Professional Documents
Culture Documents
74767bos60492 cp8
74767bos60492 cp8
AUDIT REPORT
LEARNING OUTCOMES
CHAPTER OVERVIEW
And what about those issues which were identified as significant issues during the
audit? Can such issues and manner of addressing such issues be reported? What
kind of audit procedures were performed on those significant matters? There must
be some sort of reporting mechanism for these issues. In absence of such type of
flexibility in reporting, audit report can become too mechanical. He was mulling
deeply.
What if auditor wants to express a modified opinion? What are different types of it
and under what circumstances different types of modified opinion can be given by
auditor? Does auditor have to state basis for such an opinion compulsorily? These
were probing thoughts criss-crossing his mind.
He was also considering about reporting requirements if some matters are
specifically required to be reported in accordance with law. Particularly, in case of
companies, are there some specific matters? How reporting is to be made by
auditor in respect of such matters?
Amidst this maze of thoughts, Shekhar called him to inform that, audit of company
his team was doing, is now over and audit report has been issued. Wanting to know
about outcome, he was asked by Shekhar to go to website of the company and go
through audit report himself.
INTRODUCTION
Management is responsible for the preparation of the financial statements.
Management also accepts responsibility for necessary internal controls to enable
the preparation of financial statements that are free from material misstatement,
whether due to fraud or error.
The purpose of an audit is to enhance the degree of confidence of intended users
of the financial statements. The aforesaid purpose is achieved by the expression of
an independent reporting by the auditor as to whether the financial statements
exhibit a true and fair view of the affairs of the entity.
Thus, an audit report is an opinion drawn on the entity’s financial statements to
make sure that the records are true and fair representation of the transactions they
claim to represent. This involves considering whether the financial statements have
been prepared in accordance with an acceptable financial reporting framework
applicable to the entity under audit. It is also necessary to consider whether the
financial statements comply with the relevant statutory requirements. The main
users of audit report are shareholders, members and all other stakeholders of the
company.
This evaluation shall include consideration of the qualitative aspects of the entity’s
accounting practices, including indicators of possible bias in management’s
judgements.
1.3.1 Qualitative Aspects of the Entity’s Accounting Practices
1. Management makes a number of judgements about the amounts and
disclosures in the financial statements.
2. SA 260 (Revised) contains a discussion of the qualitative aspects of
accounting practices.
3. In considering the qualitative aspects of the entity’s accounting practices, the
auditor may become aware of possible bias in management’s judgements.
The auditor may conclude that the cumulative effect of lack of neutrality,
together with the effect of uncorrected misstatements, causes the financial
statements as a whole to be materially misstated. Indicators of a lack of
neutrality include the following:
(e) The financial statements provide adequate disclosures to enable the intended
users to understand the effect of material transactions and events on the
information conveyed in the financial statements; and
(f) The terminology used in the financial statements, including the title of each
financial statement, is appropriate.
Further, when the financial statements are prepared in accordance with a fair
presentation framework, the evaluation mentioned above (Paragraph 1.3 & 1.4)
shall also include an evaluation by the auditor as to whether the financial
statements achieve fair presentation which shall include consideration of:
(a) The overall presentation, structure and content of the financial statements;
and
(b) Whether the financial statements, including the related notes, represent the
underlying transactions and events in a manner that achieves fair
presentation.
The auditor shall evaluate whether the financial statements adequately refer to or
describe the applicable financial reporting framework.
An overview of specific evaluations by the auditor
1.5 Definitions
For making the understanding better, the following terms have been defined below:
(a) General purpose financial statements – Financial statements prepared in
accordance with a general purpose framework.
(c) Unmodified opinion – The opinion expressed by the auditor when the
auditor concludes that the financial statements are prepared, in all material
respects, in accordance with the applicable financial reporting framework.
2. FORM OF OPINION
the auditor shall modify the opinion in the auditor’s report in accordance
with SA 705.
