Auditing and Ethics · Audit Report

Reporting under Companies Act: Section 143 and CARO 2020

Q: What does an auditor report under Section 143(3)?

Clauses (a) to (j) cover information obtained, books of account and returns from branches not visited, receipt of the report of a branch auditor (appointed under Section 143(8)) and how you dealt with it, agreement of the balance sheet, statement of profit and loss, cash flow statement and statement of changes in equity (where applicable) with the books and returns, compliance with accounting standards specified under Section 133 (AS or Ind AS as applicable), adverse financial matters, director disqualification, qualifications, reservations or adverse remarks on the maintenance of accounts and other matters connected therewith, internal financial controls and other prescribed matters. You report these in the audit report alongside the opinion.

Q: What is reporting on internal financial controls under 143(3)(i)?

You state whether the company has an adequate IFC system with reference to the financial statements and whether it operated effectively. The directors set up the controls and you give an opinion on them. The opinion is conventionally given as an Annexure to the auditor's report, as per the ICAI Guidance Note. Section 143(3)(i) itself does not require an Annexure.

Q: How many clauses does CARO 2020 have?

Paragraph 3 of CARO 2020 has 21 clauses, numbered (i) to (xxi). They cover matters such as fixed assets, inventory, loans, statutory dues, borrowings, fraud, related party transactions, cash losses, auditor resignation and CSR.

Updated 4 October 2026 · Fact-checked

Section 143(3) lists matters the auditor must state in the audit report, such as information obtained, books kept, accounting standards, director disqualification and internal financial controls. CARO 2020 adds a separate report on 21 clauses for companies it covers. To answer, identify the company, check exemptions, then report matter by matter.

Understand Reporting under Companies Act: Section 143 and CARO 2020

A company auditor reports to members under Section 143. Besides the opinion on the financial statements (SA 700), the Companies Act, 2013 requires the auditor to state certain extra matters. These are the additional reporting requirements. Think of the opinion as the main answer and Section 143(3) as a checklist of things the law wants you to confirm or flag.

Section 143(3) has clauses (a) to (j). In short, you report on: (a) whether you got all information and explanations needed; (b) whether proper books of account were kept, including whether proper returns adequate for audit were received from branches not visited; (c) whether the report on the accounts of a branch office, audited under Section 143(8) by a person other than you (the branch auditor), was sent to you, and how you dealt with it in preparing your report. This is the branch auditor's work, not your own audit work; you only report on how you used it; (d) whether the balance sheet, statement of profit and loss, cash flow statement and statement of changes in equity (where applicable) agree with the books and returns; (e) whether the financial statements comply with the accounting standards specified under Section 133 (AS or Ind AS as applicable); (f) observations on financial transactions or matters that adversely affect the functioning of the company; (g) whether any director is disqualified under Section 164(2); (h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith; (i) internal financial controls; (j) other matters prescribed in the Companies (Audit and Auditors) Rules, 2014.

Internal financial controls (IFC) under clause (i): you report whether the company has an adequate IFC system with reference to the financial statements, and whether those controls operated effectively. The directors are responsible for establishing IFC. You are responsible for expressing an opinion on it. Section 143(3)(i) itself does not say where this opinion must be placed. By practice under the ICAI Guidance Note, the IFC report is conventionally given as an Annexure to the auditor's report. The Annexure is a reporting convention, not a statutory requirement of clause (i).

The Central Government has exempted some companies from IFC reporting: one person companies, small companies, and a private company that meets both of these conditions: turnover less than ₹50 crore as per its last audited financial statements, and aggregate borrowings from banks, financial institutions or any body corporate less than ₹25 crore at any time during the financial year. The private company exemption is for a private company that is not a holding or subsidiary of a public company. Confirm the holding or subsidiary status before you claim it.

The matters prescribed under clause (j) (Rule 11) include the impact of pending litigations on financial position, provision for material foreseeable losses on long-term contracts including derivatives, delays in transferring amounts to the Investor Education and Protection Fund, management representations on funds lent, invested or received through intermediaries, compliance with Section 123 on dividend declared or paid, and the audit trail (edit log) feature in accounting software, which is reported under Rule 11(g). Keep this separate from clause (h), which covers qualifications, reservations or adverse remarks on the maintenance of accounts and matters connected therewith.

