## CARO Clause: Capability of the Company to Meet Its Existing Liabilities

### What the Auditor Must Opine

Based on available evidence, the auditor must state whether, in their opinion, no material uncertainty exists as at the audit report date regarding the company's ability to meet liabilities:

Existing as at the Balance Sheet date, AND
Falling due within one year from the Balance Sheet date

> This is a positive comfort statement — the auditor affirms the absence of material uncertainty, not merely discloses risk.

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### Basis for the Opinion

Evidence Category	Examples
Financial ratios	Current ratio, quick ratio, debt-service coverage ratio
Ageing of financial assets	Expected realisation dates of receivables, investments
Ageing of financial liabilities	Expected payment dates of creditors, loan repayments
Management/Board plans	Plans to raise funds, restructure debt, dispose assets
Auditor's own knowledge	Information gathered through the audit process

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### Relationship with Going Concern (SA 570)

This CARO clause is directly linked to the going-concern assessment under SA 570. If material uncertainty is identified here, it typically triggers a going-concern emphasis-of-matter paragraph or qualification in the main audit report.

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### Auditor's Procedure

1. Compute and analyse key liquidity and solvency ratios.

2. Prepare/review ageing schedules for receivables and payables.

3. Obtain and critically evaluate management's plans for meeting obligations.

4. Form an overall opinion on whether material uncertainty about liability-meeting capacity exists.

5. Disclose findings in CARO.

Worked example

### Example 1

A manufacturing company has a current ratio of 0.6, significant overdue creditors, and no approved credit line. The auditor identifies material uncertainty about the company's ability to meet liabilities within one year. CARO disclosure: 'Based on financial ratios and ageing analysis, the auditor is of the opinion that material uncertainty exists regarding the company's capability to meet its liabilities falling due within one year from the Balance Sheet date.'

### Example 2

A company has a current ratio of 2.1, well-spread receivable maturity profile, and a confirmed ₹50 crore revolving credit facility. No material liabilities fall due within 12 months. CARO disclosure: 'In the opinion of the auditor, no material uncertainty exists as at the date of the audit report that the company is capable of meeting its liabilities existing at the Balance Sheet date and when they fall due within a period of one year.'

⚠️ Common exam mistakes

Confusing this clause with a general going-concern opinion — it specifically focuses on liabilities falling due within one year from the Balance Sheet date.
Relying solely on management representations without independently verifying ratios and ageing schedules.
Treating the clause as requiring only a risk disclosure rather than a definitive opinion on the absence (or presence) of material uncertainty.
Ignoring management's plans — even if current ratios look weak, credible funded plans can resolve the uncertainty.

Reference:

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Going Concern – Capability to Meet Liabilities Within One Year

Worked example

⚠️ Common exam mistakes