CARO 2020 Applicability for FY 2025-26: Exemptions, Tests and Worked Examples

Oct 24

7 min read

Updated: 14 hours ago

The Companies (Auditor's Report) Order, 2020 (CARO 2020) adds 21 reporting clauses to the statutory auditor's report. Before any of those clauses is answered, the auditor has to settle a prior question: does CARO apply to this company at all? For FY 2025-26 audits the answer changed for many private companies, because the small company limits under Section 2(85) of the Companies Act, 2013 were raised with effect from 1 December 2025.

This is the first part of a clause-by-clause CARO 2020 series. It covers the legal basis of the Order, the five exemptions in paragraph 1(2), how the 1 December 2025 change affects FY 2025-26 audits, three worked applicability tests, and a one-line map of all 21 clauses.

Legal basis of CARO 2020

CARO 2020 was notified by the Ministry of Corporate Affairs vide S.O. 849(E) dated 25 February 2020, under Section 143(11) of the Companies Act, 2013, after consultation with the National Financial Reporting Authority. It superseded CARO 2016.
Under paragraph 2, as amended, it applies to auditor's reports for financial years commencing on or after 1 April 2021. FY 2025-26 (year ending 31 March 2026) is therefore the fifth year of reporting.
It applies to every company, including a foreign company as defined in Section 2(42), unless one of the exemptions in paragraph 1(2) applies.
No order has replaced CARO 2020 so far; it continues to govern FY 2025-26 and FY 2026-27 audits.

CARO reporting forms part of the main audit report under Section 143, so its timing follows the statutory audit and AGM calendar explained in Statutory Audit Last Date 2026 for Companies.

Who is exempt: paragraph 1(2) of CARO 2020

CARO 2020 applicability flowchart: exemptions for banking, insurance, Section 8, OPC, small company and private company tests

CARO 2020 does not apply to the following companies:

A banking company as defined in Section 5(c) of the Banking Regulation Act, 1949.
An insurance company as defined under the Insurance Act, 1938.
A company licensed to operate under Section 8 of the Companies Act, 2013.
A One Person Company under Section 2(62) and a small company under Section 2(85).
A private limited company that meets all of these conditions: (a) it is not a subsidiary or holding company of a public company; (b) its paid-up capital plus reserves and surplus does not exceed ₹1 crore as on the balance sheet date; (c) its total borrowings from any bank or financial institution do not exceed ₹1 crore at any point of time during the year; and (d) its total revenue as disclosed under Schedule III (including revenue from discontinuing operations) does not exceed ₹10 crore during the year.

The small company route (item 4) and the private company route (item 5) are separate tests. A company that qualifies under either one is outside CARO.

Practice guide for professionals

For working-paper formats and review checklists on this topic, see the Audit Documentation & CARO 2020 Practical Guide (PDF, ₹299).

See all guides and toolkits

Small company limits from 1 December 2025

The Companies (Specification of definition details) Amendment Rules, 2025, notified vide G.S.R. 880(E) dated 1 December 2025, substituted Rule 2(1)(t). For Section 2(85), a small company now means a company, other than a public company, whose:

paid-up share capital does not exceed ₹10 crore (earlier ₹4 crore); and
turnover as per the profit and loss account for the immediately preceding financial year does not exceed ₹100 crore (earlier ₹40 crore).

Both limits must be met together. Even within these limits, the following can never be small companies: a holding company or a subsidiary company, a company registered under Section 8, and a company or body corporate governed by a special Act.

For FY 2025-26, the balance sheet date (31 March 2026) falls after the amendment came into force, so the revised limits are the ones to test. The turnover test looks back to FY 2024-25.

Points that decide the private company route

Holding or subsidiary of a public company: the route is closed only where the other company is a public company. A private company that is a subsidiary of another private company can still use it, though it will not be a small company.
Borrowings are tested at any point of time during the year, not only at year end. Check the peak balance in bank statements and CC/OD accounts, not just the closing figure.
As per the ICAI Guidance Note on CARO 2020, borrowings include interest accrued and due, current maturities of long-term borrowings and credit card dues; interest accrued but not due is excluded.
Total revenue means the Schedule III figure, that is revenue from operations plus other income, not just sales.
Capital plus reserves and surplus is tested as on the balance sheet date; a debit balance in the profit and loss account reduces reserves and surplus.

Worked examples: applying the tests for FY 2025-26

A guide on audit documentation and CARO 2020 reporting is listed on the Budget & Guides page.

Example 1: private company that becomes a small company

Alpha Components Pvt Ltd is not a holding or subsidiary company. Paid-up capital is ₹8 crore. Turnover for FY 2024-25 was ₹85 crore. Bank borrowings peaked at ₹12 crore during FY 2025-26.

