Resources · 8 decision trees

Audit Decision Trees.

Eight Yes/No flowcharts for the most common applicability and treatment questions Indian auditors face — CARO 2020, RPT, tax audit, Ind AS, NFRA jurisdiction, Section 143(12) fraud reporting, audit-opinion type, SQM 1. Each tree cites the underlying statute or Standard on Auditing. Use as a working-paper aid alongside the source text.

Index

Tree 1
Does CARO 2020 apply to this company?
Tree 2
Does this Related Party Transaction need shareholder special resolution?
Tree 3
Is a tax audit under Section 44AB mandatory?
Tree 4
Does the entity prepare financials under Ind AS or AS?
Tree 5
Is this audit under NFRA jurisdiction?
Tree 6
Do I need to file Form ADT-4 under Section 143(12)?
Tree 7
Which audit opinion should I issue?
Tree 8
Does SQM 1 apply to my firm?

Tree 1 of 8 · Companies (Auditor's Report) Order 2020 + Section 143(11)

Does CARO 2020 apply to this company?

Test whether the Companies (Auditor's Report) Order 2020 applies to a given company. CARO 2020 is effective from FY 2021-22 onwards (originally FY 2020-21, deferred to FY 2021-22 due to COVID-19).

Is the entity a banking company / insurance company / Section 8 (non-profit) company / one-person company (OPC)?

YES

CARO 2020 does NOT apply (explicit exemption under CARO 2020 para 1(2))

→ Go to Step 2

Is the entity an LLP?

YES

CARO 2020 does NOT apply (LLPs are governed by the LLP Act 2008, not the Companies Act 2013)

→ Go to Step 3

Is the entity a "small company" under Section 2(85) of the Companies Act 2013?

YES

CARO 2020 does NOT apply (small companies are exempt)

→ Go to Step 4

Is the entity a private company AND not a holding/subsidiary of a public company?

YES

→ Go to Step 5

CARO 2020 APPLIES (the entity is a public company or related to one — auditor must address all 21 CARO clauses)

Are ALL three financial thresholds met: paid-up + reserves ≤ ₹1 cr, total revenue ≤ ₹10 cr, AND borrowings ≤ ₹1 cr at any point during the year?

YES

CARO 2020 does NOT apply (private-company small-thresholds exemption)

CARO 2020 APPLIES (one or more thresholds breached — auditor must address all 21 clauses)

Open the interactive CARO checker →

Tree 2 of 8 · Section 188 + Rule 15 Companies (Meetings of Board and its Powers) Rules 2014 + SEBI LODR Reg 23

Does this Related Party Transaction need shareholder special resolution?

Decision tree for whether a proposed RPT under Section 188 requires prior shareholder approval by special resolution, in addition to mandatory board approval.

Is the counterparty a "related party" under Section 2(76) of the Companies Act 2013 (director, KMP, relative, holding/subsidiary/associate company, etc.)?

YES

→ Go to Step 2

Section 188 does NOT apply (not an RPT). Treat as ordinary commercial transaction. Note: SEBI LODR has a broader related-party definition for listed entities.

Is this transaction in any of the seven categories under Section 188(1) — sale/purchase of goods, sale/purchase of property, leasing, services, agent appointment, office/place of profit, or underwriting?

YES

→ Go to Step 3

Section 188 does NOT apply (transaction outside the seven specified categories). Still test under SEBI LODR Reg 23 for listed entities.

Is the transaction in the ordinary course of business AND on an arm's-length basis (documented with evidence — TP study, comparable prices, signed policy)?

YES

→ Go to Step 4

→ Go to Step 5

Is this a LISTED entity (and the transaction is "material" under SEBI LODR Reg 23 — i.e., exceeds 10% of consolidated turnover or ₹1,000 crore, whichever is lower)?

YES

SPECIAL RESOLUTION required under SEBI LODR Reg 23 (the arm's-length carve-out does NOT override SEBI material RPT rules for listed entities). Board approval also required.

