The Hindu Business Line : The `comfort' factor for auditors from public issues

A COMPANY that has raised money through public issue would now be required to provide comfort to its statutory auditor on the "completeness of the disclosure" of the end-use of such money in the financial statements.

The comfort would come through a "representation from management," which an auditor must obtain to satisfy himself that there has been adequate disclosure of the end-use of such money in the company's financial statements.

The Companies (Auditor's Report) Order, 2003 (CARO), requires an auditor to report upon the disclosure of end-use of the money by the management in the financial statements. The auditor is also required to state whether he has verified the disclosure made by the management in this regard. To help its members conform to the requirements of CARO, the Institute of Chartered Accountants of India (ICAI) has recently come up with a Statement on CARO.

An ICAI official told Business Line that an auditor must also be guided by the declaration made on the end-use of money in the prospectus of the company.

"Besides obtaining the management representation, our members should also examine the prospectus for getting an understanding of the proposed end-use of money raised from public. The auditor should verify that the amount of end-use of money disclosed in the financial statements by the management is not significantly different from the proposed and actual end-use," the official said.

The Statement on CARO, which is mandatory on the members of the ICAI, requires an auditor to state the fact of inadequate disclosures in his audit report if he is of the opinion that adequate disclosure on the end-use of funds has not been made in the financial statements.

An auditor who is not able, for any reason, to verify the end use of money raised from public issues should state that he is not able to comment upon the disclosure of end-use since he could not verify the same. He should also mention the reasons that contributed to the auditor's inability to verify the disclosure.

Prior to the issuance of CARO, there was no legal requirement under the Companies Act for disclosure of the end-use of money raised by public issues in the financial statements. However, companies were making such a disclosure in the Board's report. Schedule VI of the Companies Act requires that only unutilised amount of any public issue made by the company should be disclosed in the financial statements of a company.