Audit Report and Reporting under CARO: formula sheet

Key formulas

Minimum elements of the report (SA 700, para 49)

Title; Addressee; Opinion section (with framework); Identification of financial statements audited; Independence and Code of Ethics statement; Going concern section where applicable; Basis for Qualified/Adverse Opinion where applicable; Key audit matters or prescribed additional information where applicable; Other information section where applicable; Management's responsibilities and those charged with oversight; Auditor's responsibilities with reference to SAs and law; Signature; Place; Date

Para 49(a)-(n). These are the minimum if law prescribes a specific layout and the report still refers to the Standards on Auditing. Remember the order a to n for a list answer.

Choosing the opinion

Material, not pervasive misstatement → Qualified | Material and pervasive misstatement → Adverse | Material, not pervasive inability to get evidence → Qualified | Material and pervasive inability to get evidence → Disclaimer | No material matter → Unmodified

This is the logic of SA 705 para 2: nature of the matter and pervasiveness. Use it for every opinion-type question.

Heading change (SA 705, para 20)

"Basis for Opinion" → "Basis for Qualified Opinion" / "Basis for Adverse Opinion" / "Basis for Disclaimer of Opinion"

The section must also describe the matter giving rise to the modification.

No contradiction rule (SA 705, para 15)

Adverse opinion or disclaimer on the financial statements as a whole → no unmodified opinion on a single statement or element under the same framework in the same report

Such an unmodified opinion would contradict the adverse opinion or disclaimer.

Decision grid: misstatement

Material but not pervasive → Qualified opinion; Material and pervasive → Adverse opinion

Used when the auditor disagrees with management on the financial statements.

Decision grid: inability to obtain evidence

Material but not pervasive → Qualified opinion; Material and pervasive → Disclaimer of opinion

Used for scope limitations where possible effects could be material.

Opinion wording

Qualified (misstatement): 'except for the effects of the matter described in the Basis for Qualified Opinion paragraph'; Qualified (scope limitation): 'except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph'; Adverse: 'do not give a true and fair view'

Disclaimer: 'we do not express an opinion'. The heading of the opinion section also changes to match.

Report structure

Opinion → Basis for (Qualified / Adverse) Opinion or Basis for Disclaimer of Opinion

The basis paragraph must state the reasons and, where practicable, quantify the effect.

Conditions for an EOM paragraph (SA 706, para 8)

EOM allowed only if: (a) no modification of opinion is needed under SA 705 (Revised) AND (b) when SA 701 applies, the matter is not a KAM

The matter must be presented or disclosed in the financial statements and be fundamental to users' understanding.

EOM vs OM test

Matter presented or disclosed in financial statements → EOM; matter not presented or disclosed → OM

Both are used to draw attention. Neither changes the opinion.

KAM definition (SA 701)

KAMs = matters of most significance in the audit of the current period, selected from matters communicated with those charged with governance

Mandatory for complete sets of general purpose financial statements of listed entities (SA 700 para 30).

EOM is not a substitute for KAM

When SA 701 applies: EOM ≠ replacement for describing individual KAMs

A matter determined to be a KAM must be communicated as a KAM.

Placement of EOM with KAM section

EOM may sit directly before or after the Key Audit Matters section

Choose by relative significance. Adding context to the heading, e.g. "Emphasis of Matter – Subsequent Event", helps tell it apart from KAMs.

EOM on reporting framework

EOM about the applicable framework may be placed immediately after the Basis of Opinion section

This gives context to the opinion.

General rule

CARO 2020 applies to every company, including a foreign company, unless an exception in paragraph 1(2) applies

Start from 'applicable' and then test exemptions.

Fully exempt company types

Banking company; insurance company; section 8 company; One Person Company; small company

No further test is needed for these categories.

Small private company exemption

Private limited company, not a subsidiary or holding company of a public company, AND paid up capital + reserves and surplus ≤ ₹1 crore AND no borrowings from bank or financial institution > ₹1 crore at any point in the year AND total revenue ≤ ₹10 crore

All conditions must hold together. Failing one means CARO applies. Borrowings are tested at any point during the year; capital and reserves on the balance sheet date.

Consolidated financial statements

CARO 2020 does not apply to the report on consolidated financial statements, except clause (xxi) of paragraph 3

Clause (xxi) deals with qualifications or adverse remarks in CARO reports of group companies.