3. AUDITOR’S REPORT
The auditor’s report shall be in writing. This SA- 700 requires the use of specific
headings, which are intended to assist in making auditor’s report more
recognizable, where audit is conducted in accordance with the relevant Standards
on Auditing.
3. Auditor’s Opinion: The first section of the auditor’s report shall include the
auditor’s opinion, and shall have the heading “Opinion.”
The Opinion section of the auditor’s report shall also:
Unmodified Opinion:
When expressing an unmodified opinion on financial statements, the auditor’s
opinion shall, unless otherwise required by law or regulation, use one of the following
phrases, which are regarded as being equivalent:
(a) In our opinion, the accompanying financial statements present fairly, in all
material respects, […] in accordance with [the applicable financial reporting
framework]; or
(b) In our opinion, the accompanying financial statements give a true and fair
view of […] in accordance with [the applicable financial reporting framework].
The phrases “present fairly, in all material respects,” and “give a true and fair
view” are regarded as being equivalent
ILLUSTRATION 3
M/s Amitabh & Associates are the statutory auditors of Ringston Ltd. which is a
company engaged in the business of manufacture of pen drives. The auditor has
started drafting the audit report for the FY 2021-22. CA Amitabh, the engagement
partner is of the view that the financial statements of Ringston Ltd. represent a true
and fair view. Give the draft of the opinion paragraph of the audit report.
SOLUTION
Opinion
We have audited the financial statements of Ringston Limited which comprise the
Balance Sheet as at 31.03.2022 and the statement of Profit and Loss Account and
the notes to the financial statements, including a summary of significant accounting
policies and other explanatory information.
In our opinion and to the best of our information and according to the explanations
given to us, the aforesaid financial statements give the information required by the
Act in the manner so required and give a true and fair view in conformity with the
accounting principles generally accepted in India, of the state of affairs of the
company as at 31.03.2022 and the Profit & Loss for the year ending on that date.
4. Basis for Opinion: The auditor’s report shall include a section, directly
following the Opinion section, with the heading “Basis for Opinion”, that:
1. States that the audit was conducted in accordance with Standards on
Auditing;
2. Refers to the section of the auditor’s report that describes the auditor’s
responsibilities under the SAs;
3. Includes a statement that the auditor is independent of the entity in
accordance with the relevant ethical requirements relating to the audit and
has fulfilled the auditor’s other ethical responsibilities in accordance with
these requirements.
4. States whether the auditor believes that the audit evidence the auditor has
obtained is sufficient and appropriate to provide a basis for the auditor’s
opinion.
Thus, the Basis for opinion section provides important context about the
auditor’s opinion.
ILLUSTRATION 4
M/s Kite Rite & Associates are the statutory auditors of Prime Deluxe Limited, for the
FY 2021-22. At the time of finalising the audit report, one of the engagement team
members, Mr. Robin, asked the engagement partner, CA Kite as to what all should be
included in the Basis of Opinion Paragraph. The engagement partner CA Kite,
explained the team in detail and asked Mr. Robin to draft such section for the auditor’s
report of Prime Deluxe Limited. Help Mr. Robin to draft the Basis for opinion section.
SOLUTION
Basis for Opinion
We conducted our audit in accordance with the Standards on Auditing (SAs)
specified under section 143(10) of the Companies Act, 2013. Our responsibilities
under those Standards are further described in the Auditor’s Responsibilities for
the Audit of the Financial Statements section of our report. We are independent of
the Company in accordance with the Code of Ethics issued by the Institute of
Chartered Accountants of India together with the ethical requirements that are
relevant to our audit of the financial statements under the provisions of the
Companies Act, 2013 and the Rules thereunder, and we have fulfilled our other
ethical responsibilities in accordance with these requirements and the Code of
Ethics. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
A material uncertainty exists when the magnitude of its potential impact and
likelihood of occurrence is such that, in the auditor’s judgement, appropriate
disclosure of the nature and implications of the uncertainty is necessary for:
(a) In the case of a fair presentation financial reporting framework, the fair
presentation of the financial statements, or
(b) In the case of a compliance framework, the financial statements not to
be misleading.
