← Notes Hub Chapter 7: Reporting Under Companies Act & CARO 2020
CA Final Advanced Auditing • Paper 3

Chapter 7: Reporting Under Companies Act, 2013 & CARO, 2020

A structured, exam-oriented study guide covering Section 143 statutory audit duties, Rule 11 reporting, Form ADT-4 fraud reporting timelines, and exhaustive clause-by-clause coverage of CARO 2020 with practical computation limits.

📑 21 CARO Clauses
⚖️ Section 143 Provisions
🚨 Form ADT-4 Fraud Reporting
🏢 Private Co. Exemption Limits

1. Duties of Auditors (Section 143 & Rules)

1. Duty of Auditor to Inquire on Certain Matters – Sec 143(1)

It is the duty of the statutory auditor to inquire into the following 6 specific matters. The auditor is required to report to members only if his finding on any of these matters is adverse / negative.

A
Loans & Advances on Security: Whether loans & advances made by the company on the basis of security have been properly secured and whether the terms are prejudicial to the interests of the company or its members.
B
Book Entries: Whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company.
C
Sale of Shares / Securities at Loss: Where the company is not an investment or banking company, whether assets consisting of shares, debentures & securities have been sold at a price less than their purchase cost.
D
Loans Shown as Deposits: Whether loans and advances made by the company have been improperly shown as deposits in the books.
E
Personal Expenses: Whether personal expenses of directors or employees have been improperly charged to the revenue account.
F
Shares Allotted for Cash: Where stated in books that shares were allotted for cash, whether cash has actually been received, and if not, whether the stated position in books and balance sheet is correct and not misleading.
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Exam Golden Rule u/s 143(1): Inquire vs. Report — The auditor does not need to write a report on these 6 matters in the standard audit report unless an inquiry reveals an adverse, irregular, or prejudicial situation!

2. Duty to Sign the Audit Report – Sec 145

As per Section 145, the person appointed as an auditor of the company shall sign the auditor's report or sign/certify any other document of the company in accordance with Section 141(2). Qualifications, observations, or adverse comments mentioned in the report shall be read before the company in general meeting and shall be open to inspection by any member.

3. Duty to Comply with Auditing Standards – Sec 143(9) & (10)

• Every auditor shall comply with the auditing standards prescribed by the Central Government u/s 143(10).

• The CG prescribes standards recommended by the ICAI in consultation with and after examination of recommendations by NFRA.

• Until standards are notified by the CG, standards of auditing specified by the ICAI shall be deemed to be the auditing standards.

4. Duty to State Matters in Audit Report – Sec 143(3) & Rule 11

Section 143(3) mandates that the statutory auditor's report shall state:

(a) Information & Explanations
Whether obtained all information & explanations necessary for audit; if not, details & effect on financial statements.
(b) Proper Books of Account
Whether proper books of account as required by law have been kept, and proper branch returns received.
(c) Branch Audit Report
Whether report on branch accounts audited u/s 143(8) by another auditor was sent and how dealt with.
(d) Agreement with Books
Whether Balance Sheet and Profit & Loss account are in agreement with the books of account and returns.
(e) Compliance with AS / Ind AS
Whether, in his opinion, the financial statements comply with applicable Accounting Standards.
(f) Adverse Financial Observations
Observations or comments on financial transactions or matters having any adverse effect on functioning of company.
(g) Director Disqualification
Whether any director is disqualified from being appointed as director under Section 164(2).
(h) Qualifications on Maintenance
Any qualification, reservation, or adverse remark relating to the maintenance of accounts.
(i) Internal Financial Controls (IFCoFR)
Whether company has adequate internal financial controls with reference to financial statements in place & operating effectiveness.
⚡ Exemption for Private Companies: Section 143(3)(i) does NOT apply to: (i) One Person Co. (OPC) or Small Co.; OR (ii) Private co. with Turnover < ₹50 Crores AND aggregate borrowings from banks/FIs/bodies corporate < ₹25 Crores at any point during FY.