Board approval ONLY (Section 188(1) proviso — arm's-length + ordinary-course carve-out applies). Disclosure in Board's Report under Rule 8.

Does the transaction value exceed the Rule 15 threshold for its category (e.g., 10% of turnover for sale of goods; 10% of net worth for property; ₹2.5L/month for office of profit)?

YES

SPECIAL RESOLUTION required (Section 188 + Rule 15). Board approval also required.

Board approval ONLY (transaction is below Rule 15 threshold). Still subject to LODR Reg 23 test for listed entities.

Open Section 188 RPT calculator →

Tree 3 of 8 · Section 44AB Income Tax Act 1961

Is a tax audit under Section 44AB mandatory?

Determine whether an assessee is required to get its accounts audited under Section 44AB of the Income Tax Act 1961 for the relevant assessment year. Refer Section 44AB sub-clauses (a) to (e).

Is the assessee carrying on business (not profession)?

YES

→ Go to Step 2

→ Go to Step 4

Is total turnover / gross receipts > ₹1 crore in the previous FY?

YES

→ Go to Step 3

No tax audit under Section 44AB(a) (turnover threshold not breached). Check 44AD presumptive separately.

Are aggregate cash receipts ≤ 5% AND aggregate cash payments ≤ 5% of total receipts and payments respectively?

YES

Higher threshold of ₹10 crore applies. Tax audit required only if turnover > ₹10 cr.

TAX AUDIT REQUIRED under Section 44AB(a). Form 3CA/3CB + Form 3CD by 30 September of the AY.

Is the assessee carrying on a profession?

YES

→ Go to Step 5

→ Go to Step 6

Are gross receipts from the profession > ₹50 lakh in the previous FY?

YES

TAX AUDIT REQUIRED under Section 44AB(b). Form 3CA/3CB + Form 3CD by 30 September.

No tax audit under Section 44AB(b). Check 44ADA presumptive separately.

Has the assessee opted out of presumptive taxation under Section 44AD/44ADA/44AE despite eligibility, AND total income exceeds the basic exemption?

YES

TAX AUDIT REQUIRED under Section 44AB(d)/(e). Form 3CA/3CB + Form 3CD by 30 September.

No mandatory tax audit. Refer specific facts for Section 44AB(c) on certain other persons.

See SA 200 (Overall Objectives) →

Tree 4 of 8 · Companies (Indian Accounting Standards) Rules 2015

Does the entity prepare financials under Ind AS or AS?

The Indian Accounting Standards (Ind AS) framework applies in phases. This tree applies the Phase I + Phase II tests under Companies (Ind AS) Rules 2015.

Is the entity listed on a stock exchange in India?

YES

IND AS — mandatory (listed entities apply Ind AS from FY 2016-17 onwards).

→ Go to Step 2

Is the entity in the process of being listed (DRHP filed) on a stock exchange in India?

YES

IND AS — mandatory (entities in the process of listing apply Ind AS).

→ Go to Step 3

Is the entity a company (other than banking / insurance / NBFC) with net worth ≥ ₹250 crore?

YES

IND AS — mandatory under Phase II (net worth ≥ ₹250 cr, applicable from FY 2017-18 onwards).

→ Go to Step 4

Is the entity a holding / subsidiary / associate / joint venture of a company that applies Ind AS?

YES

IND AS — mandatory (group-application principle). All entities in the group apply Ind AS for consistency.

→ Go to Step 5

Is the entity an NBFC with net worth ≥ ₹250 crore (Phase II for NBFCs)?

YES

IND AS — mandatory (NBFC Phase II from FY 2019-20 onwards).

AS framework — Companies (Accounting Standards) Rules 2021 applies. AS 1 to AS 29 with Schedule III Division I disclosure.

See SA 200 →

Tree 5 of 8 · NFRA Rules 2018 Rule 3

Is this audit under NFRA jurisdiction?

Determine whether an audit falls under NFRA (National Financial Reporting Authority) jurisdiction. NFRA covers audits of certain Public Interest Entities (PIEs) only; ICAI continues to oversee all other audits.

