CARO's clause on loans, advances and investments asks the auditor to report on the terms and conditions of loans, advances, guarantees and investments made by the company during the year, including to related parties, whether they are prejudicial to the company's interest, whether the schedule of repayment is stipulated and receipts are regular, the total amount overdue, and whether reasonable steps have been taken for recovery, with specific attention to loans that were overdue and were then renewed or extended, or fresh loans given to settle amounts due from the same party. This clause is written to catch a specific pattern: an overdue loan kept alive indefinitely by rolling it forward, which never shows up as a default because it is never allowed to sit overdue long enough to be classified as one. The exact clause number and sub-points should be confirmed against the current order.
The pattern this clause is designed to surface
A loan given to a related party or a group entity that cannot repay on schedule has an obvious workaround: renew the loan, extend the tenure, or disburse a fresh loan that is used to settle the old one. On the books this can look like a performing loan with no overdue amount, because the overdue amount was cleared by the renewal. CARO specifically asks the auditor to look through this and report the renewal pattern itself as a disclosure item, separate from whether any amount is currently overdue.
A loan with no overdue balance at year end is not evidence that nothing needs reporting here. If that loan was overdue earlier in the year and was renewed or extended to clear the overdue position, or if a fresh loan was given specifically to settle amounts due from the same borrower, that is itself the pattern this clause asks about, separately from the overdue balance test.
Testing approach
- 01Build a complete population of loans, advances and investments givenPull this from the loan ledger, the investment register and board minutes approving loans, not from a schedule the client prepares, since a client-prepared schedule can omit a loan that was fully repaid and re-disbursed during the year in a way that obscures it.
- 02Obtain the sanction terms for eachRate of interest, repayment schedule, tenure, and security if any. Compare the rate against market benchmarks where the counterparty is a related party, since an interest-free or below-market loan to a related party is relevant to the "prejudicial to the company's interest" assessment.
- 03Age every loan against its stipulated repayment scheduleBuild a schedule-versus-actual ageing for principal and interest separately, across the full year, not just at the balance sheet date, so a loan that was overdue mid-year and later cleared is still visible.
- 04Trace the source of funds that cleared any overdue balanceWhere an overdue loan shows as cleared, trace what cleared it. A repayment from the borrower's own operating cash flow is one thing; a fresh disbursement from the same lender, or a related entity, used to settle the old balance is the renewal pattern the clause targets.
- 05Quantify the total amount overdue at the balance sheet dateSeparately for loans to related parties and to others, by borrower, with the number of days overdue.
- 06Assess recovery steps takenWhere amounts are overdue, check what the company has actually done: demand notices, legal proceedings, provisioning, or nothing at all. "Reasonable steps" is a judgement, but the absence of any step is itself evidence worth recording.
| Signal | Points toward |
|---|---|
| Renewal terms unchanged, same rate and tenure as original | Could be either; needs further testing |
| Renewal rate lower than original, or interest waived | Disguised default — the borrower could not service the original terms |
| Fresh loan amount equals exactly the overdue balance being settled | Disguised default — circular funding to clear an overdue position |
| Independent board approval with documented commercial rationale for the renewal | Genuine commercial accommodation, better supported |
| No board discussion of the renewal at all | Weak governance around the decision, worth separate comment regardless of the clause |
Related party loans specifically
Loans to related parties deserve more scepticism than loans to third parties, not because they are automatically improper, but because the commercial pressure to avoid reporting a default is strongest exactly where the lender and borrower share ownership or management. Cross-reference this testing against the related party register and the related party transaction approvals tested separately in the audit, so the loan population here and the related party population elsewhere in the file agree with each other.
Regulatory requirement
The exact clause wording, what counts as prejudicial to the company's interest, and the specific disclosure format for overdue amounts and renewals are set out in the Companies (Auditor's Report) Order as currently in force. Confirm the current text before drafting the report; this article describes a testing approach, not the authoritative clause language.
How we think about this
Ageing every loan against its schedule across the full year, and tracing the source of funds that cleared an overdue balance, is exhaustive reconciliation work that should run against the complete loan population rather than a sample, because the renewal pattern this clause targets is specifically designed to not show up unless every period is checked. Deciding whether a given renewal reflects genuine commercial accommodation or a disguised default is a judgement that depends on context a system cannot infer on its own, and stays with the auditor.
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 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.
- CARO & Companies ActCARO whistleblower and fraud reporting clausesThe auditor's reporting responsibility on fraud noticed and whistle-blower complaints received, and how to document the enquiry behind it.
- Related parties & disclosuresAuditing loans to directors and connected personsThe riskiest loans to directors are rarely booked as loans. They show up as unsettled expense advances and drifting current-account balances.
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