Rule 11 Matters Included in Auditor's Report – Section 143(3)(j)

  • (a) Pending Litigations: Whether company disclosed impact of pending litigations on financial position.
  • (b) Foreseeable Losses: Whether provision made for material foreseeable losses on long-term & derivative contracts.
  • (c) IEPF Delays: Whether any delay occurred in transferring amounts required to be transferred to Investor Education & Protection Fund.
  • (d) Intermediary & Funding Party Representations:
    (i) Representation that no funds loaned/invested to Intermediaries to further lend to Ultimate Beneficiaries or provide guarantee.
    (ii) Representation that no funds received from Funding Parties to further lend to Ultimate Beneficiaries.
    (iii) Auditor confirms nothing has come to notice causing belief of material misstatement in these representations.
  • (e) Dividend Compliance: Whether dividend declared or paid during year complies with Section 123 of Companies Act, 2013.
  • (f) Audit Trail (Edit Log) in Accounting Software:
    Whether company used accounting software with an operating audit trail (edit log) facility throughout the year for all transactions, feature not tampered with, and audit trail preserved as per statutory records retention requirements.
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What is Audit Trail? A step-by-step sequential record providing documented history of financial transactions from source document to general ledger. Enables the auditor to track every alteration, deletion, or modification with date, time, and user ID.

Managerial Remuneration – Section 197(16)

The statutory auditor of a public company must state in the audit report whether remuneration paid by the company to its directors is in accordance with Section 197, whether any excess was paid, and details of waiver/recovery. Reported under "Report on Other Legal & Regulatory Requirements".

5. Duty to Report on Frauds – Section 143(12) & Rule 13

Statutory obligation on auditors, cost accountants, and secretarial auditors to report fraud committed by officers or employees against the company:

🚨 Fraud ≥ ₹1 Crore (Individual) To Central Govt
1
Within 2 Days: Report to Board or Audit Committee seeking reply/observations within 45 days.
2
Within 15 Days: On receipt of Board reply, forward report + Board reply + auditor comments to Central Govt (MCA).
3
No Reply from Board? Forward report to CG with note mentioning earlier report was not replied to.
4
Format: In Form ADT-4 on auditor's letterhead, sealed cover by Speed Post/RPAD + confirmation email.
⚠️ Fraud < ₹1 Crore To Board / Audit Comm
1
Within 2 Days: Report matter to Audit Committee (u/s 177) or Board of Directors.
2
Specify 3 Things: (a) Nature of fraud with description, (b) Approximate amount involved, and (c) Parties involved.
3
Disclosure in Board's Report: Board must disclose details in Board Report (Nature, Amount, Parties, Remedial action taken).
4
Good Faith Protection: Sec 143(13) protects auditor from breach of duty when reporting in good faith.
⚖️
Penalties for Failure to Report Fraud u/s 143(12):
• Listed Company Auditor: Penalty of ₹5 Lakhs.
• Other Company Auditor: Penalty of ₹1 Lakh.

Branch Audit, Reasons for Negative Report & Sec 143(11)

Sec 143(8) Branch Audit
Accounts of branch audited by company auditor or qualified person appointed u/s 139. Foreign branch audited by company auditor or accountant qualified under foreign country's laws. Branch auditor submits report to company auditor. Fraud reporting extends to branch auditor.
Sec 143(4) Negative Report
Where any matter required in audit report is answered in negative or with qualification, report must explicitly state reasons therefor.
Sec 143(11) Power for CARO
Central Government may, in consultation with NFRA, order inclusion of specific reporting matters in audit report for prescribed classes of companies (This powers CARO 2020).

2. Applicability of CARO, 2020

The Companies (Auditor's Report) Order, 2020 applies to every company including a foreign company u/s 2(42), EXCEPT the following categories:

🚫 Banking Company
As defined in clause (c) of Section 5 of the Banking Regulation Act, 1949.
🚫 Insurance Company
As defined under the Insurance Act, 1938.
🚫 Section 8 Company
Licensed to operate under Section 8 of the Companies Act, 2013 (Charitable objectives).
🚫 One Person Co. & Small Co.
One Person Company u/s 2(62) and Small Company u/s 2(85).