Is the entity listed on a recognised stock exchange in India?

YES

NFRA JURISDICTION (all listed companies are PIEs under NFRA Rules 2018 Rule 3(1)(a)).

→ Go to Step 2

Is the entity an unlisted public company with paid-up capital ≥ ₹500 crore OR turnover ≥ ₹1,000 crore OR outstanding loans/debentures/deposits ≥ ₹500 crore as on 31 March of preceding FY?

YES

NFRA JURISDICTION (large unlisted public company under Rule 3(1)(b)).

→ Go to Step 3

Is the entity an insurance company / banking company / electricity-generating company referred to in Rule 3(1)(c)?

YES

NFRA JURISDICTION (specified sectoral entities).

→ Go to Step 4

Has the Central Government specifically referred this entity to NFRA in public interest under Rule 3(1)(e)?

YES

NFRA JURISDICTION (government-referred entity).

ICAI JURISDICTION (entity is not a NFRA-covered PIE; statutory audit oversight remains with ICAI).

See NFRA enforcement tracker →

Tree 6 of 8 · Section 143(12) Companies Act 2013 + Rule 13 Companies (Audit and Auditors) Rules 2014

Do I need to file Form ADT-4 under Section 143(12)?

The auditor's mandatory fraud reporting decision. Section 143(12) prescribes both the threshold and the routing (Central Government vs Audit Committee).

Have you (or your audit team) identified or suspected an offence involving fraud being committed against the company by officers / employees / directors?

YES

→ Go to Step 2

No Section 143(12) report required. Continue normal audit procedures under SA 240.

Is the amount involved ₹1 crore or more (Rule 13(1) threshold)?

YES

→ Go to Step 3

→ Go to Step 4

Have you communicated with the Board / Audit Committee within 2 days and given them 45 days to respond, with at least the reply or absence of reply received?

YES

FILE Form ADT-4 with Central Government via MCA21 portal within 15 days of receipt of reply (or 60 days from initial knowledge if no reply). Continue communication with TCWG under SA 260.

FIRST — write to Board / Audit Committee within 2 days describing the suspected fraud, ask for reply within 45 days. Then proceed per Step 3.

Have you reported to the Audit Committee (or Board if no AC) within 2 days of identification, with circumstances and amount?

YES

Disclosure in Board's Report under Sec 134(3)(ca) is required. No ADT-4 to CG required (below ₹1 cr threshold). Audit team must continue to evaluate risk implications under SA 240.

REPORT to AC / Board immediately. Section 143(12) requires the auditor to report below-threshold fraud to AC / Board within 2 days, even if not to CG.

JE Risk Scorer (SA 240) →

Tree 7 of 8 · SA 700 + SA 705 + SA 706

Which audit opinion should I issue?

Determine the appropriate auditor's opinion form under SA 700 (Forming an Opinion), SA 705 (Modifications) and SA 706 (EOM / Other Matter paragraphs).

Have you obtained sufficient appropriate audit evidence to conclude on whether FS are free from material misstatement?

YES

→ Go to Step 2

→ Go to Step 4

Are the FS free from material misstatement, AND in accordance with the applicable financial reporting framework (Ind AS / AS / IFRS)?

YES

→ Go to Step 3

→ Go to Step 5

Is there a material uncertainty related to going concern, OR significant subsequent event, OR matter requiring user attention?

YES

UNMODIFIED OPINION + Emphasis of Matter paragraph (SA 706) drawing attention to the matter, OR if going-concern then a "Material Uncertainty Related to Going Concern" section (SA 570).

UNMODIFIED OPINION ("clean" report) under SA 700. No paragraphs added.

Is the scope limitation material AND pervasive (affects multiple line items or fundamental to FS as a whole)?

YES

DISCLAIMER OF OPINION (SA 705 para 9-10) — you cannot form an opinion because of scope limitation that is material and pervasive.