6. Key Audit Matters: For audits of complete sets of general purpose financial
statements of listed entities, the auditor shall communicate key audit matters in the
auditor’s report in accordance with SA 701.
When the auditor is otherwise required by law or regulation or decides to
communicate key audit matters in the auditor’s report, the auditor shall do so in
accordance with SA 701.
Law or regulation may require communication of key audit matters for audits of
entities other than listed entities.
Example
The auditor may also decide to communicate key audit matters for other entities,
including those that may be of significant public interest, for example because they
have a large number and wide range of stakeholders and considering the nature
and size of the business.
Examples of such entities may include financial institutions (such as banks, insurance
companies, and pension funds), and other entities such as charitable institutions.
Oversight of the financial reporting process: This section of the auditor’s report
shall also identify those responsible for the oversight of the financial reporting
process, when those responsible for such oversight are different from Management.
In this case, the heading of this section shall also refer to “Those Charged with
Governance” or such term that is appropriate in the context of the legal
framework applicable to the entity.
ILLUSTRATION 5
Diamond Shine Ltd. is a company engaged in the manufacture of detergent. M/s
Bright & Associates are the statutory auditors of the company. Explain how the
paragraph related to the management’s responsibility will come in the auditor’s
report.
SOLUTION
Management’s Responsibility for the Standalone Financial Statements
The Company’s Board of Directors is responsible for the matters stated in section
134(5) of the Companies Act, 2013 (“the Act”) with respect to the preparation of
these standalone financial statements that give a true and fair view of the financial
position, financial performance, (changes in equity) and cash flows of the Company
in accordance with the accounting principles generally accepted in India, including
the accounting Standards specified under section 133 of the Act. This responsibility
also includes maintenance of adequate accounting records in accordance with the
provisions of the Act for safeguarding of the assets of the Company and for
preventing and detecting frauds and other irregularities; selection and application
of appropriate accounting policies; making judgements and estimates that are
reasonable and prudent; and design, implementation and maintenance of adequate
internal financial controls, that were operating effectively for ensuring the accuracy
and completeness of the accounting records, relevant to the preparation and
presentation of the financial statement that give a true and fair view and are free
from material misstatement, whether due to fraud or error. In preparing the
(c) That misstatements can arise from fraud or error, and either:
(i) Describe that they are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements; or
(a) State that, as part of an audit in accordance with SAs, the auditor
exercises professional judgement and maintains professional
skepticism throughout the audit; and
(b) Describe an audit by stating that the auditor’s responsibilities are:
(i) To identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error; to design and
perform audit procedures responsive to those risks; and to obtain
audit evidence that is sufficient and appropriate to provide a basis
for the auditor’s opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.
(a) State that the auditor communicates with those charged with
governance regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any
significant deficiencies in internal control that the auditor identifies
during the audit;
(b) For audits of financial statements of listed entities, state that the auditor
provides those charged with governance with a statement that the
auditor has complied with relevant ethical requirements regarding
independence and communicate with them all relationships and other
Within an appendix to the auditor’s report, in which case the auditor’s report
shall include a reference to the location of the appendix or
ILLUSTRATION 6
M/s Ajay Vijay & Associates are the statutory auditors of Sarovar Ltd. for the FY 2021-
22. The company is engaged in the business of manufacture of water bottles. At the
time of finalising the auditor’s report, one of the audit team members asked CA Ajay,
the engagement partner to advise as to how the auditor’s responsibilities can be
shown in an appendix to the auditor’s report. Draft the auditor’s responsibility
paragraph so as to advise the audit team member.