CARO 2020 is the Companies (Auditor's Report) Order, 2020, issued under Section 143(11). It requires a separate report on 21 clauses in paragraph 3, usually given as an Annexure. It covers areas such as fixed assets, inventory, loans, statutory dues, borrowings, fraud, related party transactions, internal audit, cash losses, auditor resignation and CSR. It does not apply to every company. Banking companies, insurance companies, section 8 companies, one person companies and small companies are outside it. A private company that is not a holding or subsidiary of a public company is also outside it if it meets all three limits: paid-up capital and reserves not above ₹1 crore as on the balance sheet date, borrowings from banks and financial institutions not above ₹1 crore at any time in the year, and total revenue (as disclosed in Schedule III, including discontinued operations) not above ₹10 crore during the financial year.

Key rules to remember

Section 143(3) checklist: (a) information; (b) proper books and returns from branches not visited; (c) receipt of the branch auditor's report (Sec 143(8)) and how you dealt with it; (d) agreement of balance sheet, statement of profit and loss, cash flow statement and statement of changes in equity (where applicable) with books and returns; (e) accounting standards under Section 133 (AS or Ind AS as applicable); (f) adverse financial matters; (g) director disqualification, Sec 164(2); (h) qualifications, reservations or adverse remarks on maintenance of accounts and connected matters; (i) IFC; (j) Rule 11 matters (audit trail is Rule 11(g)); Learn the ten items in this order. In clause (c), the audit of the branch is done by the branch auditor, not by you. Questions often ask you to list or pick the one that does not belong.
IFC reporting: Opinion: adequate IFC system in place AND operating effectively; Both parts are needed. Directors establish IFC; the auditor only opines on it. The IFC report is conventionally given as an Annexure as per the ICAI Guidance Note. Section 143(3)(i) itself does not require an Annexure.
IFC exemption for private companies: Turnover < ₹50 crore (last audited financial statements) AND aggregate borrowings from banks, financial institutions or any body corporate < ₹25 crore at any time during the financial year; Both conditions must be met. Claim it only for a private company that is not a holding or subsidiary of a public company; confirm that status first. One person companies and small companies are also exempt.
CARO 2020 exemption for private companies: Paid-up capital + reserves ≤ ₹1 crore AND borrowings from banks and financial institutions ≤ ₹1 crore at any time in the year AND total revenue ≤ ₹10 crore; Applies only to a private company that is not a holding or subsidiary of a public company. Revenue is as disclosed in Schedule III, including discontinued operations. If any one limit is crossed, CARO applies.
CARO 2020 scope: Paragraph 3: 21 clauses, (i) to (xxi); Banking, insurance, section 8, one person and small companies are excluded.
CARO inventory discrepancy threshold: Report if discrepancy ≥ 10% in aggregate for each class of inventory; Clause (ii)(a). Compare physical count with book records, class by class.

How to solve Reporting under Companies Act: Section 143 and CARO 2020 questions

Use this method for any question on Section 143 or CARO 2020, whether it is a scenario, a list-the-matters question or a clause-specific question.

1Read the facts and identify the type of company: public or private, holding or subsidiary, small, one person, section 8, banking or insurance.
2Decide applicability. For CARO 2020, check the exclusions first, then test the three limits for a private company. For IFC, check the turnover and borrowing exemption, and confirm the company is not a holding or subsidiary of a public company.
3Name the provision you are applying: Section 143(3) clause, Rule 11, or the CARO 2020 clause number.
4State the rule in plain words: what the auditor must report or confirm.
5Apply the rule to the facts with figures and show the working, for example the percentage of discrepancy.
6Give the conclusion in reporting language: what you will report, whether it is a qualification, and where it appears (main report or Annexure).
7If the matter is adverse, say how it affects the opinion or the CARO comment.

Quickest way: Applicability first, then the clause

When to use it: Use for MCQs and for the opening lines of a written answer, when time is short.

MCQs: apply the elimination trick. An option saying CARO applies to a bank, insurer or small company is wrong. An option saying a private company is exempt if only one of the three limits is met is wrong, because all three must hold.
For a numeric test, write the limits next to the facts and tick each one. One failed limit means CARO applies.
For IFC, remember that the auditor opines but does not design controls. Eliminate any option that makes the auditor responsible for establishing IFC.
Written answers: use the format Provision, Facts, Conclusion. Write the clause number, then one line of rule, then the facts with figures, then the conclusion. Each part earns step marks.
In list questions, number the points (a) to (j) so the examiner can tick them quickly.