QUALIFIED OPINION (SA 705 para 7) — "except for" the effects of the matter described in the basis-for-qualified-opinion section.

Is the misstatement / non-compliance with the framework material AND pervasive?

YES

ADVERSE OPINION (SA 705 para 8) — the FS do not give a true and fair view, or are not presented fairly, in all material respects.

QUALIFIED OPINION (SA 705 para 7) — material but not pervasive misstatement. Use "except for" language.

See SA 700 →

Tree 8 of 8 · SQM 1 (Standard on Quality Management) — ICAI

Does SQM 1 apply to my firm?

Determine whether SQM 1 (which replaced SQC 1) applies to your audit firm. Note: ICAI has deferred SQM 1 implementation multiple times — refer the latest ICAI Council notification for the current effective date.

Does your firm conduct or perform any engagement that requires application of the Standards on Auditing (SAs)?

YES

→ Go to Step 2

SQM 1 does NOT apply (it applies only to firms that conduct audit, review, other assurance or related-services engagements).

Does the firm engagements include audits of financial statements?

YES

SQM 1 APPLIES (along with SQM 2 for engagement quality reviews where required). Effective date — refer latest ICAI Council notification.

→ Go to Step 3

Does the firm perform review engagements (SRE 2400 / 2410) or other assurance / related-services engagements?

YES

SQM 1 APPLIES (covers all firms performing assurance + related-services engagements, not just statutory audit).

SQM 1 does NOT apply (no in-scope engagements).

SQM 1 Implementation Checklist →

Frequently asked questions

What is a decision tree in audit context?+

A decision tree is a structured Yes/No flowchart that helps an auditor work through whether a regulatory requirement applies, what action to take, or which audit treatment is correct. Each step asks a single closed-ended question, and the answer routes you to the next question or to an outcome. The format is useful when a statute or standard has multiple interlocking conditions (e.g., CARO 2020 has 6 entity-type exemptions plus a 3-condition small-private-company carve-out).

Are these decision trees a substitute for professional judgement?+

No. Each tree summarises the statutory / standard-based decision logic, but the auditor must apply professional judgement at each step — particularly when assessing materiality, arm's-length pricing, going-concern indicators, or fraud risk. Always refer the underlying statute, standard or rule for full text; cite the underlying source in the working papers.

How do I document the decision in my working papers?+

Under SA 230 (Audit Documentation), the working paper should record (a) the question being decided, (b) the basis (statute / standard / Rule), (c) the evidence relied on, (d) the conclusion reached, and (e) the partner sign-off. The decision tree on this page can be cited as a working aid but is not a substitute for the underlying source citation.

When was CARO 2020 made effective?+

CARO 2020 was notified on 25 February 2020. The original effective date was financial years commencing on or after 1 April 2020 (i.e., FY 2020-21). Due to COVID-19 the effective date was deferred to FY 2021-22 onwards by MCA notification dated 17 December 2020.

Is the Section 188 RPT special-resolution test the same for listed and unlisted entities?+

No. Unlisted companies follow Section 188 + Rule 15 thresholds. For LISTED entities, SEBI LODR Reg 23 imposes an ADDITIONAL "material RPT" test — material = 10% of consolidated turnover OR ₹1,000 crore, whichever is lower. For material RPTs, prior shareholder approval is required regardless of arm's-length status.

Which SAs are most commonly cited by NFRA in enforcement orders?+

Across the verified NFRA orders 2022-2025: SA 240 (Fraud), SA 550 (Related Parties), SA 230 (Audit Documentation), SA 200 (Professional Skepticism), SA 315 (Risk Assessment), SA 500 / 501 (Audit Evidence + Inventory) and SA 600 (Using Work of Other Auditors). The "Section 143(12) fraud reporting" decision tree above is informed by repeat findings on delayed / missed ADT-4 filings.

Anchored in the same SAs CORAA operationalises.

Each tree cites the underlying statute or SA. For full text, follow the SA / CARO clause links.

All SA pages All CARO 2020 clauses All 22 calculators