By CA Surekha S Ahuja
CARO does not begin with 21 clauses. It begins with one question: Does CARO apply?
CARO 2020 is issued under Section 143(11) of the Companies Act, 2013 and applies from FY 2021-22 onwards.
For FY 2025-26, the practical approach is:
APPLICABILITY → LAW → TRIGGER → THRESHOLD, IF ANY → EVIDENCE → EXCEPTION → REPORTING
The key mistake is treating CARO as a tick-box exercise or assuming every clause has a monetary threshold.
Some clauses are transaction-based, some event-based, some compliance-based, and some require auditor assessment.
1. FIRST TEST — DOES CARO APPLY?
CARO does not apply to:
| Company | Position |
|---|---|
| Banking company | Exempt |
| Insurance company | Exempt |
| Section 8 company | Exempt |
| One Person Company | Exempt |
| Small company | Exempt |
| Specified qualifying private company | Exempt |
A Nidhi company or NBFC is not automatically exempt merely because it is a Nidhi/NBFC. Their specific CARO provisions are contained in Clause 3(xii) and Clause 3(xvi) respectively.
2. SMALL COMPANY — THE FY 2025-26 TEST
The limits were increased with effect from 1 December 2025:
| Parameter | Limit |
| Paid-up share capital | ≤ Rs.10 crore |
| Turnover | ≤ Rs.100 crore |
The Rs.100 crore turnover test is based on turnover as per the P&L for the immediately preceding financial year. Accordingly, for FY 2025-26, the turnover considered is FY 2024-25.
The company must also satisfy the exclusions in Section 2(85), including that it is not a holding company, subsidiary company, Section 8 company or company/body corporate governed by a special Act.
In short:
Paid-up capital ≤ Rs.10 crore
AND
FY 2024-25 turnover ≤ Rs.100 crore
AND
No Section 2(85) exclusion
→ Small company → CARO exempt
3. PRIVATE-COMPANY EXEMPTION — ALL CONDITIONS MUST BE MET
A private company which is not a small company may still be exempt under CARO paragraph 1(2)(v).
All conditions are cumulative — AND, not OR.
| Condition | Requirement |
| Paid-up capital + reserves & surplus | ≤ Rs.1 crore at balance-sheet date |
| Bank/FI borrowings | ≤ Rs.1 crore at any point during FY 2025-26 |
| Total revenue | ≤ Rs.10 crore during FY 2025-26 |
| Status | Not a holding/subsidiary of a public company |
If even one condition fails → this exemption is lost.
4. IF CARO APPLIES — FIND THE TRIGGER
| Clause | What should trigger your review? | Key threshold / test |
| 3(i) | PPE/intangibles, physical verification, title deeds, revaluation, benami property | 10% applies to specified discrepancies/revaluation tests |
| 3(ii) | Inventory and working-capital limits | 10% class-wise inventory discrepancy; WC limits >Rs.5 crore |
| 3(iii) | Loans, advances, guarantees, securities | >90 days overdue; also test terms, evergreening and demand/no-term loans |
| 3(iv) | Transactions covered by Sections 185/186 | Compliance test |
| 3(v) | Deposits / deemed deposits | Compliance test |
| 3(vi) | Section 148 cost-record requirement | Applicability + maintenance |
| 3(vii) | Statutory dues | Undisputed dues >6 months; disputed dues separately |
| 3(viii) | Previously unrecorded income admitted/surrendered in tax proceedings | Recording in books |
| 3(ix) | Borrowings | Any default, wilful defaulter, utilisation/end-use and group-funding tests |
| 3(x) | IPO/FPO/debt instruments or private placement/preferential allotment | Utilisation + statutory compliance |
| 3(xi) | Fraud / Section 143(12) / whistle-blower complaints | Nature and amount / consideration |
| 3(xii) | Nidhi company | Nidhi-specific requirements |
| 3(xiii) | Related-party transactions | Sections 177/188 + disclosures |
| 3(xiv) | Internal audit | Section 138 applicability + reports considered |
| 3(xv) | Non-cash transactions with directors/connected persons | Section 192 |
| 3(xvi) | RBI/NBFC/HFC/CIC matters | Registration / regulatory requirements |
| 3(xvii) | Cash losses | Current FY + immediately preceding FY |
| 3(xviii) | Auditor resignation | Reasons/issues considered |
| 3(xix) | Going-concern uncertainty | Liabilities existing at BS date falling due within 1 year |
| 3(xx) | Unspent CSR | 30 days / 6 months, depending on category |
| 3(xxi) | CARO qualifications/adverse remarks in components | CFS reporting |
5. THE NUMBERS THAT MUST NOT BE CONFUSED
| Number | Where it belongs |
| Rs.10 crore / Rs.100 crore | Small-company test |
| FY 2024-25 | Turnover year for FY 2025-26 small-company test |
| Rs.1 crore / Rs.1 crore / Rs.10 crore | Private-company CARO exemption |
| 10% | Specific PPE/inventory/revaluation tests |
| Rs.5 crore | Working-capital limits — Clause 3(ii)(b) |
| 90 days | Overdue loans — Clause 3(iii)(d) |
| 6 months | Undisputed statutory dues — Clause 3(vii)(a) |
| 1 year | Liability period relevant to Clause 3(xix) |
| 30 days / 6 months | Unspent CSR transfers |
These are not universal CARO materiality thresholds.
6. THREE CRITICAL TRAPS
90 DAYS ≠ GENERAL BORROWING DEFAULT
3(iii)(d): loan/advance overdue more than 90 days
3(ix)(a): any default in repayment of borrowings or payment of interest
6 MONTHS ≠ ALL STATUTORY DUES
3(vii)(a): undisputed dues outstanding more than six months
3(vii)(b): disputed dues — report amount and forum; no six-month test
Rs. 5 CRORE ≠ CARO APPLICABILITY
The Rs.5 crore threshold belongs only to Clause 3(ii)(b) for working-capital limits secured by current assets.
It does not determine whether CARO applies.
7. THE SIMPLE CARO WORKING-PAPER FORMULA
For every clause:
LAW → TRIGGER → THRESHOLD, IF ANY → FACTS → EVIDENCE → EXCEPTION → REPORTING
Use one simple working-paper structure:
| Clause | Trigger | Threshold, if any | Facts | Evidence | Exception | Conclusion |
| 3(ii)(b) | WC limits secured by current assets | >Rs. 5 crore | Rs___ | Sanctions/statements | ___ | ___ |
| 3(iii)(d) | Loan overdue | >90 days | Rs___ | Ageing/confirmations | ___ | ___ |
| 3(vii)(a) | Undisputed statutory dues unpaid | >6 months | Rs___ | Returns/challans | ___ | ___ |
| 3(ix)(a) | Borrowing default | No minimum threshold | Rs___ | Bank confirmations | ___ | ___ |
| 3(xvii) | Cash loss | Current + preceding FY | Rs___ | Computation | ___ | ___ |
| 3(xix) | Material uncertainty | Liabilities due within 1 year | Rs___ | Cash flow/ageing | ___ | ___ |
THE BOTTOM LINE
CARO is not a 21-clause tick-box exercise.
For FY 2025-26:
FIRST — Does CARO apply?
SECOND — What triggers the clause?
THIRD — Is there a prescribed threshold?
FOURTH — What does the evidence establish?
FINALLY — What must the auditor report?
The real CARO discipline is not “Applicable / Not Applicable”. It is “Why applicable, what triggered it, what evidence supports it, and what exactly has to be reported?”
That is the CARO decision matrix an audit team can actually use.