Common mistakes in Reporting under Companies Act: Section 143 and CARO 2020

Treating CARO 2020 as applicable to every company.
Students remember the 21 clauses but skip the exclusions.
Fix: Start every CARO question with the exclusions: banking, insurance, section 8, one person, small and the private company limits.
Saying a private company is exempt from CARO because its borrowings and capital are low, ignoring revenue.
Students remember only two of the three limits.
Fix: Test capital plus reserves, borrowings and total revenue every time. All three must be within limits for the exemption.
Saying the auditor is responsible for maintaining internal financial controls.
The words 'IFC' and 'audit' get mixed up.
Fix: Directors establish and maintain IFC. The auditor expresses an opinion on adequacy and operating effectiveness.
Reporting only on adequacy of IFC and not on operating effectiveness.
Clause (i) is remembered as 'adequate IFC system'.
Fix: Write both parts: adequate system in place and operating effectiveness of such controls.
Mixing up Section 143(3) matters with the content of CARO 2020.
Both are 'additional reporting' and appear in the same chapter.
Fix: Section 143(3) is a ten-item list in the report itself. CARO 2020 is a separate 21-clause order, usually an Annexure.
Giving a vague answer on a CARO clause without the threshold or figure.
Students learn clause titles but not the tests inside them.
Fix: Learn the key numbers, such as the 10% inventory discrepancy, and show the calculation in your answer.

Worked examples

Example 1

ABC Private Limited is not a holding or subsidiary of any public company. At the balance sheet date its paid-up capital and reserves are ₹60 lakh. Its borrowings from banks never exceeded ₹80 lakh during the year. Its total revenue for the year is ₹12 crore. Is the auditor required to report under CARO 2020?

Show the solution

Identify the company: a private company that is not a holding or subsidiary of a public company. The private company exemption can be considered.
State the exemption: all three must hold: paid-up capital and reserves ≤ ₹1 crore, borrowings from banks and financial institutions ≤ ₹1 crore at any time in the year, total revenue ≤ ₹10 crore.
Test capital and reserves: ₹60 lakh ≤ ₹1 crore. Condition met.
Test borrowings: ₹80 lakh ≤ ₹1 crore. Condition met.
Test total revenue: ₹12 crore is more than ₹10 crore. Condition not met.
Conclude: because one condition fails, the exemption is not available.

Answer: CARO 2020 applies to ABC Private Limited, because its total revenue of ₹12 crore exceeds the ₹10 crore limit. The auditor must give the CARO 2020 report along with the audit report.

Example 2

While reporting under CARO 2020 for a company, the auditor notes that for one class of inventory the book records show ₹50,00,000, while physical verification by management found ₹44,00,000. How should the auditor deal with this under clause (ii)(a)?

Show the solution

Identify the clause: CARO 2020 clause (ii)(a) deals with physical verification of inventory by management and discrepancies found.
State the rule: report the discrepancy if it is 10% or more in aggregate for each class of inventory, and whether it was properly dealt with in the books of account.
Compute the discrepancy: ₹50,00,000 − ₹44,00,000 = ₹6,00,000.
Compute the percentage: ₹6,00,000 ÷ ₹50,00,000 × 100 = 12%.
Compare with the threshold: 12% is more than 10%, so the discrepancy must be reported.
Add the further point: state whether the discrepancy has been properly dealt with in the books of account.

Answer: The discrepancy is ₹6,00,000, which is 12% of the book value. It is above the 10% threshold, so the auditor must report it under clause (ii)(a) and state whether it was properly dealt with in the books.

Exam tips

In MCQs, the usual traps are CARO applicability to small, one person, banking or insurance companies, and the 'all three limits' test for private companies. Practise these first.
For written answers, give the clause number and the plain-words rule before applying it. Even if your conclusion is slightly off, the provision and facts earn marks.
Know the Section 143(3) list from (a) to (j). Know that clause (i) is IFC and clause (g) is director disqualification under Section 164(2).
Link this topic with IFC and SA 700 questions. Scenarios often ask where the IFC opinion goes (conventionally an Annexure under the ICAI Guidance Note, not a requirement of Section 143(3)(i) itself) and who is responsible for the controls (directors).
Learn the numeric tests inside CARO clauses, such as the 10% inventory discrepancy, and write the working in full.

Practice questions from Audit Report