Private Limited Company Exemption – The 3-Point Threshold Test

A private limited company (not being a subsidiary or holding of a public company) is exempted from CARO 2020 only if it satisfies ALL THREE conditions simultaneously:

Paid-up Capital + Reserves
≤ ₹1 Crore
As on Balance Sheet Date

Paid-up share capital plus Reserves & Surplus (including capital, revenue & revaluation reserve).

Total Borrowings (Banks/FIs)
≤ ₹1 Crore
At ANY point of time during FY

Aggregate borrowings from banks & financial institutions (short-term, long-term, CC limit, invoked guarantees).

Total Revenue
≤ ₹10 Crores
During the Financial Year

Total revenue as disclosed in Schedule III (Revenue from operations + Other income + Discontinuing operations).

⚠️
Consolidated Financial Statements (CFS) Exemption: CARO 2020 does NOT apply to the auditor's report on consolidated financial statements — EXCEPT Clause 3(xxi) (which requires reporting on qualifications/adverse remarks in CARO reports of group entities).

Deep Dive: Rules for Computation of Limits

💰 Paid-Up Capital & Reserves
  • Calls unpaid: Deduct from paid-up capital.
  • Forfeited shares original amount: Add to paid-up capital.
  • Share Application money: Excluded.
  • Convertible instruments: Counted only once shares are issued.
  • Reserves: Capital reserves, Securities Premium, DRR, Revaluation Reserve, Surplus. P&L debit balance deducted from surplus.
  • Ind AS / OCI Exclusion: Equity component of compound instruments, OCI revaluation surplus, cash flow hedge reserves are excluded.
🏦 Borrowings from Banks / FIs
  • Includes term loans, demand loans, overdrafts, cash credits, bills discounted, and credit card dues.
  • Current maturities of long-term borrowings: Included.
  • Both secured & unsecured borrowings: Included.
  • Invoked bank guarantees & devolved LCs: Included.
  • Interest accrued & due: Included; Interest accrued but not due: Excluded.
  • Peak Limit Rule: If cash credit facility exceeds ₹1 Crore on even a single day during the year, CARO becomes applicable!

3. Matters to be Included in Auditor's Report – CARO, 2020 (21 Clauses)

CARO 2020 at a Glance (The 21 Clauses Architecture)

Part 1: Assets & Inventory
  • (i) PPE & Intangibles
  • (ii) Inventory & Working Capital
Part 2: Loans, Investments & Dues
  • (iii) Loans, Guarantees & Securities
  • (iv) Sec 185 & 186 Compliance
  • (v) Deposits u/s 73-76
  • (vi) Cost Records u/s 148
  • (vii) Statutory Dues
Part 3: Borrowings & Capital
  • (viii) Undisclosed Income
  • (ix) Repayment of Borrowings
  • (x) IPO / FPO & Private Placement
Part 4: Frauds, Nidhi & Related Parties
  • (xi) Fraud Reporting & ADT-4
  • (xii) Nidhi Company Rules
  • (xiii) Related Parties (Sec 177/188)
Part 5: Internal Audit & NBFCs
  • (xiv) Internal Audit System
  • (xv) Non-cash Transactions (Sec 192)
  • (xvi) RBI / NBFC / CIC Registration
Part 6: Solvency, CSR & CFS
  • (xvii) Cash Losses
  • (xviii) Auditor Resignation
  • (xix) 1-Year Going Concern Solvency
  • (xx) CSR Unspent Funds
  • (xxi) CARO Remarks in CFS
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Clause 3(i) Fixed Assets