Period covered

Auditor's reports for financial years commencing on or after 1 April 2019

The matters in paragraphs 3 and 4 are reported in addition to the section 143 report, as applicable.

Clause 3(i)(a)

Proper records: PPE (full particulars, quantitative details, situation); intangibles (full particulars)

Reported separately: (A) for PPE and (B) for intangible assets.

Clause 3(i)(b)

PPE physically verified by management at reasonable intervals; material discrepancies properly dealt with in books

Physical verification of PPE is by management. The auditor reports whether it was done and how discrepancies were treated.

Clause 3(i)(c)

Title deeds of all immovable properties held in company's name; if not, give details in prescribed format

Excludes properties where the company is lessee and lease agreements are duly executed in its favour. Format covers description, gross carrying value, name held in, whether promoter/director/relative/employee, period held, reason (and whether in dispute).

Clause 3(i)(d)

Revaluation of PPE (including Right of Use assets) or intangibles: based on Registered Valuer? Specify change if 10% or more in aggregate of net carrying value of each class

The 10% test is applied class by class, on net carrying value.

Clause 3(i)(e)

Benami property proceedings initiated or pending under the Benami Transactions (Prohibition) Act, 1988; disclosure in financial statements

Report whether details are appropriately disclosed.

Clause 3(ii)(a)

Inventory verified by management at reasonable intervals; coverage and procedure appropriate in auditor's opinion; discrepancies of 10% or more in aggregate for each class of inventory properly dealt with

The 10% test is for each class of inventory.

Clause 3(ii)(b)

Working capital limits sanctioned above ₹5 crore in aggregate at any point in the year, on security of current assets: do quarterly returns or statements agree with books of account?

Applies to limits from banks or financial institutions. If they do not agree, give details.

Clause 3(iii)

Investments made, guarantees or security provided, loans or advances in the nature of loans granted to companies, firms, LLPs or other parties: report sub-clauses (a) to (f)

Sub-clauses (a) and (e) are not applicable to companies whose principal business is to give loans.

Clause 3(iii) details

(a) amounts during year and outstanding, to subsidiaries/JVs/associates and to others; (b) not prejudicial to company's interest; (c) repayment schedule stipulated and regular; (d) overdue more than ninety days and recovery steps; (e) renewals or fresh loans to settle overdues; (f) loans repayable on demand or with no terms

Under (f), give aggregate amount, percentage to total loans granted, and amount granted to Promoters and related parties as defined in section 2(76) of the Companies Act, 2013.

Clause 3(iv)

Loans, investments, guarantees and security: sections 185 and 186 complied with? If not, give details

Short clause, but a qualification here needs the details of the breach.

Clause 3(v)

Deposits accepted or deemed deposits: RBI directives and sections 73 to 76 or other relevant provisions and rules complied with? If not, state nature of contraventions; if an order has been passed by Company Law Board, NCLT, RBI, a court or tribunal, has it been complied with?

Applies where applicable.

Clause 3(vii)(a): undisputed statutory dues

Report arrears outstanding on the last day of the year for more than six months from the date payable

Applies to undisputed dues including GST, provident fund, ESI, income-tax, sales-tax, service tax, customs, excise, VAT, cess and other statutory dues.

Clause 3(vii)(b): disputed dues

Disclose amount involved and forum where dispute is pending

A mere representation to the department is not a dispute.

Clause 3(ix)(a): default in repayment

Report period and amount of default, in the prescribed format

Format covers nature of borrowing, lender name, amount not paid, principal or interest, days of delay and remarks. Lender-wise details are needed for banks, financial institutions and Government.

Clause 3(xi): fraud and whistle-blowers

(a) fraud noticed or reported, with nature and amount; (b) ADT-4 filed under section 143(12); (c) whistle-blower complaints considered

Covers fraud by the company and fraud on the company.

Clause 3(xiv): internal audit

System commensurate with size and nature; internal audit reports considered by statutory auditor

Two separate sub-clauses, (a) and (b).

Clause 3(xvii): cash losses

Cash loss in current year and in immediately preceding year; state amount

Report whether cash losses were incurred in the current year and in the immediately preceding year. State the amount for each year in which they were incurred.

