6 CARO 2020 clauses that are easy to answer wrong — and how to get them right

Once you have decided that CARO 2020 applies (the applicability test is covered separately), the report itself has twenty-one clauses. Many take a minute for a typical private company. A handful take real work, and in small and mid-sized company files they are often answered from memory or copied from last year. Here are six, with what each clause asks, the easy slip, the evidence to keep and how to report. The clause text is from the Order (S.O. 849(E), 25 February 2020); the guidance is from ICAI's Guidance Note on CARO 2020 (Revised 2022 Edition).

1. Clause 3(i)(c): title deeds of immovable property

What it asks. Whether the title deeds of all immovable properties disclosed in the financial statements are held in the company's name — other than properties where the company is the lessee and the lease agreement is duly executed in its favour. If not, the details go in a prescribed table.

The easy slip. Answering "yes" without seeing the deeds — usually because the deeds are with the bank as security, or because the property came from a partnership firm that was converted into the company and the deed is still in the firm's name. The Guidance Note specifically asks for detailed examination in conversions and amalgamations, where the title may still be in the name of the earlier entity.

Evidence to keep.

• A list of immovable properties from the fixed asset register, reconciled to the deeds examined.
• Copies of deeds, or a confirmation from the bank holding them as security.
• Where deeds are lost: certified copies, the FIR details and a written representation.
• For leased premises: the lease deed, to confirm it is duly executed in the company's favour.

How to report. Where a property is not in the company's name, use the Order's columns: description, gross carrying value, held in the name of, whether the holder is a promoter, director, their relative or an employee, period held, and the reason (also indicating if in dispute). Schedule III now requires a similar table in the notes, so check that the CARO answer and the note say the same thing.

2. Clause 3(ii)(b): quarterly returns to banks

What it asks. Whether, at any point during the year, the company was sanctioned working capital limits of more than ₹5 crore in aggregate from banks or financial institutions on the security of current assets — and if so, whether the quarterly returns or statements filed with them agree with the books. If not, give details.

The easy slips.

• Looking at utilisation, not sanction. The Guidance Note is clear that the test is the sanctioned limit. A ₹6 crore cash credit drawn to ₹3 crore is covered; a ₹4.5 crore limit overdrawn to ₹5.2 crore is not.
• Testing only at 31 March. The threshold is tested on any day of the year, across all banks and FIs together, and includes both fund-based and non-fund-based limits (letters of credit, bank guarantees). Limits sanctioned without the security of current assets are excluded.
• Treating the stock statement as unchallengeable. Statements are often prepared from provisional figures before the quarter's books are closed. Where they differ from the books, the difference is reported.

Evidence to keep. Sanction letters and renewals, the register of charges, copies of the statements actually filed (for monthly filers, the Guidance Note limits the comparison to the statement for the last month of each quarter), and the company's reconciliation of each one with the books.

How to report. Where there are differences, a quarter-wise table works well: bank, quarter, particulars (inventory, receivables, payables), amount as per the books, amount as per the statement, difference and reason. Separately, Schedule III requires the company to disclose in its notes whether the quarterly returns agree with the books, and a summary of the reconciliation and reasons for material discrepancies, wherever it has borrowings on the security of current assets — that disclosure has no ₹5 crore threshold.

3. Clause 3(iii): loans, advances, guarantees and security given

What it asks. Six sub-clauses on investments made, guarantees and security provided and loans or advances in the nature of loans granted to companies, firms, LLPs or any other parties: (a) the aggregate during the year and the balance at the year end, split between subsidiaries, joint ventures and associates and others; (b) whether the terms are prejudicial to the company's interest; (c) whether a repayment schedule is stipulated and receipts are regular; (d) amounts overdue for more than ninety days and the steps taken to recover them; (e) loans that fell due and were renewed, extended or settled by fresh loans to the same party; and (f) loans repayable on demand or without terms of repayment, with the amounts to promoters and related parties.

The easy slips.

• Reporting only the closing balance. Clause (a) asks for the gross amount granted during the year. A loan given in June and repaid in December still counts — the Guidance Note gives a similar example.
• Missing advances in the nature of loans. An advance to a supplier far in excess of the order value, or kept outstanding far longer than normal trade practice, may be a loan to the extent of the excess.
• Forgetting opening balances. Clauses (c), (d) and (e) cover loans with opening balances as well as those given during the year.
• Leaving out (f). Interest-free loans to group concerns or directors' relatives "payable on demand" are common in small companies and are exactly what (f) is about.

Evidence to keep. A party-wise schedule from management (relationship, gross granted, repaid, closing balance, terms), the loan agreements or letters, Board resolutions, the guarantees register and minutes, and the list of promoters and related parties — read with the clause 3(iv) work on sections 185 and 186.

How to report. The Guidance Note suggests tables for most sub-clauses — for (a), guarantees, security, loans and advances in nature of loans by category, granted during the year and outstanding at the year end; for (f), all parties, promoters and related parties, split between repayable on demand and no terms specified, with the percentage to total loans.

