Corporate Accounting and Auditing · Statutory Audit under the Companies Act, 2013

Audit Report and CARO 2020 for CMA Intermediate

Updated 10 October 2026 · Fact-checked

An audit report is the auditor's written opinion to members on whether the financial statements give a true and fair view. Section 143 sets its contents. The opinion is unmodified, or modified as qualified, adverse or disclaimer. CARO 2020 adds specific reporting clauses for companies it covers.

Understand Audit Report and CARO 2020

The audit report is the end product of an audit. The auditor reports to the members of the company on the accounts examined and on every financial statement that must be laid before the company in general meeting (Section 143(2)). The report must say whether, to the best of the auditor's information and knowledge, the accounts give a true and fair view of the state of affairs at year end, and of the profit or loss and cash flow for the year.

Section 143(3) lists matters the report must also state. These include whether all information and explanations were obtained, whether proper books were kept, whether the balance sheet and profit and loss account agree with the books, whether the financial statements comply with accounting standards, observations on transactions with an adverse effect on the functioning of the company, whether any director is disqualified under Section 164(2), and any qualification or adverse remark on maintenance of accounts. It also covers whether the company has adequate internal financial controls with reference to financial statements and their operating effectiveness. Under Section 143(4), if any matter is answered in the negative or with a qualification, the report must state the reasons.

The opinion can take two broad forms. An unmodified (clean) opinion means the statements are prepared, in all material respects, in accordance with the applicable framework. A modified opinion is of three kinds, as per SA 705: qualified (except for), adverse (statements do not give a true and fair view) and disclaimer (auditor cannot form an opinion). The choice depends on two things: whether the issue is a misstatement or a limitation on scope, and whether its effect is material only or material and pervasive.

Matters that are not a modification, but need the reader's attention, go in an Emphasis of Matter or Other Matter paragraph (SA 706). The opinion itself stays unmodified.

The Companies (Auditor's Report) Order, CARO 2020, is issued by the Central Government under Section 143(11). It requires the auditor's report of covered companies to include a statement on specified matters, such as fixed assets, inventory, loans, statutory dues, borrowings and fraud. The auditor answers each clause in a separate annexure to the report. Check the Order's applicability and exemptions in the related topic before answering a question on who is covered. The auditor must also comply with the auditing standards (Section 143(9)). Under Section 143(12), an auditor who has reason to believe that an offence involving fraud is being or has been committed by officers or employees must report it as prescribed.

Key rules to remember

Basis of opinion: Nature of issue (misstatement or scope limitation) × Effect (material, or material and pervasive); This pair decides the opinion type.
Misstatement, material not pervasive: Qualified opinion: 'except for'; Report the effect of the matter.
Misstatement, material and pervasive: Adverse opinion; Statements do not give a true and fair view.
Scope limitation, material not pervasive: Qualified opinion: 'except for the possible effects'; Auditor could not obtain sufficient evidence on one area.
Scope limitation, material and pervasive: Disclaimer of opinion; Auditor cannot express an opinion at all.
Negative answers: Section 143(4): reasons must be stated; Any matter in the report answered in the negative or with a qualification needs reasons.
Fraud reporting: Section 143(12): report to Central Government as prescribed; For frauds below the specified amount, report to the audit committee or Board.

How to solve Audit Report and CARO 2020 questions

Use this order for any question on the audit report, opinion type or CARO.

1Read the facts and identify the issue: a wrong or missing item in the accounts (misstatement), or something the auditor could not verify (scope limitation).
2Judge the effect: is it material, and is it also pervasive (affects many items or a substantial part of the statements)?
3Match to the opinion: qualified, adverse or disclaimer, using the table of combinations. If there is no problem, state unmodified.
4Check if it is only an Emphasis of Matter or Other Matter item, which does not change the opinion.
5Link to the legal source: Section 143(2), 143(3) or 143(4) for contents, and CARO 2020 for a clause-specific matter.
6Write the conclusion with reasons, and state what the report must say, such as the 'Basis for Opinion' paragraph.

Quickest way: Two-question opinion test

When to use it: Use in MCQs and short case questions asking which opinion the auditor should give.

