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.
The last five clauses of the Order deal with cash losses, auditor resignation, the company's ability to pay what it owes within a year, unspent corporate social responsibility money and, for consolidated statements, the qualifications in group companies' CARO reports. This article explains how the ICAI Guidance Note says to approach each.
It is explained from the ICAI Guidance Note on the Companies (Auditor's Report) Order, 2020 (Revised 2022 Edition, July 2022). CARO 2020 applies to audits of financial years commencing on or after 1 April 2021. Later amendments to the Order, Schedule III and the laws named should be checked.
Cash losses are not defined, so the GN gives a working method starting from the profit or loss after tax. Resignation reporting applies when the incoming auditor fills a casual vacancy, not on rotation. Clause 3(xix) is a negative-assurance statement tested at the date of the audit report, and is not the same as the going concern opinion. CSR reporting separates ongoing and other than ongoing projects. Clause 3(xxi) is the only clause in consolidated reports.
The Order's wording is in the live clause xvii to xxi explainer. The preceding clauses are in our clauses 3(xii) to 3(xvi) article.
Clause 3(xvii): cash losses (paragraph 82)
The clause applies to all companies and covers the year under audit and the immediately preceding year. The GN says "cash losses" is not defined in the Act or the standards and is not a ready figure in the statements. It is also different from distributable surplus and from realised profits. The GN's approach:
| Step | Treatment |
|---|---|
| Start | Profit or loss after tax from the statement of profit and loss (for Ind AS companies, excluding other comprehensive income) |
| Add back non-cash charges | Depreciation, amortisation, impairment loss or its reversal, deferred tax, foreign exchange and fair value changes |
| Other comprehensive income | Cash profits or losses realised and recognised there are included; later reclassification into the profit and loss is a non-cash item and is not counted |
| Prior year | If restated, use the restated figure |
| Contingent items | Do not adjust for contingent expenses such as disputed claims or appealed tax demands for which provision was made |
| Cash flow statement | Not a substitute, since interest and similar items matter here |
| Qualifications | Adjust for quantified qualifications in the audit reports; say the opinion was formed after considering them, and that the effect of unquantified ones was not taken into account |
If losses arose in only one year, comment on each year. The working paper should show the starting figure and each add-back, and a finance team supported by virtual CFO services can keep that working ready month by month.
Clause 3(xviii): resignation of the statutory auditor (paragraph 83)
The clause applies where an incoming auditor is appointed during the year to fill a casual vacancy under section 140(2) caused by resignation. It does not cover a change because of mandatory rotation, and where one of joint auditors resigns the other joint auditor considers the reasons. The incoming auditor must:
- communicate with the outgoing auditor before accepting, as the Code of Ethics requires;
- obtain the resignation letter and the copy of Form ADT-3 (filed within thirty days), which should describe the circumstances rather than give vague reasons, and for a listed company the information required by the SEBI circular on resignation;
- read board minutes and communications to the audit committee, and weigh the reasons;
- read the outgoing auditor's last report and ask about any modification, particularly on insufficient evidence, and assess the effect on his own strategy and report;
- take a management representation that there are no concerns beyond those already received.
See our ADT-3 guide for the filing side.
Clause 3(xix): material uncertainty about meeting liabilities (paragraph 84)
The auditor states whether, on the basis of financial ratios, ageing and expected realisation of financial assets and payment of financial liabilities, other information accompanying the statements, and his knowledge of the Board's and management's plans, no material uncertainty exists on the date of the audit report that the company can meet liabilities existing at the balance sheet date as they fall due within one year of that date.
How it differs from going concern. The emphasis is on ability to pay existing liabilities within a year, and the test is as at the report date, so events after the balance sheet are considered under SA 560. Liabilities falling due within a year are not the same as current liabilities, since the current classification depends on the operating cycle and the unconditional right to defer settlement. The GN directs the auditor to SA 570 part 1 and part 2, and any going concern paragraph in the main report should be considered here too.
Inputs to consider:
- the ratios Schedule III requires (current ratio, debt-equity, debt service coverage, return and turnover ratios and others), at the balance sheet date and near the report date;
- ageing and subsequent realisation of receivables and payment of payables;
- the directors' report and management discussion, read as other information;
- plans of the Board and management, backed by documents.
