The Companies (Auditor's Report) Order, 2020 is an annexure to the auditor's report on the standalone financial statements. It's issued under s.143(11) of the Companies Act and effective for FY2021-22 audits onward, and in it the auditor must answer 21 specific questions. Nothing like it exists in US filings. A US auditor gives one opinion on the statements as a whole. The Indian auditor must go on record, clause by clause, about title deeds, bank submissions, related-party loans, statutory dues, defaults and fraud. CARO doesn't apply to the consolidated statements, with one exception. Clause (xxi) forces the consolidated report to list every qualification or adverse CARO remark made anywhere in the group, which gives you a group-wide rap sheet in one paragraph. CARO also exempts banking and insurance companies, s.8 companies, and small/one-person companies and certain small private companies.
What does each CARO 2020 clause cover?
The full clause map, with the analyst's signal value:
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| Clause | The auditor must report on | Signal |
|---|---|---|
| (i) | PP&E records; title deeds held in the company's name?; revaluations; benami proceedings | Title deeds not in the company's name = classic promoter-asset entanglement (real estate, infra) |
| (ii) | Physical verification of inventory; (b) if working-capital limits >₹5 crore are secured on current assets — do the quarterly stock statements filed with banks agree with the books? | High. Divergence between bank submissions and books was the smoking gun in several NBFC/mid-cap collapses (the DHFL-era pattern). Inflated stock statements = inflated drawing power = a lie to lenders in writing |
| (iii) | Loans, advances, guarantees, security to any entity: amounts to subsidiaries/JVs/associates and to others; terms prejudicial?; repayment regular?; overdue >90 days?; (e) evergreening — fresh loans to settle old ones?; (f) loans repayable on demand (or without terms) to promoters/related parties | Highest. This is the fund-diversion clause. Promoter-funding-by-loan lives here |
| (iv) | Compliance with s.185/186 (loans to directors; inter-corporate loan/investment limits) | Legal breach flag |
| (v) | Public deposits | Niche |
| (vi) | Cost records maintained | Low |
| (vii) | Statutory dues (PF, ESI, GST, income tax…): undisputed amounts overdue >6 months; disputed dues by forum | Unpaid PF/GST = acute cash stress — companies stop paying the government before they stop paying suppliers who can cut them off |
| (viii) | Undisclosed income surrendered in tax assessments | Direct honesty flag |
| (ix) | Defaults on loans: lender-wise details; wilful-defaulter declaration; term loans used for stated purpose?; (d) short-term funds used for long-term purposes; (e) funds raised to meet group-company obligations; (f) borrowings against pledge of shares in group entities | Highest. (d) is the ALM-mismatch clause (the IL&FS/DHFL failure mode, formalized); (e) and (f) are diversion routes |
| (x) | IPO/preferential-allotment proceeds used as stated | Check after any raise |
| (xi) | Fraud by or on the company noticed/reported; auditor's ADT-4 filings to the central government; whistle-blower complaints considered by the auditor | Self-explanatory |
| (xii) | Nidhi companies | Niche |
| (xiii) | RPT compliance with s.177/188 and disclosure | Cross-check with the RPT note |
| (xiv) | Internal audit system commensurate with size | Weak "no" answers precede control failures |
| (xv) | Non-cash transactions with directors | Diversion route |
| (xvi) | RBI registration (45-IA) if the company is doing NBFC-type business; CIC status | An unregistered lender inside a group = regulatory arbitrage |
| (xvii) | Cash losses in the FY and the preceding FY | Blunt distress marker |
| (xviii) | Auditor resignation during the year — were the outgoing auditor's issues considered? | Forces the exit story into the record |
| (xix) | Capability of meeting liabilities falling due within one year (a solvency screen on ratios, ageing, expected realizations) | A mini going-concern check, in the annexure |
| (xx) | CSR unspent amounts transferred as required | Low |
| (xxi) | (Consolidated report) list of all CARO qualifications/adverse remarks across group companies | Read this first on any conglomerate — it's the index of trouble |
How do you scan CARO 2020 in 30 seconds?
Build a 30-second CARO scan into your checklist. Jump to clauses (ii)(b), (iii), (vii), (ix), (xi), (xvii), (xviii), (xix), and (xxi) on the consolidated report. In a clean company this takes half a minute ("no exceptions noted" ×8). Anything else means you slow down and quantify. A CARO paragraph noting ₹380 crore of loans to group entities "repayable on demand, no schedule stipulated" (clause iii(f)) tells you more about governance than fifty pages of the glossy. The CG Power episode is the canonical case of what such loans become. In 2019 the board discovered unauthorized related-party transactions and understated liabilities, and the promoter was ousted.