This is a composite, illustrative scenario built from how a CARO loans-clause omission typically gets caught, not an account of a named client. A loan the parent company had extended to its wholly owned subsidiary was correctly identified, valued and disclosed in the notes to the financial statements under related-party and loan disclosure requirements. The CARO report's clause on loans, investments, guarantees and advances — covering the terms, whether they are prejudicial to the company's interest, and the schedule of repayment — made no mention of it at all. The loan existed correctly in one part of the file and had simply never been carried across into the other.
How the same loan ended up in one place and not the other
The notes to accounts were prepared by the team handling financial statement close, working from the general ledger and the related-party schedule. The CARO working paper was prepared separately by a different team member, working from a CARO-specific checklist that asked “have any loans been given during the year” — and that team member, reasonably but incorrectly, checked the current-year loan register rather than also reviewing what the financial-statement team had already identified and disclosed. The loan had actually been extended in the prior year and simply remained outstanding; it generated no “new loan this year” transaction for the current-year register to catch.
CARO's loans clause is not limited to loans originated in the current year — it requires reporting on loans, investments, guarantees and advances outstanding, including terms and repayment schedule for amounts that remain outstanding from an earlier period. A checklist built around “what's new this year” will silently miss anything that originated earlier and simply continued.
How it was found
- 01Cross-checked the CARO working paper against the related-party noteA direct comparison, not a re-performance of the CARO team's own procedure — simply confirming that every loan disclosed in the notes had a corresponding line in the CARO clause, and finding one that didn't.
- 02Confirmed the loan's current termsInterest rate, repayment schedule, and outstanding balance, pulled from the loan agreement rather than assumed to be unchanged from origination.
- 03Assessed whether the terms were prejudicial to the companyThe interest rate was below what the company itself paid on its own borrowings — a specific question the clause requires an answer to, not just a yes/no on whether the loan existed.
- 04Checked whether Section 186 approval existed for this loan at originationIt did — a board resolution from the prior year, correctly obtained, which meant this was a disclosure-completeness gap only, not a compliance breach on top of it.
What went into the CARO report
| Required element | What was added |
|---|---|
| Terms of the loan | Interest rate, repayment schedule, security if any |
| Whether terms are prejudicial to the company's interest | Assessed and reported explicitly — the below-market rate noted and explained as an intercompany accommodation, not flagged as prejudicial given the wholly owned relationship, with the reasoning stated |
| Schedule of repayment and whether it is being adhered to | Confirmed the subsidiary was current on the schedule set at origination |
What went into the audit file
- The cross-check procedure itself, documented as a step — not just its result — so a future reviewer can see completeness was tested, not assumed.
- The loan agreement terms used as the basis for the clause response.
- The Section 186 board resolution confirming the loan was properly approved at origination.
- A note on why the checklist process missed it, and a recommendation that the CARO loans-clause procedure specifically include a cross-check against the related-party and loan disclosure notes, not rely on a current-year transaction register alone.
How we think about this
A CARO checklist built around “what happened this year” structurally misses anything that originated earlier and simply continued outstanding — which is most of what a loans clause actually needs to report on in a mature company. Cross-checking against the financial statement disclosures that already exist, rather than re-deriving the population from scratch, is what actually closes that gap.
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 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 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.
- Related parties & disclosuresSection 188 compliance: what an auditor checksSection 188 approval is a governance fact to verify against minutes, not an assumption to carry forward from last year's file.
Free tools, no signup
Each one reads a file entirely in your browser — or, for two of them, just answers a few questions — and nothing is ever uploaded.
- Purchase register checkDuplicate payments, round-sum amounts, weekend-dated invoices, incomplete records.
- GSTR-2B reconcilerMatches your purchase register against GSTR-2B — missing invoices either side, amount mismatches.
- Bank reconciliation checkerMatches your cash book against a bank statement — what's outstanding on each side.
- Fixed asset register checkDuplicate asset codes, missing location or useful life, negative net book value.
- Payroll red-flag scannerBank accounts shared across employees, and records missing an ID, PAN or salary.
- MSME payment delay checkerMSME-flagged invoices paid — or still unpaid — beyond the 45-day Section 22 limit.
- Related-party transaction screenerTransactions above a threshold you set with no approval reference, grouped by counterparty.
- Depreciation useful life checkerCompares a useful life in use against the Schedule II, Part C indicative figure.
- Materiality calculatorOverall and performance materiality against PBT, revenue, assets or equity, with reasoning shown.
- Sample size calculatorStatistical sample size for a test of controls or a substantive test of detail.