## CARO Clause: Reporting on Consolidated Financial Statements

### What the Auditor of the Holding Company Must Disclose

When issuing a CARO report on Consolidated Financial Statements (CFS), the auditor must state:

1. Whether any qualifications or adverse remarks appear in the CARO reports of auditors of entities included in the CFS

2. If yes: the names of those companies and the specific paragraph numbers of their CARO reports containing the qualifications or adverse remarks

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### Why This Clause Is Significant

Without this requirement, material concerns at subsidiary or associate level could be buried in individual entity reports, invisible to users of the consolidated financial statements.

This clause ensures transparency at the group level — a qualification in a subsidiary's CARO must surface in the parent's CARO report.

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### Broader Regulatory Significance

> 'The change in reporting requirements clearly shows that regulator's expectations from auditors are increasing significantly.'

Auditors are expected to be more conscious, sceptical, and accurate
Greater emphasis on utilisation of funds, financial stability, and regulatory compliance

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### Auditor's Procedure

1. Collect CARO reports of all entities (subsidiaries, associates, JVs) included in the CFS.

2. Identify any qualifications, adverse remarks, or disclaimers in those reports.

3. Prepare a summary listing affected entities and the relevant paragraph numbers.

4. Include this disclosure in the holding company's CARO report.

5. Coordinate with component auditors to obtain their CARO reports on time.

Worked example

### Example 1

A holding company consolidates three subsidiaries. Subsidiary B's CARO report contains a qualified remark at Para 3(vii)(b) regarding outstanding statutory dues. Subsidiary C's CARO has an adverse remark at Para 3(ix)(a) about default on bank loans. The holding company's CARO must disclose: 'The CARO reports of Subsidiary B (Para 3(vii)(b)) and Subsidiary C (Para 3(ix)(a)) contain qualifications/adverse remarks as detailed above.'

### Example 2

All subsidiary CARO reports are clean with no qualifications or adverse remarks. The holding company's CARO states: 'There are no qualifications or adverse remarks in the CARO reports of the companies included in the consolidated financial statements.' No further action required.

⚠️ Common exam mistakes

Including only subsidiaries and forgetting associates and joint ventures that are part of the consolidated financial statements.
Citing the company names without the specific paragraph numbers — both are required.
Treating an emphasis-of-matter paragraph as equivalent to a qualification or adverse remark — this clause covers qualifications and adverse remarks, not emphasis of matter.
Obtaining CARO reports from component auditors too late, leading to incomplete disclosure in the parent's CARO.

Reference:

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Reporting on Consolidated Financial Statements – Qualifications in Subsidiary CARO Reports

Worked example

⚠️ Common exam mistakes