CA FINAL
35 Points
Joined November 2012
You should note that, above amount will attract provision xvii of CARO 2003 which states as under, and the auditor will have to appropriately qualify it : whether the funds raised on short-term basis have been used for long-term investment; If yes, the nature and amount is to be indicated
because (a) The principles of financial management suggest that the long-term assets of an enterprise should be financed from long-term funds. The genesis of the principle is that if funds raised from short-term sources are used for long-term investments, the enterprise can face liquidity problems as soon as the short-term sources fall due for payment. However, an exception to the principle would be the situation where an enterprise is able to generate sufficient funds
from long-term sources either through its operations or other means to meet the working capital requirements arising from the event of short-term sources falling due for payment. The application of the principle is considered to be of utmost importance for the financial health of an enterprise. The clause requires the auditor to comment whether the funds raised on short-term basis have been used for long-term investment, so that the readers can assess whether the company has followed the above-mentioned principle of financial management. Examples of use of funds raised on short-term basis and used for long-term purposes would include investing money from overdraft facilities in long-term investments in shares of subsidiaries/associates/joint ventures or investing money raised from public deposits due for repayment in three years in a project whose pay back period is ten years. Further, cash from operating activities represent a long term source of funds.