Private company route: fails, because capital (₹8 crore) and borrowings (₹12 crore) both exceed ₹1 crore.
Small company route: paid-up capital ₹8 crore ≤ ₹10 crore and preceding-year turnover ₹85 crore ≤ ₹100 crore. It is a small company.
Result: CARO 2020 does not apply for FY 2025-26. Under the earlier ₹4 crore / ₹40 crore limits it would have applied, so last year's CARO annexure should not simply be rolled forward.

Example 2: subsidiary with a borrowing spike

Beta Foods Pvt Ltd is a wholly owned subsidiary of another private company. Paid-up capital plus reserves is ₹90 lakh, revenue (including other income) is ₹7 crore, and its cash credit balance touched ₹1.15 crore for two weeks in November 2025 before falling to ₹60 lakh at year end.

Small company route: closed, because a subsidiary company cannot be a small company, whatever its size.
Private company route: the holding company is private, so condition (a) is met; capital and revenue are within limits; but borrowings exceeded ₹1 crore at a point of time during the year.
Result: CARO 2020 applies. The year-end balance of ₹60 lakh does not help.

Example 3: unlisted public company of very small size

Gamma Infra Ltd is an unlisted public company with paid-up capital of ₹50 lakh, no borrowings and revenue of ₹2 crore.

A public company cannot be a small company, and the paragraph 1(2)(v) route is available only to private limited companies.
Result: CARO 2020 applies in full, although the company is far smaller than Alpha in Example 1.

Group structures also bring in beneficial ownership questions; if the shareholding chain is layered, see Significant Beneficial Ownership under Section 90 and Form BEN-2.

Consolidated financial statements

Under the proviso to paragraph 2, CARO 2020 does not apply to the auditor's report on consolidated financial statements, except clause 3(xxi). That clause requires the auditor of the parent to report any qualifications or adverse remarks in the CARO reports of companies included in the consolidated financial statements, with the company names and the paragraph numbers concerned.

The 21 clauses of paragraph 3 at a glance

3(i): Property, plant and equipment and intangible assets: records, physical verification, title deeds, revaluation, benami proceedings.
3(ii): Inventory verification and quarterly returns to banks where working capital limits above ₹5 crore are secured by current assets.
3(iii): Investments, guarantees, security and loans or advances granted to companies, firms, LLPs or other parties.
3(iv): Compliance with Sections 185 and 186.
3(v): Deposits and deemed deposits under Sections 73 to 76.
3(vi): Maintenance of cost records under Section 148(1).
3(vii): Regular deposit of undisputed statutory dues and details of disputed dues.
3(viii): Unrecorded income surrendered or disclosed in income-tax assessments.
3(ix): Default in repayment of borrowings, wilful defaulter status, use of term loans and short-term funds.
3(x): Money raised by IPO/FPO and preferential allotment or private placement.
3(xi): Fraud, reports in Form ADT-4 under Section 143(12) and whistle-blower complaints.
3(xii): Nidhi company compliance.
3(xiii): Related party transactions under Sections 177 and 188.
3(xiv): Internal audit system and consideration of internal audit reports.
3(xv): Non-cash transactions with directors under Section 192.
3(xvi): Registration under Section 45-IA of the RBI Act and core investment companies.
3(xvii): Cash losses in the current and immediately preceding financial year.
3(xviii): Resignation of the statutory auditor.
3(xix): Material uncertainty about meeting liabilities falling due within one year.
3(xx): Unspent CSR amounts and transfer to a Schedule VII fund or the Unspent CSR Account under Section 135.
3(xxi): Qualifications or adverse remarks in CARO reports of group companies (consolidated statements).

Paragraph 4 adds a reporting rule: where the answer to any clause is unfavourable or qualified, the auditor must state the reasons, and where the auditor cannot express an opinion, the report must say so with reasons. Later posts in this series take each clause in turn.

Applicability checklist for the audit file

Confirm the company type from the MCA master data: public or private, Section 8, OPC, banking or insurance.
Identify any holding or subsidiary relationship at any time during the year, and whether the other company is public or private.
Record paid-up capital and FY 2024-25 turnover against the revised ₹10 crore / ₹100 crore small company limits.
If the company is private, compute capital plus reserves and surplus at the balance sheet date, peak bank and FI borrowings during the year, and Schedule III total revenue.
Document the conclusion, with the numbers, in the working papers, in line with SA 230. If CARO applies, include the CARO annexure; if it does not, keep the computation on file.

Where a company also has to get a tax audit, the statutory audit report can be relied on under the third proviso to Section 44AB; see Third Proviso to Section 44AB.