Ask 1: Is it a wrong accounting treatment, or a lack of evidence?
Ask 2: Is the effect limited to some items, or widespread?
Limited: qualified. Widespread misstatement: adverse. Widespread lack of evidence: disclaimer.
If the matter is only disclosed well and needs highlighting, choose Emphasis of Matter, not a modification.

Common mistakes in Audit Report and CARO 2020

Treating Emphasis of Matter as a qualification.
Both draw attention to an issue in the report.
Fix: Remember that an Emphasis of Matter paragraph leaves the opinion unmodified.
Choosing adverse opinion for a scope limitation.
Students focus on how serious the issue is and ignore its nature.
Fix: Adverse is for misstatements. A pervasive lack of evidence leads to a disclaimer.
Forgetting to state reasons for a negative answer.
Students list the Section 143(3) matters but skip Section 143(4).
Fix: Always add that reasons must be given when a matter is answered in the negative or with a qualification.
Confusing CARO 2020 with the main audit report.
Both are signed by the auditor in the same report.
Fix: Treat CARO as an additional statement on specified matters, given in an annexure, issued under Section 143(11).
Saying the auditor reports every fraud to the Central Government.
Section 143(12) is remembered without its provisos.
Fix: State that fraud below the specified amount goes to the audit committee or the Board, as prescribed.

Worked examples

Example 1

During the audit of Sundaram Textiles Ltd, the auditor finds that the company has not charged depreciation on its plant, which is a material item but does not affect most other items. Management refuses to correct it. What opinion should the auditor give and why?

Show the solution

Identify the issue: depreciation is not charged, so the accounts are wrongly stated. This is a misstatement, not a scope limitation.
Assess the effect: the amount is material, but the effect is limited to one area, so it is not pervasive.
Match: a material but not pervasive misstatement gives a qualified opinion.
Report: use 'except for' wording, describe the matter and its effect in the Basis for Qualified Opinion paragraph, and give reasons as Section 143(4) requires.

Answer: Qualified opinion ('except for the effect of non-charging of depreciation'), with reasons stated in the report.

Example 2

The auditor of Bharat Agro Ltd could not obtain sufficient evidence on a large part of the company's receivables and inventory. The possible effects are both material and pervasive. Which opinion should be given, and how does it differ from an adverse opinion?

Show the solution

Identify the issue: the auditor could not obtain evidence. This is a scope limitation.
Assess the effect: possible effects are material and pervasive.
Match: a material and pervasive scope limitation leads to a disclaimer of opinion.
Distinguish: an adverse opinion is given when the auditor has evidence and concludes the statements are materially and pervasively misstated. A disclaimer is given when the auditor cannot reach a conclusion.

Answer: Disclaimer of opinion. It differs from an adverse opinion because the problem is lack of evidence, not a known misstatement.

Exam tips

For opinion-type MCQs, decide misstatement versus scope limitation first, and then material versus pervasive.
In written answers, list Section 143(3) matters in short bullet points and add Section 143(4) as the closing rule.
Mention that CARO 2020 is issued under Section 143(11) and answered in an annexure, then name the clauses the question asks about.
Write the exact opinion wording for the type: 'except for' for qualified, 'do not give a true and fair view' for adverse, 'we do not express an opinion' for disclaimer.
No negative marking applies in Section A, so attempt every MCQ.

Practice questions from Statutory Audit under the Companies Act, 2013

Audit Report and CARO 2020 in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CA IntermediateReporting under Companies Act: Section 143 and CARO 2020

Audit Report and CARO 2020: frequently asked questions

What is the difference between a modified and an unmodified audit report?

An unmodified report gives a clean opinion because the statements are prepared, in all material respects, in line with the applicable framework. A modified report contains a qualified, adverse or disclaimer opinion because of a material misstatement or a limitation on evidence.

What are the types of audit opinion?

There are four: unmodified, qualified, adverse and disclaimer. The last three are modified opinions. The type depends on the nature of the problem and whether its effect is material or material and pervasive.

Under which section is CARO 2020 issued?

The Central Government issues it under Section 143(11) of the Companies Act, 2013. It directs that the auditor's report for specified classes of companies must include a statement on matters listed in the Order.

Does the auditor have to report fraud?

Yes. Under Section 143(12), if the auditor has reason to believe an offence involving fraud is being or has been committed by officers or employees, the auditor must report it as prescribed. For fraud below the specified amount, the report goes to the audit committee or the Board.