CARO 2020, Tax Audit and the Year-End GST Questions

CARO 2020 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

GST reaches the audit report itself in two clauses, and reaches the closing entries in about a dozen small decisions. Most of them are settled by one fact: the accounts cannot be revised once adopted.

CARO clause 3(vii)(a) asks whether undisputed statutory dues including goods and services tax were regularly deposited, and the extent of arrears outstanding for more than six months at the year end. Clause 3(vii)(b) asks, for dues "not deposited on account of any dispute", for "the amounts involved and the forum where dispute is pending." And on late findings: "there is no option to revise the accounts already finalized and adopted… Any adjustments on account of GST annual returns shall be adjusted in the subsequent period only."

The two CARO clauses

Clause 3(ii) — inventory. "the auditor should ensure that ITC availed on the inventory destroyed, damaged, lost, etc. have been reversed in the books of accounts." Physical verification write-offs →

Clause 3(vii)(a) — undisputed statutory dues. The four standard wordings from the ICAI Guidance Note on CARO (2020) form a graded scale:

• "have been regularly deposited by the company with the appropriate authorities in all cases during the year";
• "have generally been regularly deposited… though there has been a slight delay in a few cases";
• "have not generally been regularly deposited… though the delays in deposit have not been serious";
• "have not been regularly deposited… and there have been serious delays in a large number of cases."

Choosing between the second and third wording is the real judgment, and the auditor's action point supplies the test — "review whether the dues paid and returns filed by the entity are within the time limits prescribed." Returns, not just payments, which for GST means GSTR-1 and GSTR-3B filing dates as much as the cash.

Clause 3(vii)(b) — disputed dues. "in case of disputed statutory dues, the amounts involved should be stated along with the forum where the dispute is pending. Therefore, even minor amounts would be required to be reported under this Clause. The amount should be reported in a manner so that the reader is able to understand the dispute and the amount involved."

"Even minor amounts" removes materiality from this clause — an ordinary GST appeal for a small sum still appears in the audit report, with the forum named.

The irreversibility rule

Asked whether audited accounts should be revised when the annual return is completed later: "As of now there is no option to revise the accounts already finalized and adopted in case of companies and accounts filed under income tax law for non-corporates. Any adjustments on account of GST annual returns shall be adjusted in the subsequent period only."

And how they land: "the same should be properly adjusted or incorporated in the subsequent year's Financial Statements. The same would warrant a separate disclosure as prior period item, if considered material."

This is why the whole exercise is front-loaded. Nothing found in December can be put back into March. The only defences are doing the reconciliation before signing, or accepting a prior period item in the following year's accounts.

Where GST items sit in the accounts

Interest and penalty on late payment — "shown as part of rates and taxes in the other expenses and charged to statement of profit and loss."

ITC reversals — "There is no specific ledger account for reversal of ITC. The reversal will either be classified as rates and taxes or in case of ineligible credits it will be added as part of the expenses debited to the statement of profit and loss."

Disputed penalty paid under protest — "shall be shown separately as loans and advances or other current assets. This may also warrant a disclosure as part of contingent liability as the said amount is not provided in the books."

Closing stock — "GST should not be included as part of closing stock… The GST component is considered as input tax credit. As per AS-2: 'Valuation of Inventories' any recovered/ recoverable duties will not be considered as part of cost of inventory."

Year-end provisions for rent, audit fee, retainer fees — "Input tax credit should not be accounted in case of year end entries as there are no valid tax invoice / documents." So provisions are made exclusive of any assumed credit; the credit follows the invoice, in the next year.

The recurring year-end questions

Goods invoiced before 31 March but not received. "Section 16(2)(b)… mandates that input tax credit… shall be available… after he has received such goods/ services. Therefore, input tax credit cannot be taken in the present scenario."

GST TDS deducted by the customer in the next year. "GST TDS must be accounted only when the same is received in the GST portal i.e. when the recipient/deductor files FORM GSTR-7." And it is usable: TDS credited to the cash ledger "can be used for payment of liabilities on account of RCM, late fees or interest."

Export without an LUT. "No note is required if Letter of Undertaking (LUT) has been filed prior to export… However, if export has taken place without filing LUT, the GST authorities may direct the entity to discharge GST liability… The auditor must ensure that a provision is made for the same along with interest. In case the entity fails to make a provision, the auditor must exercise professional judgement to modify his opinion."

Import of services — rate and due date. The exchange rate is "as per the generally accepted accounting principles for the date of time of supply"; the liability is disclosed in GSTR-3B, due "20th or 22nd of the subsequent month."

Repairs to buildings. Blocked for construction on own account, "As an exception… construction including re-construction, renovation, additions or alterations or repairs to the extent not capitalised can be taken as input."

Renting of motor vehicles at 18%. "Yes. …any GST paid on motor vehicles will be allowed as ITC, when the output tax charged is 18%, if the same is used for making further taxable supply i.e. for renting of motor vehicles."

Refund of ITC on capital goods for exports without payment of tax — "Input tax credit on capital goods is not allowed as a refund."

Cost sharing with a foreign head office — "RCM is payable on cost sharing transactions, as the same would be considered as import of services."

And on the statutory auditor's own responsibility, the answer is SA 315 — assess the risk of material misstatement by understanding the entity, "review the compliance of other laws and regulations which impact the entity", and consider the impact in the report. Not a GST audit; a risk assessment that cannot ignore GST.

Key takeaways

• CARO clause 3(ii) requires ITC on destroyed, damaged or lost inventory to be reversed.
• Clause 3(vii)(a) grades regularity of deposit across four standard wordings, and covers returns filed, not only tax paid.
• Clause 3(vii)(b) requires even minor disputed amounts to be reported with the forum.
• Adopted accounts cannot be revised — GST annual return findings go into the next year, as a prior period item if material.
• Interest and penalty, and most ITC reversals, sit in rates and taxes.
• Disputed amounts paid under protest go to loans and advances or other current assets, with a contingent liability disclosure.
• GST is not part of closing stock — AS-2 excludes recoverable duties.
• Year-end provisions carry no credit, because there is no invoice yet.
• Export without an LUT requires a provision with interest, failing which the opinion may need modification.
• GST TDS is accounted when GSTR-7 is filed and can pay RCM, late fee and interest.

Read next

• Finalisation of Accounts with GST: The Audit Approach
• Expense-Side GST Review: RCM, Blocked Credit and ISD
• Year-End Inventory under GST: Goods in Transit and Job Work

Disclaimer: Positions stated as on 5 September 2026, based on the Companies (Auditor's Report) Order, 2020, the ICAI Guidance Note thereon, SA 315, AS-2, sections 16, 17 and 51 of the CGST Act, 2017 and Form GSTR-7, as reproduced in the ICAI Handbook on Finalisation of Accounts with GST Perspective (Second Edition, June 2026).