A prospectus is a document that is issued every time a sale of securities takes place, either through an initial public offering (IPO) on an organized stock exchange or through a private placement transaction. Essentially, a prospectus is a company's business plan that also contains information about the securities being issued.
To protect investors, independent auditors have to perform due diligence of the prospectus. An audited prospectus is then approved by the regulator (the Securities and Exchange Commission (SEC) in the United States), and the securities are sold to investors.
Verify Financial Statements
On of the key responsibilities of an auditor with regards to making due diligence on a prospectus is to verify all financial statements, including balance sheet, profit and loss statements, and cash flow statement. All accounts need to be checked and verified. If the firm presents consolidated statements of all its affiliates the individual statements comprising the consolidated statements need to be diligently verified as well.
Confirm Non-Financial Parts
The prospectus also contains a lot of information of non-numerical nature, such as the description of the firm's products or the firm's prospects. It is an auditor's responsibility to confirm that there is no misleading or fraudulent information contained in the non-financial parts of the prospectus.
Write a Comfort Letter
The auditor has to write a so called "comfort letter" to the regulator (the SEC in the United States). In it, the auditor, informs the authorities about his examination of the company and provides information about the statements included in the prospectus. It is necessary to note, however, that the auditor displays no opinion about whether the company is a good buy, though the auditor can provide negative assurance (a term used by Certified Public Accountants, meaning that the reviewed financial information is correct from the legal point of view).
