CARO's clause on default in repayment asks the auditor to report whether the company has defaulted in repayment of loans or other borrowings, or in payment of interest, to any lender during the year, and if so, the period and amount of default, lender-wise, for banks, financial institutions and government, along with related disclosures for defaults to debenture holders. Testing this means building a lender-wise repayment schedule from the loan sanction terms and matching every instalment, principal and interest, against the date it was actually paid, independently corroborated through bank confirmations rather than taken from the company's own loan ledger alone. The exact clause structure and disclosure format should be confirmed against the current order.
Why this cannot be answered by asking management
The most common shortcut on this clause is to ask the finance team whether the company defaulted on any loan during the year, get a no, and move on. This is not a test; it is a representation, and it is exactly the kind of representation that is least reliable when a default has actually occurred, since management has an obvious incentive not to characterise a delay as a default. The clause requires an independent schedule-to-actual comparison.
Building the repayment schedule
- 01Obtain the sanction letter and repayment schedule for every loan and borrowing facilityTerm loans, working capital facilities, debentures and any other borrowing. The schedule should specify the due date and amount for every instalment of principal and every interest payment, not just the overall tenure.
- 02List every lender separatelyThe clause requires lender-wise reporting, so the working paper should be organised by lender from the start rather than aggregated and split out later.
- 03Pull the actual payment date and amount for every instalmentFrom the company's loan account statements and bank statements, not from a summary schedule in the loan ledger that could itself contain the error being tested for.
- 04Match schedule to actual, instalment by instalmentEvery due date against every payment date, every due amount against every payment amount. A payment made in full but a few days late is a different finding from a payment made on time but short of the due amount, and both should be visible separately in the working paper.
Bank confirmations as the independent check
A bank or financial institution's own confirmation of the loan account, including any statement of default or restructuring, is stronger evidence than the company's internal loan ledger, because the lender has no incentive to understate a default. Request a confirmation that specifically addresses repayment status and any default or restructuring during the year, not just the closing balance.
| Source | Independence | What it tells you |
|---|---|---|
| Lender confirmation stating repayment status and any default | Highest | Direct statement from the party with the least incentive to understate a default |
| Bank statement showing actual debits for instalments | High | Objective record of what actually left the account, independent of how the company's ledger describes it |
| Loan account statement issued by the lender | High | Lender's own record of amounts due and received |
| Company's internal loan ledger | Lower | Useful for building the schedule but should always be corroborated, not relied on alone |
| Management representation that no default occurred | Lowest | A starting point for enquiry, never sufficient on its own |
Distinguishing a reportable default from a minor delay
Not every late payment is the kind of default the clause is aimed at, but auditors should not assume a threshold exists where none has been confirmed. A payment made a day or two late due to a bank processing delay, with no breach recorded by the lender and no penal interest charged, is different in substance from a missed instalment that triggered a penal interest clause, a loan classification change at the lender, or a restructuring discussion. The facts that distinguish the two matter more than any fixed number of days, and auditors should look at what the lender itself treated the delay as.
- Did the lender charge penal interest or a default fee for the specific instalment? If so, the lender has already treated it as a default event.
- Did the lender's classification of the account change, such as being flagged as a special mention account or moving toward a non-performing classification?
- Was there any loan restructuring, moratorium, or renegotiation during or shortly after the year, which often follows an unreported default?
- Is the delay a one-off, explainable event (a bank holiday, a technical glitch corroborated by the bank) or part of a recurring pattern across multiple instalments?
A loan that was restructured during the year, with the lender's agreement, is not automatically exempt from this clause. If a default occurred before the restructuring took effect, that default still needs to be reported for the period it occurred, separately from the restructuring itself.
Regulatory requirement
The exact clause wording, the lender-wise disclosure format, and the treatment of debenture-holder defaults are set out in the Companies (Auditor's Report) Order as currently in force. There is no single fixed number-of-days threshold asserted in this article; whether a delay rises to a reportable default is a judgement informed by the facts above, and the clause text itself should be checked for any specific disclosure triggers before the report is drafted.
How we think about this
Matching every instalment's due date and amount against the actual payment date and amount, for every lender, is a complete reconciliation that should be run exhaustively rather than sampled, because a single missed instalment anywhere in the schedule is the entire finding. Judging whether a given delay is a technical glitch or a real default, and how to word the lender-wise disclosure, is where the auditor's judgement is still required.
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 2020 reporting checklist for statutory auditorsThe topic areas CARO reporting covers, what evidence each one needs, and how the clauses fit together across the audit file.
- CARO & Companies ActCARO clause on loans, advances and investmentsTesting loans, advances and investments given by the company for CARO reporting, including the overdue-loan-renewal pattern the clause is designed to surface.
- CARO & Companies ActCARO statutory dues clause: testing approachHow to test timely deposit of statutory dues for CARO reporting, handle disputed dues disclosure, and avoid redoing work already done in the GST and payroll sections.
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