## CARO Clause: Cash Losses

### What the Auditor Must Report

The auditor must state:

Whether the company incurred cash losses during:
The current financial year, AND
The immediately preceding financial year
If yes, the amount of cash losses in each year

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### Understanding Cash Loss

Cash Profit / (Loss) = Net Profit / (Loss) + Non-cash charges (Depreciation, Amortisation, etc.)

A company can show an accounting profit yet generate a cash loss if non-cash revenues (e.g., unrealised gains) inflate net income. Conversely, heavy depreciation can produce an accounting loss while cash flows remain positive.

This clause focuses on cash-based performance, not accrual-based profit.

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### Why This Matters

Consecutive cash losses are a key indicator of:

Operational cash-flow stress
Potential going-concern issues (relevant to CARO Q19 as well)
Possible inability to service debt or meet liabilities

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### Auditor's Procedure

1. Compute cash profit/(loss) by adjusting net profit for non-cash items.

2. Verify figures independently for both the current year and the immediately preceding year.

3. Confirm the amounts and include the disclosure in the CARO report.

Worked example

### Example 1

Company A reports a net profit of ₹5 lakh for the year but has depreciation of ₹8 lakh and amortisation of ₹2 lakh. Cash profit = ₹5L + ₹8L + ₹2L = ₹15 lakh. No cash loss exists — no CARO disclosure required under this clause.

### Example 2

Company B reports a net loss of ₹30 lakh. Adding back depreciation of ₹10 lakh gives cash loss of ₹20 lakh. In the preceding year the cash loss was ₹12 lakh. The auditor must disclose: 'The company has incurred cash losses of ₹20 lakh in the current FY and ₹12 lakh in the immediately preceding FY.'

⚠️ Common exam mistakes

Reporting accounting (book) loss instead of cash loss — the clause specifically asks for cash losses, requiring adjustment for non-cash items.
Checking only the current year and omitting the immediately preceding financial year.
Forgetting to quantify the amount — merely stating 'yes, cash losses were incurred' without providing the figures is incomplete.

Reference:

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