Property, Plant & Equipment and Intangible Assets

(a)(A) Proper records showing full particulars, quantitative details & situation of Property, Plant & Equipment (PPE).
(a)(B) Proper records showing full particulars of intangible assets.
(b) Whether PPE have been physically verified by management at reasonable intervals; whether any material discrepancies noticed & properly dealt with in books.
(c) Title deeds of all immovable properties (other than properties where company is lessee under duly executed lease) held in the name of company. If not held, disclose in prescribed table format below:
Description of Property Gross Carrying Value Held in Name of Whether Promoter / Director / Relative Period Held Reason for Not Being in Name (*dispute)
Land / Building ₹ Amount Name of Person / Entity Yes / No Date / Range Pending registration / in dispute
(d) Whether PPE (including ROU assets) or intangibles revalued during year; whether based on valuation by Registered Valuer; specify amount of change if change is ≥ 10% in net carrying value.
(e) Whether proceedings initiated or pending for holding Benami Property under Benami Transactions (Prohibition) Act, 1988; whether appropriately disclosed in financial statements.
Clause 3(ii) Inventory & Working Capital

Inventory & Working Capital Limits

(a) Physical Verification of Inventory: Whether physical verification conducted at reasonable intervals by management; whether coverage & procedure appropriate; whether discrepancies of ≥ 10% in aggregate for each class of inventory were noticed and properly dealt with in books.
(b) Sanctioned Working Capital Limits > ₹5 Crores: Whether at any point of time during the year, company sanctioned working capital limits in excess of > ₹5 Crores in aggregate from banks/FIs on security of current assets; whether quarterly returns/statements filed with banks agree with books of account.
Clause 3(iii) Loans & Investments

Loans, Investments, Guarantees & Advances

(a) Aggregate Amount & Balance: Disclose aggregate amount during year and balance outstanding at balance sheet date for: (A) Subsidiaries, Joint Ventures & Associates, and (B) Other parties.
(b) Terms Not Prejudicial: Whether investments made, guarantees provided, security given, and terms & conditions of loans/advances are not prejudicial to company's interest.
(c) Repayment Stipulation: Whether schedule of repayment of principal and interest has been stipulated and repayments/receipts are regular.
(d) Overdue > 90 Days: If amount is overdue, state total amount overdue for > 90 days and whether reasonable recovery steps have been taken.
(e) Evergreening / Loan Renewal: Whether loans due during year were renewed, extended, or fresh loans granted to settle overdues of existing loans; specify aggregate amount & percentage.
(f) Loans Repayable on Demand / Without Terms: Whether loans granted repayable on demand or without specifying terms; specify aggregate amount, percentage, and amount granted to Promoters / Related Parties.
Clause 3(iv) Statutory Compliance

Compliance with Sections 185 & 186

In respect of loans, investments, guarantees, and security, whether provisions of Section 185 (Loans to Directors) and Section 186 (Loan and Investment by Company) have been complied with; if not, provide details thereof.
Clause 3(v) Deposits

Public Deposits & Deemed Deposits

In respect of deposits or deemed deposits accepted by the company, whether directives issued by the RBI and provisions of Sections 73 to 76 of the Companies Act have been complied with. If order passed by CLB, NCLT, RBI, or court, whether complied with.
Clause 3(vi) Cost Records

Maintenance of Cost Records

Whether maintenance of cost records has been specified by the Central Government u/s 148(1) and whether such accounts and records have been made and maintained.
Clause 3(vii) Statutory Dues

Payment of Statutory Dues

(a) Undisputed Dues > 6 Months: Whether regular in depositing undisputed statutory dues (GST, PF, ESI, Income-tax, Customs, Cess). If not, indicate arrears outstanding on last day of financial year for > 6 months from date they became payable.
(b) Disputed Dues: Where statutory dues have not been deposited on account of any dispute, state amounts involved and forum where dispute is pending (mere representation to department is not a dispute).
Clause 3(viii) Undisclosed Income

Undisclosed Income

Whether any transactions not recorded in books have been surrendered or disclosed as income during the year in tax assessments under the Income Tax Act, 1961; if so, whether previously unrecorded income has been properly recorded in books during the year.
Clause 3(ix) Loan Repayments

