CARO 2020 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Clause 3(x) asks whether money raised from the public or by private placement was used for the purposes stated, and whether sections 42 and 62 were followed. Clause 3(xi) asks about fraud noticed or reported, any ADT-4 report filed and whistle-blower complaints considered. This article sets out the ICAI Guidance Note's approach to the five limbs.
It is explained from the ICAI Guidance Note on the Companies (Auditor's Report) Order, 2020 (Revised 2022 Edition, July 2022). CARO 2020 applies to audits of financial years commencing on or after 1 April 2021. Later amendments to the Order, Schedule III and the laws named should be checked.
For public offers, the auditor verifies the end use disclosed by management against the offer document. For private placements and preferential allotments, he tests sections 42 and 62 and the use of funds. For fraud, the clause covers fraud noticed or reported during the year, both by and on the company; the auditor is not asked to discover it. ADT-4 reports and whistle-blower complaints of the year are reported separately.
The Order's wording is in the live explainers for clauses vii to x and clauses xi to xvi. Reviewing a placement before it is made is part of financial and legal due diligence. The preceding clause is in our clause 3(ix) article.
Clause 3(x)(a): public offers (paragraph 68)
The clause covers money raised by an initial or further public offer, including debt instruments, during the year. The GN reads it as covering equity shares, convertible securities and debt securities (non-convertible debentures and similar), and as not covering an offer for sale by an existing holder (no money reaches the company) or, strictly, money raised abroad by depository receipts. If an offer combines a fresh issue with an offer for sale, only the company's money is covered; the auditor may check that the financial statements state the terms of the offer for sale.
There is no legal requirement in the Act to disclose end use in the financial statements; Schedule III requires only the unutilised amount. The GN therefore expects companies to disclose end use by notes, and the auditor to verify it. Procedures:
- read the offer document for the proposed end use and compare it with the actual use in the notes; the difference should not be material;
- take a representation on the completeness of the disclosure;
- consider the listing regulations' disclosures, where utilised amount is cumulative and utilised plus unutilised equals issue size, and any monitoring agency report;
- if the end use cannot be verified, say so and give the reasons.
One-to-one tracing is not needed because money may move into a common account, and buying a better version of the stated machine is not misuse. Year-end receipts that are unspent are explained as such, and temporary parking of funds is mentioned with the final use. Where funds were not applied as stated, report the amount, nature of default including delay, and any later rectification.
Clause 3(x)(b): private placement and preferential allotment (paragraph 69)
The auditor tests whether sections 42 and 62 and their rules were followed, and whether funds were used for the stated purposes. Preferential allotment is not defined in the Act; the GN points to section 62 with the share capital rules. The GN summarises the section 42 conditions the auditor tests:
| Condition | What the auditor checks |
|---|---|
| Select group | Offers to persons identified by the Board, within the prescribed number in a financial year, using a private placement offer-cum-application letter |
| Special resolution | Previous approval for each offer |
| No fresh offer | Earlier offer completed, withdrawn or abandoned first |
| Allotment timing | Allotment within 60 days of receiving application money, or refund within 15 days after that |
| Separate bank account | Application money kept apart and used only for allotment or refund |
| No public advertisement | No media or marketing used to reach the public |
| Return of allotment | Form PAS-3 filed with the Registrar within 15 days of allotment |
For preferential allotment, the auditor evaluates the special resolution, valuation by a registered valuer where required (the GN notes that a listed company's price does not need one), the conditions of section 42, and for listed companies the SEBI regulations. Use of funds is compared with the purpose in the offer letter and the explanatory statement to the general meeting notice. If no specific purpose is stated, verify general business use. Non-compliances are reported with nature of security, type of issue, amount and nature of non-compliance.
Clause 3(xi)(a): fraud (paragraph 70)
The words "officers or employees" were removed, so the clause covers fraud by the company and on the company, including by third parties, that is noticed or reported during the year. The auditor reports the nature and amount separately for fraud on the company and fraud by the company. He need not discover frauds, and the clause does not reduce his duties under SA 240 or section 143(12). The Act's explanation of fraud includes intent to injure whether or not any gain or loss follows, so some acts may be undetectable, but those noticed or reported must be reported. Management fraud is generally treated as fraud by the company, and employee or third party fraud as fraud on the company.