Procedures the GN lists: get due dates of financial liabilities from agreements; check subsequent payment status; ask management for plans on unpaid liabilities; test recoverability of financial assets; where a holding company's support letter is relied on, evaluate that company's ability to pay; review interim MIS and twelve-month cash flow projections; check guarantees given for group entities; and take a representation on realisation plans and post balance sheet events. The assessment is overall; a one-to-one match of liabilities to assets is not needed.
Reporting. If no material uncertainty exists, the statement is one of negative assurance, with a caution that it is not an assurance of future viability and rests on facts up to the report date. If uncertainty exists, discuss with the Board, state it with reasons, and consider the effect on the main report, including a separate paragraph under SA 700 and adequate disclosure.
Clause 3(xx): unspent CSR (paragraphs 85 and 86)
| Limb | Rule as the GN prints it | Auditor's check |
|---|---|---|
| (a) Other than ongoing projects | Unspent amount transferred to a Schedule VII fund within six months of the end of the financial year | Receipts, challans and bank statements of transfer |
| (b) Ongoing projects | Unspent amount transferred to a special Unspent CSR Account within thirty days of the end of the financial year; spent within three financial years of transfer, failing which transferred to a Schedule VII fund within thirty days of the end of the third year | Account opened for that year only and earmarked; track use in three years |
Limb (b) reporting concerns the thirty day transfer; later use is verified but not reported. See our ongoing CSR projects guide and section 135 explainer.
Procedures common to both: confirm section 135 applies; get the Board-approved policy and CSR committee minutes; check the two per cent of average net profit working; confirm activities fall within Schedule VII; verify spending with receipts and bank statements; check the provision for unspent amounts and commitment disclosure; and compare with the Schedule III CSR disclosures. Where a transfer is late, record the year, unspent amount, amount transferred, due date, actual date and days of delay. Where the time limit has not run out at the report date, say so.
Clause 3(xxi): group CARO remarks (paragraph 87)
This is the one clause reported on consolidated statements. The auditor reports qualifications or adverse remarks in the CARO reports of companies in the consolidation to which CARO applies, with the names and the clause numbers, not the text. The GN reads "qualifications or adverse remarks" as the unfavourable or qualified answers in paragraph 4 of the Order, not a modified opinion under SA 705. The principal auditor decides, may ask component auditors to flag them, and carries the responsibility. The parent's own remarks are included. If a component's CARO report is not yet issued, name the component and say so. Every component remark is included without re-testing group materiality.
A worked example
Falcon Textiles Limited reports a loss after tax of Rs 90 lakh with depreciation of Rs 60 lakh and deferred tax credit of Rs 10 lakh. Adding back the depreciation leaves Rs 30 lakh, and removing the non-cash deferred tax credit of Rs 10 lakh brings the cash loss to Rs 40 lakh. The previous year showed cash profit, so the auditor reports separate positions for each year.
Need help with CFO-level reporting?
Cash flow forecasts, liability schedules and CSR trackers are the base documents for these clauses. TaxClue's virtual CFO services team can help set them up and keep them audit-ready.
Key takeaways
- Cash losses use a documented working from profit after tax; quantified qualifications adjust the figure.
- Resignation reporting applies to casual vacancies, not rotation.
- Clause 3(xix) tests material uncertainty at the report date over liabilities due within a year; it is not the going concern conclusion.
- CSR reporting separates the six-month fund transfer from the thirty-day special account transfer.
- Clause 3(xxi) is the only clause reported on consolidated statements.
Read next
- CARO 2020 Guidance Note: the form of report, board reply and checklist
- CARO 2020 clauses 3(xii) to 3(xvi) in practice
- SA 570: going concern, part 2
- Ongoing CSR projects and the three-year rule
Disclaimer: Based on the Companies (Auditor's Report) Order, 2020 as explained in the ICAI Guidance Note on CARO 2020 (Revised 2022 Edition), as consulted on 3 October 2026. CARO applies to financial years commencing on or after 1 April 2021; later amendments to the Order, Schedule III and the laws referred to should be checked. This article is general information, not legal advice; check the official text before acting.