Source of CARO

CARO 2020 = Order made under Section 143(11) of the Companies Act, 2013 (S.O. 849(E), 25 February 2020)

It supersedes CARO 2016, except for things done or omitted before supersession.

IFC reporting location

Main report, Section 143(3) matters: IFC clause refers to separate "Annexure A"

The SA 700 illustration places this under the Report on Other Legal and Regulatory Requirements.

What the IFC report covers

IFC report = adequacy of IFC over financial reporting + operating effectiveness of such controls

Both limbs must be addressed.

CARO clause 3(xxi)

Consolidated FS: report whether any qualifications or adverse remarks exist in the CARO reports of included companies; if yes, give company names and paragraph numbers

Reported by the auditor of the consolidated financial statements.

Where CARO appears

CARO statement = Annexure to the audit report, on matters in the Order, to the extent applicable

Do not mix it with the IFC Annexure A.

Quick revision

• After the title and addressee, the report begins with the Opinion section, followed by the Basis for Opinion.
• There are four opinion types: unmodified, qualified, adverse and disclaimer.
• Qualified: the matter is material but not pervasive.
• Adverse: misstatements are material and pervasive.
• Disclaimer: the auditor cannot obtain sufficient appropriate evidence and the possible effects are material and pervasive.
• Key audit matters (SA 701) are mandatory for listed entities, and are not communicated when the auditor disclaims an opinion.
• Emphasis of Matter draws attention to a matter already disclosed; it does not modify the opinion.
• Other Matter paragraph refers to a matter not presented or disclosed but relevant to users' understanding of the audit or the report.
• CARO 2020 applies to companies only if they are not specifically exempt, so always check applicability first.
• CARO clauses are reported in a separate annexure to the auditor's report.
• Internal financial controls reporting is a separate requirement and is not a CARO clause.
• If a CARO clause does not apply, state that it is not applicable instead of leaving it blank.

Common mistakes

• Treating qualified and adverse as differing only in severity words, without pervasiveness. Fix: State the test: both involve material misstatement, but adverse applies when the effect is also pervasive.
• Giving an adverse opinion when the auditor could not get evidence. Fix: Inability to get evidence that is material and pervasive leads to a disclaimer. Adverse relates to misstatement.
• Giving an adverse opinion when the auditor could not get evidence on a pervasive matter. Fix: Adverse is only for misstatement. A pervasive scope limitation gives a disclaimer of opinion.
• Calling a qualified opinion a 'partial disclaimer' or mixing the two terms. Fix: Qualified expresses an opinion 'except for' the matter. A disclaimer expresses no opinion at all.
• Using an EOM paragraph to deal with a material misstatement. Fix: SA 706 allows EOM only if the opinion need not be modified under SA 705. A misstatement needs a qualified or adverse opinion.
• Saying an EOM paragraph is a qualification of the opinion. Fix: EOM does not modify the opinion. The opinion stays unmodified; the paragraph only highlights a disclosed matter.
• Treating any private company with low revenue as exempt. Fix: Check all three limits and the holding or subsidiary link. Exemption needs every condition to be met.
• Ignoring the holding or subsidiary condition. Fix: Ask first: is it a subsidiary or holding company of a public company? If yes, no exemption.
• Saying the auditor physically verifies PPE or inventory under clause 3(i)(b) or 3(ii)(a). Fix: The clause asks whether verification was done by management. For inventory, the auditor also gives an opinion on whether coverage and procedure are appropriate.
• Applying the 10% inventory discrepancy test to total inventory. Fix: The text says discrepancies of 10% or more in the aggregate for each class of inventory. Test class by class.

Exam tips

• For "differentiate" questions, give pervasiveness as the core point, then add nature of the matter and wording of the opinion.
• In MCQs, check the cause first. If the stem says "unable to obtain evidence" and the effect is pervasive, the answer is disclaimer, not adverse.
• For contents questions, follow the para 49 order and mention that these are minimum elements where law prescribes a layout.
• Write a one-line reason for the opinion type in scenario answers, because step marks go to the reasoning.
• Link the opinion to the Basis section heading change to show you know SA 705.
• Draw the 2×2 grid at the start of your answer. It earns step marks and keeps you from mixing opinions.
• In MCQs, check whether the facts describe a disagreement or a lack of evidence before looking at the options.
• Quote the figures from the question when judging materiality and pervasiveness, and do it in a line or two.