Procedures:
- discuss susceptibility to fraud in the audit team and ask management about known or suspected frauds;
- read internal audit reports and audit committee and board minutes;
- obtain written representations on responsibility for controls, disclosure of frauds and suspected frauds, the fraud risk assessment, and the effect of uncorrected misstatements, using SA 450 if management disagrees;
- consider adverse findings from clause 3(viii) (voluntary surrender of unrecorded income may indicate misreporting) and clause 3(ii)(b).
For responses to fraud risk and reporting, see SA 240 part 2 for responses and reporting.
Clause 3(xi)(b): ADT-4 (paragraph 71)
The auditor reports whether any report under section 143(12) was filed in Form ADT-4. As the GN describes the Rule, an auditor who has reason to believe that a fraud of one crore rupees or above is being or has been committed against the company by its officers or employees reports to the Board or Audit Committee within two days of knowledge, asks for a reply within forty-five days, and forwards ADT-4 with the reply and his comments to the Central Government within fifteen days of receiving it (or, without a reply, after the forty-five days with a note). Lower amounts go to the Audit Committee or Board and are disclosed in the Board's report. The GN adds that failure to comply attracts a fine of not less than one lakh rupees up to twenty five lakh rupees. Check the Rules as now in force before applying these figures. Read our posts on reporting fraud and the 60-day rule and Rule 13 and 14 on ADT-4.
Reports filed by the current auditor during the year and up to the report date are covered, and also reports filed by a predecessor auditor during the year. The cost auditor and secretarial auditor are also subject to section 143(12), so check whether they filed ADT-4.
Clause 3(xi)(c): whistle-blower complaints (paragraph 72)
The auditor must consider complaints received by the company during the year; earlier years are not required. A vigil mechanism is mandatory for listed companies, companies accepting public deposits and companies with bank and public financial institution borrowings above the amount in section 177(9) (the GN prints fifty crore rupees); other companies may adopt one voluntarily. Our section 177 explainer covers the Act.
Where a mechanism is mandatory, check the hotline process for anonymous complaints and confirm that complaints are investigated and resolved in good time. The same procedures apply to voluntary mechanisms. If none exists, ask management to share all complaints received. Read audit committee and board minutes and ask about investigations. Take a written representation from the Board, audit committee or management on completeness; if management says none were received and the auditor has no contrary information, he may rely on it. The reporting is that the complaints were considered in setting audit procedures.
A worked example
Lotus Pharma Limited, unlisted, did a private placement of convertible debentures worth Rs 5 crore. The auditor finds that application money sat in the main current account for six weeks and the PAS-3 was filed on the twentieth day. Under 3(x)(b) he reports the nature of non-compliance: the separate account condition and the late return. A store clerk's theft of Rs 3 lakh is reported under 3(xi)(a) as fraud on the company.
Need help with fund raising compliance?
If you plan a private placement or preferential allotment, getting the approvals, bank account and filings right at the start avoids later remarks. TaxClue's financial and legal due diligence team can review the process with you.
Key takeaways
- Clause 3(x)(a) is about end use of public offer money, verified against the offer document.
- Clause 3(x)(b) tests sections 42 and 62 and the use of funds raised.
- Fraud is reported when noticed or reported during the year, separately for fraud by and on the company.
- ADT-4 reports include those filed by a predecessor auditor, cost auditor or secretarial auditor.
- Only whistle-blower complaints of the year are considered.
Read next
- CARO 2020 clauses 3(xii) to 3(xvi) in practice
- CARO 2020 clause 3(ix) in practice: loan defaults and fund use
- SA 240 fraud, part 1
- Reporting fraud: auditor 60-day rule
Disclaimer: Based on the Companies (Auditor's Report) Order, 2020 as explained in the ICAI Guidance Note on CARO 2020 (Revised 2022 Edition), as consulted on 3 October 2026. CARO applies to financial years commencing on or after 1 April 2021; later amendments to the Order, Schedule III and the laws referred to should be checked. This article is general information, not legal advice; check the official text before acting.