CARO 2020 Clause 3(iii): Loans, Guarantees and Advances Audit Checklist

CARO 2020 clause 3(iii) is the auditor’s structured reporting framework for a company’s loans, advances in the nature of loans, guarantees, security and investments. It is broader than a simple inter-company-loan check. The auditor must identify the transactions, classify them correctly, evaluate their terms, examine repayment behaviour and overdue amounts, look for renewals or fresh funding that may mask defaults, and separately identify loans that are repayable on demand or have no repayment terms.

The key first-party reference is ICAI’s Guidance Note on the Companies (Auditor’s Report) Order, 2020 (Revised 2022 Edition). ICAI also provides the official Guidance Note PDF containing the clause text, explanations and suggested audit procedures.

What does clause 3(iii) cover?

ICAI explains that clause 3(iii) applies where the company has, during the year, made investments, provided guarantees or security, or granted loans or advances in the nature of loans, secured or unsecured, to companies, firms, LLPs or any other parties. Once such transactions exist, the auditor considers the relevant requirements in sub-clauses 3(iii)(a) to 3(iii)(f).

An advance is not automatically a loan. Whether an advance is “in the nature of a loan” depends on the facts. A normal trade advance made in accordance with ordinary commercial practice may not have the character of a loan. The audit file should document why a balance is classified as a trade advance, deposit, loan, or advance in the nature of a loan rather than relying only on the ledger name.

Clause 3(iii)(a): quantify what was provided

For companies to which this sub-clause applies, the auditor reports the aggregate amount provided during the year and the balance outstanding at the balance-sheet date for loans or advances in the nature of loans, guarantees and security. The reporting separates subsidiaries, joint ventures and associates from other parties.

ICAI states that the amount during the year is a gross amount, without netting subsequent settlements. A loan granted and repaid within the same year can therefore remain part of the amount granted during the year even though the closing balance is nil. ICAI also notes that clauses 3(iii)(a) and 3(iii)(e) do not apply to companies whose principal business is to give loans.

Clause 3(iii)(b): are the terms prejudicial?

The auditor considers whether investments made, guarantees provided, security given, and the terms and conditions of loans or advances in the nature of loans and guarantees are prejudicial to the company’s interest. The assessment should not stop at whether interest is charged. Relevant evidence can include the commercial rationale, borrower financial standing, security, interest rate, tenure, approvals and other terms affecting the company’s position.

Clause 3(iii)(c): repayment terms and regularity

For loans and advances in the nature of loans, the auditor checks whether a schedule of repayment of principal and payment of interest has been stipulated and whether repayments or receipts are regular. A practical working paper is a party-wise matrix showing contractual due dates, principal and interest due, actual receipt date, delay and status. That schedule also supports the overdue test under the next sub-clause.

Clause 3(iii)(d): overdue for more than 90 days

Where an amount is overdue, clause 3(iii)(d) requires the auditor to state the total amount overdue for more than 90 days and whether reasonable steps have been taken for recovery of principal and interest. ICAI explains that an amount is overdue when payment has not been received by the due date under the lending arrangement.

Evidence of recovery matters. Depending on the facts, the file may include reminder correspondence, revised payment commitments, legal notices, settlement discussions or security-enforcement steps. A management statement that recovery is being followed up is not a substitute for examining the actual recovery trail.

Clause 3(iii)(e): renewal, extension and fresh loans

This sub-clause highlights cases where a loan or advance in the nature of a loan that fell due during the year was renewed or extended, or a fresh loan was granted to the same party to settle an overdue existing loan. ICAI describes the provision as intended to identify possible “evergreening” of loans. Where applicable, the report specifies the aggregate amount of such dues and its percentage of total loans or advances in the nature of loans granted during the year. This sub-clause does not apply to companies whose principal business is to give loans.

Clause 3(iii)(f): on-demand and no-term loans

The auditor also checks whether loans or advances in the nature of loans are repayable on demand or were granted without specifying any terms or period of repayment. If so, the report includes the aggregate amount, the percentage of such loans to total loans granted, and the aggregate amount granted to promoters and related parties under the Companies Act framework. The agreement wording and the actual conduct of the parties should be reviewed together.

Worked example

Assume a manufacturing company grants an unsecured ₹1 crore loan to a group entity. The agreement requires quarterly interest and repayment of principal on 30 June. Principal is not repaid on that date. In August, the lender extends the repayment date by six months and later grants another ₹25 lakh to the same borrower.

The auditor should not treat this as one generic related-party balance. The original loan enters the clause 3(iii) population. Its terms are evaluated under 3(iii)(b); repayment regularity under 3(iii)(c); any amount overdue beyond 90 days under 3(iii)(d); and the extension plus fresh funding under 3(iii)(e). If the revised arrangement becomes repayable on demand or has no specified repayment period, 3(iii)(f) also becomes relevant.

Clause 3(iii) is not the same as clause 3(iv)

Clause 3(iii) focuses on the reporting characteristics of loans, advances, guarantees, security and investments. Compliance with sections 185 and 186 of the Companies Act is addressed separately in CARO clause 3(iv). A clean audit programme should therefore have two linked but distinct checks: the transaction and repayment analysis under clause 3(iii), followed by the statutory-compliance analysis required by clause 3(iv).

Practical audit checklist

1. Obtain a complete party-wise register of investments, loans, advances in the nature of loans, guarantees and security during the year.
2. Reconcile opening balances, additions, repayments or releases, and closing balances to the ledger and financial statements.
3. Document why each advance is or is not in the nature of a loan.
4. For 3(iii)(a), compute gross amounts granted or provided during the year before netting repayments.
5. Review approvals, agreements, interest, tenure, security and borrower financial information for the prejudicial-terms assessment.
6. Map contractual due dates to actual principal and interest receipts and age overdue amounts.
7. Collect evidence of recovery steps for amounts overdue beyond 90 days.
8. Match matured or overdue loans to renewals, extensions and fresh loans to the same parties.
9. Identify on-demand loans and balances with no specified repayment period, including promoter and related-party amounts.
10. Cross-reference, but do not merge, the clause 3(iii) work with section 185 and 186 testing under clause 3(iv).

Common mistakes

• testing only related-party loans and missing other parties;
• netting repayments against fresh loans when computing the amount granted during the year;
• assuming every trade advance is a loan, or every ledger called “advance” is outside the clause;
• checking only closing balances and missing loans granted and repaid during the year;
• ignoring delayed interest while focusing only on principal; and
• accepting a renewal without examining whether it followed a default or overdue position.

Practical takeaway

CARO 2020 clause 3(iii) is best audited as a transaction lifecycle, not as a year-end balance check. Start with a complete population, classify advances correctly, quantify gross activity, test commercial terms, map contractual due dates to actual receipts, identify amounts overdue beyond 90 days, investigate renewals or fresh funding to the same borrowers, and isolate on-demand or no-term loans. That workflow produces a clearer CARO conclusion and a stronger audit trail.