ICAI: GUIDANCE NOTE TO AUDITORS ON FUNDING DISCLOSURE NORMS

The Institute of Chartered Accountants of India (ICAI) has issued a detailed set of instructions to auditors to make sure that the financial statement of companies audit act in accordance with the government’s new investment reporting requirements.

The Self regulator of the accounting profession has issued the guidance note to assist auditors to ensure that amendments to the rules which is bought by the government last year are properly met. The reporting requirements prescribed in the Companies (Audit and Auditors) Amendment rules, 2021 are applicable for audits of companies for the financial year 2021-22 and onwards.

As per this, the management and auditors  have to make additional disclosures in notes to accounts.

The purpose of this guidance note is to infuse greater transparency in the flow of funds between entities and the purpose of such flow of funds. Companies have to disclose details of the transactions of advances or loans or investments made in an intermediary for further lending or for making investments directly or indirectly. As per ICAI’s guidance note, the disclosure should include the date and amount of fund advanced or loaned or invested in intermediaries with complete details of each intermediary.

Also, the investing or lending company should declare that provisions of the Foreign Exchange Management Act and Companies Act has been complied with for such deals and that these do not breach the Prevention of Money-Laundering Act (PMLA), according to experts.

These rules have cast onerous responsibility on auditors as scope of reporting under FEMA and PMLA rules is very wide. The management as well as the board of directors will have to carefully evaluate transactions of lending or investing in another entity or person to determine the nature and purpose of such funding, which should be very clearly evidenced and documented while approving such funding.

These amendments require significant additional disclosures in the statutory financial statements of the companies and enhance reporting responsibilities of the auditors as well as the management and board of directors of the company.