Repayment of Loans & Other Borrowings

(a) Default in Repayment: Whether company defaulted in repayment of loans/borrowings or interest; if yes, report period and amount as per format below (lender-wise details required for banks/FIs/Govt):
Nature of Borrowing Name of Lender Amount Unpaid Principal / Interest Days Delay / Unpaid Remarks
Term Loan / Debt Security Bank / FI Name ₹ Amount Principal / Interest No. of Days Default remarks
(b) Whether declared a wilful defaulter by any bank, FI, or other lender.
(c) Whether term loans applied for purpose obtained; if not, amount diverted & purpose.
(d) Whether short-term funds utilized for long-term purposes; nature and amount.
(e) Whether company took funds to meet obligations of subsidiaries, associates, or JVs.
(f) Whether company raised loans on pledge of securities held in subsidiaries/JVs.
Clause 3(x) Capital Issue

Application of Issue Proceeds

(a) IPO / FPO Funds: Whether moneys raised by initial public offer or further public offer (including debt instruments) were applied for purposes raised; if not, details of delay/default.
(b) Preferential Allotment / Private Placement: Whether company made preferential allotment or private placement of shares/convertible debentures; whether requirements of Section 42 & 62 complied with; whether funds used for intended purposes.
Clause 3(xi) Fraud Reporting

Reporting on Frauds & Whistle-Blowers

(a) Whether any fraud by the company or on the company noticed or reported during year; state nature and amount involved.
(b) Whether report u/s 143(12) filed by auditors in Form ADT-4 with Central Government.
(c) Whether auditor considered whistle-blower complaints received during year.
Clause 3(xii) Nidhi Company

Nidhi Company Compliance

(a) Net Owned Funds to Deposits ratio maintained at 1:20.
(b) Maintenance of 10% unencumbered term deposits as per Nidhi Rules, 2014.
(c) Any default in payment of interest on deposits or repayment thereof.
Clause 3(xiii) Related Parties

Related Party Transactions

Whether all transactions with related parties are in compliance with Section 177 (Audit Committee approval) and Section 188 (Related party contracts) of Companies Act, and details properly disclosed in financial statements as required by applicable Accounting Standards.
Clause 3(xiv) Internal Audit

Internal Audit System

(a) Whether internal audit system commensurate with size and nature of business.
(b) Whether reports of Internal Auditors for period under audit were considered by statutory auditor.
Clause 3(xv) Non-Cash Deals

Non-Cash Transactions with Directors

Whether company entered into non-cash transactions with directors or persons connected with them, and if so, whether provisions of Section 192 have been complied with.
Clause 3(xvi) RBI & NBFC Regulations

Registration with RBI, NBFC & CIC

(a) Required registration u/s 45-IA of RBI Act, 1934 obtained.
(b) Any NBFC or Housing Finance activities conducted without valid Certificate of Registration (COR).
(c) Whether company is a Core Investment Company (CIC) and fulfils criteria.
(d) Whether Group has more than one CIC; indicate total number of CICs in Group.
Clause 3(xvii) Financial Health

Cash Losses

Whether company incurred cash losses in the financial year AND in immediately preceding financial year; if so, state amount of cash losses.
Clause 3(xviii) Auditor Resignation

Resignation of Statutory Auditors

Whether there has been resignation of statutory auditors during year; if so, whether incoming auditor considered issues, objections, or concerns raised by outgoing auditor.
Clause 3(xix) Going Concern Solvency

Ability to Meet Liabilities Falling Due in 1 Year

On basis of financial ratios, ageing and expected realisation of financial assets and liabilities, and management plans, whether auditor is of opinion that no material uncertainty exists that company is capable of meeting liabilities existing at balance sheet date as and when they fall due within 1 Year from balance sheet date.
Clause 3(xx) CSR Compliance

Corporate Social Responsibility (CSR)

(a) Other than Ongoing Projects: Whether unspent CSR amount transferred to a Fund specified in Schedule VII within 6 Months of expiry of financial year u/s 135(5).
(b) Ongoing Projects: Whether unspent amount pursuant to ongoing project transferred to special bank account within 30 days u/s 135(6).
Clause 3(xxi) Consolidated Financial Statements

CARO Remarks in Consolidated Financial Statements

Whether there have been any qualifications or adverse remarks by respective auditors in the CARO reports of companies included in consolidated financial statements; if yes, indicate details of companies and paragraph numbers of CARO report containing adverse remarks.