only to the borrowings outstanding on the balance sheet date. Borrowings at any point during the financial year need to be considered.
Total Revenue
The company's Total Revenue, as disclosed in Schedule III to the Companies Act, including revenue from discontinuing operations, must not exceed ₹10 crore during the financial year as per the financial statements.
Therefore, a private company cannot rely on only one or two of these conditions to claim exemption. The prescribed conditions must be considered together.
Understanding the Private Company Exemption
Suppose a private limited company has paid-up capital and reserves and surplus within the prescribed ₹1 crore limit. However, if its borrowings from banks or financial institutions exceed ₹1 crore at any point during the financial year, it would not qualify for this specific private-company exemption.
Similarly, even if its capital and borrowings remain within the prescribed limits, the company may not qualify if its Total Revenue exceeds ₹10 crore.
The company's relationship with a public company must also be considered. A private company that is a subsidiary or holding company of a public company cannot claim this specific exemption merely because it satisfies the financial thresholds.
This makes the applicability assessment a combination of the company's legal status and financial position.
Does CARO 2020 Apply to Private Companies?
A common misconception is that private limited companies are automatically exempt from CARO 2020. This is not correct.
CARO can apply to a private limited company unless it falls within one of the prescribed exemptions.
For example, a private company that does not qualify as a small company may still be exempt under the specific private-company exemption if it satisfies all the applicable conditions.
On the other hand, if even one of the prescribed conditions is not satisfied, the private-company exemption may not be available.
Therefore, private companies should evaluate their status, capital, borrowings and Total Revenue before concluding that CARO does not apply.
Does CARO 2020 Apply to Foreign Companies?
CARO 2020 applies to every company, including a foreign company as defined under the Companies Act, unless it falls under one of the specified exclusions.
The inclusion of foreign companies means that applicability cannot be determined solely on the basis of whether a company is incorporated in India.
The nature and status of the company under the Companies Act must also be considered.
Applicability of CARO to Branch Audits
CARO 2020 can also have relevance in relation to branch audits of companies to which the Order applies.
The ICAI Guidance Note explains that the provisions of CARO are applicable in the case of branches as well because the branch auditor has corresponding duties under the Companies Act in relation to the matters covered by the Order.
Accordingly, companies and auditors should consider the applicability of CARO while planning both the main audit and relevant branch audit procedures.
CARO 2020 and Consolidated Financial Statements
CARO 2020 generally does not apply to the auditor's report on consolidated financial statements, except for the specific reporting requirement relating to certain matters under Clause 3(xxi).
This distinction is important because the applicability of CARO to standalone financial statements and consolidated financial statements should not be treated in exactly the same manner.
The auditor should therefore determine the reporting requirements separately based on the nature of the financial statements being audited.
What Does the Auditor Report Under CARO 2020?
Once CARO 2020 is applicable, the auditor has to report on various matters prescribed under the Order.
These include areas such as Property, Plant and Equipment and intangible assets, inventories and working capital limits, investments and loans, deposits and public funds, statutory dues, disputed liabilities, borrowings and defaults, loans used for specific purposes, fraud, whistle-blower complaints, related-party transactions, internal audit, cash losses, auditor resignation, material uncertainty relating to liabilities, CSR-related amounts and other prescribed matters.
The auditor's responsibility is not limited to simply stating whether CARO applies. The applicable clauses have to be examined and reported upon based on the company's circumstances.
Why Correct CARO Applicability Matters ?
Determining CARO applicability at the beginning of an audit is important because it affects audit planning, documentation and reporting.
If a company incorrectly treats itself as exempt, required reporting may be missed. Conversely, unnecessary CARO procedures may create additional compliance work where the Order does not apply.
For this reason, auditors generally examine the company's legal status, financial statements, borrowings, paid-up capital, reserves and surplus, Total Revenue and relationship with other companies before reaching a conclusion on applicability.
The assessment should also be properly documented so that the basis for the conclusion is clear.
Key Takeaway
CARO 2020 has a broad scope and generally applies to companies, including foreign companies, unless they fall within specified exemptions.
The main exempt categories include banking companies, insurance companies, Section 8 companies, One Person Companies and small companies. Certain private limited companies can also qualify for exemption, but only when the prescribed conditions are satisfied.
For the private-company exemption, the company must meet the applicable limits for paid-up capital and reserves and surplus, borrowings and Total Revenue, and it must not be a subsidiary or holding company of a public company.
Since CARO 2020 reporting contains several detailed requirements, companies should determine its applicability carefully before the audit process begins.
Need Assistance With CARO Compliance?
If you need professional assistance in determining whether CARO 2020 applies to your company, reviewing the applicable exemption conditions or understanding auditor reporting requirements, professional guidance can help ensure that the assessment is based on the applicable provisions of the Companies Act and CARO framework.
FilingSuvidha provides accounting, audit-support and corporate compliance assistance for businesses in Delhi and across India.
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Disclaimer
This article is intended for general informational purposes only and does not constitute legal, financial, accounting or professional advice. Applicability of CARO 2020 depends on the specific facts, financial position and legal status of a company and the provisions applicable to the relevant financial year. Readers should obtain professional advice before making compliance or reporting decisions.