Applicability of CARO Report – Companies Auditor’s Report Order

The Companies Auditor’s Report Order (CARO) is a regulation that auditors must follow when they review the financial records of certain companies in India. This order comes from the Ministry of Corporate Affairs (MCA) and sets specific guidelines for auditors to make sure companies are being transparent about their finances. But who exactly does CARO apply to, and why is it important? Let’s simplify it.

What is CARO?

CARO stands for the Companies Auditor’s Report Order. It’s a set of extra rules that auditors need to follow when they prepare a company’s audit report. These rules help ensure that companies are giving a clear, honest picture of their financial situation.

The latest version, CARO 2020, came into effect on April 1, 2021. It replaced CARO 2016 and is more detailed, requiring auditors to look into several areas that might have been missed before.

Who Needs to Follow CARO 2020?

CARO doesn’t apply to all companies. Its applicability depends on certain factors, such as the size of the company and the type of business it runs. Here’s a breakdown of when CARO applies:

1. Types of Companies That Need to Follow CARO Report

CARO applies to most public and private companies, but with a few exceptions:

• Private Companies: CARO does apply to private companies, but some are exempt if they meet these conditions:
  • Their paid-up capital and reserves are less than ₹1 crore.
  • They don’t have loans exceeding ₹1 crore at any point during the year.
  • Their total revenue is less than ₹10 crore in a year.

If a private company stays under these limits, it doesn’t need to follow CARO.

• Banking, Insurance, and Non-Profit (Section 8) Companies: These types of companies don’t have to worry about CARO. They are fully exempt from these extra reporting rules.

2. Thresholds for Private Companies

For private companies, CARO applies only if they go above certain financial limits. If a private company meets any of these conditions, CARO 2020 will apply:

• Their paid-up capital and reserves exceed ₹1 crore.
• They have borrowings (loans) of more than ₹1 crore.
• Their total revenue exceeds ₹10 crore in a financial year.

What Does CARO 2020 Require Auditors to Do?

CARO 2020 asks auditors to report on several important areas of a company’s operations. Here are some of the key things auditors must check:

1. Fixed Assets: The auditor needs to check if the company keeps proper records of its assets, like buildings, land, and equipment. They also need to verify if these assets are physically checked from time to time.
2. Inventory: Auditors must ensure the company has done a physical count of its inventory (like stock in warehouses) and that everything adds up.
3. Loans: If the company has given out any loans or advances, the auditor has to confirm that these loans were given under proper terms and conditions and that they’re being repaid on time.
4. Fraud: Auditors are required to report if they find any instances of fraud during their review.
5. Taxes and Dues: Auditors check whether the company is paying its taxes and other government dues (like provident fund contributions) on time.
6. Related Party Transactions: The auditor must verify if the company has any deals with related parties (like deals between a company and its directors or subsidiaries) and whether these transactions are being done fairly.
7. Internal Audit System: For larger companies, the auditor has to review how effective the company’s internal audit system is in ensuring proper checks and balances.
8. Corporate Social Responsibility (CSR): If the company is required to spend on CSR activities, the auditor needs to check if they are meeting this obligation as per the law.

Why Does CARO Report Matter?

CARO plays a crucial role in making sure that companies stay honest and follow good financial practices. It helps protect shareholders, investors, and other stakeholders by ensuring that companies don’t hide important information or engage in questionable practices.

For companies, complying with CARO means they need to keep accurate records and be ready for a thorough audit. For auditors, CARO provides a clear checklist of areas they need to cover to give a complete picture of the company’s financial health.

Conclusion

CARO 2020 is an important regulation for companies in India, making sure that financial audits are more thorough and transparent. While it doesn’t apply to every company, many larger private companies and public companies must follow these rules. For auditors, CARO ensures that their reports cover all necessary details, from fixed assets to potential fraud.

By ensuring compliance with CARO, companies show that they are committed to transparency, which is essential for building trust with investors, shareholders, and the public.