4. Clause 3(vii): statutory dues, undisputed and disputed

What it asks. (a) Whether the company is regular in depositing undisputed statutory dues — GST, PF, ESI, income tax, cess and any other statutory dues — and if not, the arrears outstanding at the year end for more than six months from the date they became payable. (b) Where dues have not been deposited because of a dispute, the amounts and the forum where the dispute is pending. A mere representation to the department is not a dispute.

The easy slips.

• "Regular" because nothing is outstanding at 31 March. The Guidance Note requires reporting on regularity irrespective of whether there are arrears at the year end. A company that paid TDS late for most of the year and cleared it in March is not regular.
• TDS deducted only at year end. Where expenses are accrued monthly but tax is deducted only when the annual invoice arrives, the Guidance Note treats it as a default; non-deduction of TDS is also a default.
• Dropping disputed dues because they are provided for. Disputed amounts not deposited are reported whether or not provided for in the accounts; amounts paid under protest are mentioned. A stayed demand is still disputed.
• Calling a letter a dispute. There must be positive action, such as an appeal, or (per the Guidance Note) a rectification application under section 154 or a revision petition under section 264 of the Income-tax Act, 1961 (or the corresponding provisions of the Income-tax Act, 2025).

Evidence to keep. A management statement of each statute's due dates and actual payment dates, checked to challans and returns; portal status of demands; appeal papers; and a written representation listing disputed cases and undisputed arrears over six months, with a statement on completeness.

How to report. For regularity, the Guidance Note gives graded example wordings, from regular in all cases to serious delays in many cases. Arrears over six months go in a table (statute, nature of dues, amount, period, due date, date of payment, remarks); disputed dues in a statement of statute, nature, amount, period, forum and remarks — period-wise, not lumped.

5. Clause 3(ix)(a) and (d): defaults and short-term funds

What it asks. (a) Whether the company has defaulted in repaying loans or other borrowings, or interest, to any lender — with the prescribed table (nature of borrowing, lender, amount not paid on due date, principal or interest, days of delay or unpaid, remarks). (d) Whether funds raised on a short-term basis have been used for long-term purposes, and if so, the nature and amount.

The easy slips.

• Reporting only defaults outstanding at the year end. The Guidance Note asks for all defaults during the year with the days of delay, plus any default existing at the balance sheet date whenever it arose. An application for restructuring does not cure a default.
• Ignoring "any lender". The clause covers all lenders; names are needed for banks, financial institutions and Government.
• Directors' loans repayable on demand. For loans with no repayment terms, the Guidance Note suggests a representation that repayment has not been demanded, and a sentence in the report saying so.
• A reflex "No" on (d). Compare long-term sources (capital, reserves, long-term borrowings — counting current maturities as long-term) with long-term applications (fixed assets, long-term investments). A current ratio below 1 is, per the Guidance Note, an indicator that short-term funds have financed long-term assets.

Evidence to keep. Repayment schedules and loan agreements, bank statements for repayment dates, lender confirmations of the overdue position, and a short sources-and-applications working for (d).

6. Clause 3(xvii): cash losses

What it asks. Whether the company has incurred cash losses in the financial year and in the immediately preceding financial year, and if so, the amounts.

The easy slips. Answering only for the current year, or using cash flow from operations. "Cash loss" is not defined; the Guidance Note's approach for AS companies is to take profit or loss after tax and adjust it for non-cash items such as depreciation, amortisation, impairment, deferred tax, foreign exchange and fair value changes — but not for expenses of a contingent nature, such as claims not acknowledged as debts or a tax demand provided for in the year but under appeal. It says cash flow from operating activities may not be appropriate for this purpose, because items such as interest income and expense also matter.

Evidence and reporting. Keep a two-year working on the file. Where a cash loss arose in only one of the two years, say so year by year. Where the audit report is qualified, adjust for quantified qualifications and state that unquantified ones have not been considered.

Also worth a second look

• 3(xviii) — if the previous auditor resigned during the year, whether you considered the issues, objections or concerns they raised.
• 3(xx) — for companies with a CSR obligation under section 135, transfer of unspent amounts to a Schedule VII fund (within six months of the year end) or to the unspent CSR account for ongoing projects.
• 3(xxi) — applies only to the report on consolidated financial statements: qualifications or adverse remarks in the CARO reports of the companies included.
• Paragraph 4 — every unfavourable or qualified answer must state its basis, and where you cannot express an opinion on a matter, the report must say so with reasons.

Make the working paper carry the answer

For each clause, the file should show the figure or document the answer rests on — the sanction letter, the deed list, the party-wise loan schedule, the compliance calendar, the cash-loss working — and the answer should agree with the corresponding Schedule III disclosure. A disputed demand in contingent liabilities but not in 3(vii)(b) is an inconsistency any reader can see.

Frequently asked questions

Sources

• Companies (Auditor's Report) Order, 2020 — S.O. 849(E), 25 February 2020 (text reproduced in the ICAI Guidance Note)
• ICAI — Guidance Note on the Companies (Auditor's Report) Order, 2020 (Revised 2022 Edition)
• Schedule III amendment — G.S.R. 207(E), 24 March 2021 (Gazette): Additional Regulatory Information
• Companies Act, 2013 — sections 135, 185, 186
• Income-tax Act, 1961 — sections 154 and 264 (FY 2025-26)