Chapter 07: Audit Report & CARO 2020 Master Checklist
1. SA 700 / 705 / 706 Opinion Formulation Matrix
The auditor forms an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework (AFRF).
| Auditor's Assessment | Material but NOT Pervasive | Material AND Pervasive |
|---|---|---|
| Financial Statements are Materially Misstated (Disagreement / GAAP Departure) | Qualified Opinion ("Except for...") | Adverse Opinion ("Do not present fairly...") |
| Inability to Obtain SAAE (Scope Limitation / Records Destroyed) | Qualified Opinion ("Except for possible effects...") | Disclaimer of Opinion ("Do not express an opinion") |
• EOM Paragraph (SA 706): Refers to a matter appropriately presented or disclosed in the FS that is fundamental to users' understanding (e.g., exceptional litigation, early adoption of new AS, major catastrophe). Never a substitute for modified opinion or KAM!
• OM Paragraph (SA 706): Refers to a matter other than those presented or disclosed in FS relevant to users' understanding of audit, auditor's responsibilities, or report (e.g., prior period audited by predecessor auditor).
2. SA 701 Key Audit Matters (KAM) Decision Logic
Applicability: Mandatory for audits of complete sets of general purpose financial statements of listed entities and circumstances when auditor decides or law requires.
| Funnel Step | Scope / Description |
|---|---|
| Step 1: Broad Universe | Matters communicated with Those Charged with Governance (TCWG) under SA 260. |
| Step 2: Auditor Attention | Matters that required significant auditor attention in performing the audit (high risk areas, high management judgment/estimates, significant unusual transactions). |
| Step 3: KAM Selection | Matters of most significance in the audit of the financial statements of the current period. |
• KAM is NOT: (1) A substitute for disclosures in FS; (2) A substitute for a modified opinion under SA 705; (3) A substitute for Going Concern reporting under SA 570; (4) A separate opinion on individual matters.
• Disclaimer of Opinion: Communicating KAM is strictly prohibited when the auditor disclaims an opinion under SA 705 (unless required by law).
3. CARO 2020 Applicability & Exemption Test
Applies to every company including a foreign company, EXCEPT the following categories:
| Exempt Category | Statutory Criteria / Limits |
|---|---|
| 1. Banking & Insurance | Banking companies (Banking Regulation Act, 1949) & Insurance companies (Insurance Act, 1938). |
| 2. Section 8 Company | Companies licensed under Section 8 of Companies Act, 2013 (charitable objectives). |
| 3. One Person Co (OPC) & Small Co | OPC under Sec 2(62) and Small Company under Sec 2(85) (Paid-up Capital ≤ ₹4 Cr and Turnover ≤ ₹40 Cr). |
| 4. Private Limited Company Exemption | A private company (not subsidiary/holding of public co) satisfying ALL THREE tests on balance sheet date: (a) Paid-up Capital + Reserves: ≤ ₹1 Crore. (b) Total Borrowings (Banks/FIs): ≤ ₹1 Crore at any point of time during FY. (c) Total Revenue (including discontinued): ≤ ₹10 Crore during FY as per Schedule III. |
| Consolidated FS | CARO 2020 does not apply to CFS except Clause (xxi) (qualifications in subsidiary/associate/JV CARO reports). |
4. CARO 2020: Master 21 Clauses Rapid Memory Cheatsheet
| Clause # | Subject Matter | Core Reporting Trigger |
|---|---|---|
| (i) | Property, Plant & Equip & Intangibles | Proper records, physical verification (reasonable intervals), title deeds held in co name (Schedule III format), Benami proceedings. |
| (ii) | Inventory & Working Capital Limits | (a) Physical verification (≥10% variance coverage); (b) Quarterly WC limits > ₹5 Cr sanctioned on security of current assets — quarterly returns match books? |
| (iii) | Investments, Guarantees, Loans & Advances | Details of loans granted to related/other parties; prejudicial terms; schedule of repayment; overdue > 90 days; loans renewed/extended or evergreen. |
| (iv) | Compliance of Sec 185 & 186 | Loans to directors & investments/guarantees made — statutory compliance check. |
| (v) | Public Deposits | Directives of RBI and Sec 73 to 76; contravention if any; orders of CLB/NCLT/RBI. |
| (vi) | Cost Records | Maintenance of cost records prescribed under Sec 148(1). |
| (vii) | Statutory Dues | (a) Undisputed dues outstanding > 6 months from date they became payable; (b) Disputed dues with forum where pending. |
| (viii) | Unrecorded Income | Transactions surrendered/disclosed as income in Tax Assessments not previously recorded. |
| (ix) | Default in Repayment of Borrowings | Defaults to lenders (period/amount); Wilful Defaulter declared; Term loans utilized for purpose; Short-term funds used for long-term; Funds taken on pledge of securities in subsidiaries. |
| (x) | IPO/FPO & Private Placement | Utilisation of IPO/FPO funds; Preferential allotment Sec 42/62 compliance. |
| (xi) | Fraud Reporting | Fraud by or on the company noticed/reported; Form ADT-4 filed; Whistle-blower complaints considered. |
| (xii) | Nidhi Company | Net Owned Funds to Deposit ratio 1:20; 10% unencumbered term deposits. |
| (xiii) | Related Party Transactions (RPT) | Compliance with Sec 177 & 188; Disclosures in FS as per applicable AS (AS 18 / Ind AS 24). |
| (xiv) | Internal Audit System | Commensurate with size & nature; Internal audit reports considered by statutory auditor. |
| (xv) | Non-Cash Transactions | Non-cash transactions with directors under Sec 192. |
| (xvi) | RBI Registration Sec 45-IA | Registration as NBFC/CIC; Criteria met; Number of CICs in group. |
| (xvii) | Cash Losses | Cash losses in current FY and immediately preceding FY. |
| (xviii) | Resignation of Statutory Auditors | Issues, objections or concerns raised by outgoing auditor taken into consideration. |
| (xix) | Financial Viability / Going Concern (1 Year) | Capability of meeting liabilities falling due within 1 year from balance sheet date based on financial ratios, ageing, realization of assets. |
| (xx) | CSR Compliance (Sec 135) | Unspent CSR amount transferred to Fund specified in Sch VII (ongoing vs other projects - Sec 135(5) vs 135(6)). |
| (xxi) | Qualifications in CARO of Subsidiaries | Qualifications/adverse remarks in CARO reports of group companies included in CFS. |
5. Section 143 Inquiries, Reporting & Fraud (Sec 143(12))
Auditor inquires into 6 specific items: (1) Loans on security properly secured & terms not prejudicial; (2) Transactions represented merely by Book entries prejudicial; (3) Sale of shares/securities at price below purchase price (other than banking/investment co); (4) Loans & advances shown as Deposits; (5) Personal expenses charged to revenue account; (6) Shares allotted for cash & cash received entered in books.
Reporting trigger: Only if auditor finds adverse findings! If satisfied, no mention needed.
| Fraud Amount Threshold | Statutory Reporting Channel & Timelines (Sec 143(12) + Rule 13) |
|---|---|
| ₹ 1 Crore or More (Against the company by officers/employees) |
• Report to Audit Committee / Board within 2 days seeking reply in 45 days. • On receipt of reply (or expiry of 45 days), report to Central Government (MCA) within 15 days in Form ADT-4. |
| Less than ₹ 1 Crore | • Report to Audit Committee / Board within 2 days. • Disclose in Board's Report (nature of fraud, amount, parties involved if remedial action taken). No Form ADT-4 to Central Govt. |