CARO clause 3(ix) is actually six distinct reporting requirements under sub-parts (a) to (f): default in repayment of loans or borrowings, declaration as a wilful defaulter, whether term loans were applied for the purpose for which they were obtained, whether short-term funds were used for long-term purposes, whether funds were raised on the pledge of securities held in subsidiaries, joint ventures or associates, and whether funds were diverted to meet obligations of subsidiaries, joint ventures or associates; each sub-part needs its own evidence trail rather than one combined review, and the exact clause wording should be confirmed against the current order.
(a) Default in repayment of loans or other borrowings
Obtain a lender-wise schedule of all loans and borrowings outstanding during the year, with scheduled repayment dates for principal and interest, and reconcile to actual payment dates. A default includes any amount, principal or interest, not paid by its due date, even if cured shortly after and even if the lender did not formally declare an event of default; period, amount and lender name are disclosed for each instance.
(b) Declared a wilful defaulter
Check whether the company or any of its promoters or any director has been declared a wilful defaulter by any bank or financial institution or other lender, as per the criteria prescribed by the Reserve Bank of India. This is checked through direct inquiry of banks, a search of the RBI's or CIBIL's wilful defaulter list where accessible, and management representation, not assumed absent from a clean loan repayment record.
(c) Term loans applied for the purpose obtained
For every term loan, trace the sanctioned purpose stated in the loan agreement against the actual utilisation per the company's fund flow statement and bank account activity. A term loan sanctioned for plant expansion but partly used to fund working capital or repay another loan is a diversion from stated purpose, quantified and disclosed.
(d) Short-term funds used for long-term purposes
Compare the maturity profile of funds raised (working capital lines, short-term loans) against the nature of the assets or expenditure they actually funded. Short-term borrowings used to fund capital expenditure or long-term investments, visible from a mismatch between the current asset and current liability movement and capex incurred in the period, is reportable with the amount involved.
(e) Funds raised on pledge of securities of subsidiaries, joint ventures or associates
Check whether the company took any loan against the pledge of securities held in its subsidiaries, joint ventures or associate companies, and if so, obtain details of the loan and the securities pledged. This is tested through the loan sanction letters and the security documentation, not assumed from the balance sheet alone.
(f) Funds diverted to meet obligations of subsidiaries, joint ventures or associates
Trace whether the company has raised loans during the year on the pledge of securities held in its subsidiaries, joint ventures or associate companies, and whether the funds raised have been utilised for the specific purpose for which the loan was obtained, with specific attention to whether any of those funds were in substance used to meet the obligations of the subsidiary, joint venture or associate rather than the company's own stated purpose.
| Sub-part | Primary evidence |
|---|---|
| (a) Default in repayment | Lender confirmations, repayment schedules, bank statements |
| (b) Wilful defaulter | Bank inquiry responses, RBI/CIBIL checks, management representation |
| (c) Term loan purpose | Sanction letter, fund flow statement, bank account tracing |
| (d) Short-term funds for long-term use | Working capital movement analysis, capex schedule |
| (e) Pledge of subsidiary/JV/associate securities | Loan sanction documents, pledge/security agreements |
| (f) Fund diversion to subsidiaries/JV/associates | Inter-company fund flow, loan utilisation certificate |
Sub-parts (c) and (d) are the ones most often skipped in practice because they require a fund flow analysis rather than a balance confirmation. A clean repayment record on sub-part (a) says nothing about whether the funds were used for their stated purpose under (c).
Regulatory requirement
The exact clause structure, wording of each sub-part and the disclosure format for defaults are set out in the Companies (Auditor's Report) Order as currently in force. Confirm all of these against current source material before drafting the report.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- CARO & Companies ActCARO default in repayment of loans: audit testingTesting repayment schedules against actual payment dates, using bank confirmations as the independent check, and where the line sits between a minor delay and a reportable default.
- Bank, cash & treasuryLoans and borrowings audit checklistSanction letter checks, charge verification against ROC filings, covenant compliance, interest testing, and current/non-current classification.
- Bank, cash & treasuryTreasury controls audit checklist for mid-market companiesSegregation of duties over payments, dual signatories, bank mandate review frequency, and whether cash flow forecasting is real or decorative.
- Fixed assets & capexCapital work-in-progress (CWIP) audit proceduresAgeing stalled CWIP, testing the capitalisation trigger, applying Ind AS 23 in practice, and the ageing schedule now required in the financial statements.
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