SOLUTION
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud
or error, and to issue an auditor’s report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that an audit conducted
in accordance with SAs will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually
or in aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements
is included in appendix X of this auditor’s report. This description, which is located
at [indicate page number or other specific reference to the location of the description],
forms part of our auditor’s report.
11. Signature of the Auditor: The auditor’s report shall be signed. The report is
signed by the auditor (i.e. the engagement partner) in his personal name. Where
the firm is appointed as the auditor, the report is signed in the personal name of the
auditor and in the name of the audit firm.
The partner/proprietor signing the audit report also needs to mention the
membership number assigned by the Institute of Chartered Accountants of India.
They also include the registration number of the firm, wherever applicable, as
allotted by ICAI, in the audit reports signed by them.
12. Place of Signature: The auditor’s report shall name specific location, which
is ordinarily the city where the audit report is signed.
13. Date of the Auditor’s Report: The auditor’s report shall be dated no earlier
than the date on which the auditor has obtained sufficient appropriate audit
evidence on which to base the auditor’s opinion on the financial statements,
including evidence that:
The date of the auditor’s report informs the user of the auditor’s report that the
auditor has considered the effect of events and transactions of which the auditor
became aware and that occurred up to that date. The auditor’s responsibility for
events and transactions after the date of the auditor’s report is addressed in
SA 560.
UDIN
It was noticed that financial documents/ certificates attested by third person
misrepresenting themselves as CA Members were misleading the Authorities and
Stakeholders. ICAI also received number of complaints of signatures of CAs being
forged by non CAs. To curb the malpractices, the Professional Development
Committee of ICAI implemented in phased manner an innovative concept of UDIN
i.e. Unique Document Identification Number. All Certificates were made mandatory
with effect from 1st February, 2019 as per the Council decision taken at its 379th
Meeting held on 17th – 18th December, 2018.
(a) A title.
(d) An identification of the entity’s financial statements that have been audited.
(e) A statement that the auditor is independent of the entity in accordance with
the relevant ethical requirements relating to the audit, and has fulfilled
the auditor’s other ethical responsibilities in accordance with these
requirements. The statement shall refer to the Code of Ethics issued by ICAI.
(f) Where applicable, a section that addresses, and is not inconsistent with, the
reporting requirements relating to going concern as per SA 570 (Revised).
(g) Where applicable, a Basis for Qualified (or Adverse) Opinion section that
addresses, and is not inconsistent with, the reporting requirements relating
to going concern as per SA 570 (Revised).
(h) Where applicable, a section that includes the information required by SA 701,
or additional information about the audit that is prescribed by law or
regulation and that addresses, and is not inconsistent with, the reporting
requirements in that SA.
(i) A description of management’s responsibilities for the preparation of the
financial statements and an identification of those responsible for the
oversight of the financial reporting process that addresses, and is not
inconsistent with, the requirements as contained in this SA 700.
(j) A reference to Standards on Auditing and the law or regulation, and a
description of the auditor’s responsibilities for an audit of the financial
statements that addresses, and is not inconsistent with, the requirements as
contained in this SA 700.
(k) The auditor’s signature.
(l) The Place of signature.
(m) The date of the auditor’s report.
ILLUSTRATION 8
Auditor’s Report on Financial Statements of a Listed Entity Prepared in Accordance
with a Fair Presentation Framework
For purposes of this illustrative auditor’s report, the following circumst ances are
assumed:
Audit of a complete set of financial statements of a listed company (registered
under the Companies Act, 2013) using a fair presentation framework. The audit
is not a group audit (i.e., SA 600 does not apply).
Opinion
We have audited the standalone financial statements of ABC Company Limited (“the
Company”), which comprise the balance sheet as at 31st March 20XX, and the
statement of Profit and Loss, (statement of changes in equity)2 and statement of
cash flows for the year then ended, and notes to the financial statements, including
1
The sub-title “Report on the Audit of the Standalone Financial Statements” is unnecessary in
circumstances when the second sub-title “Report on Other Legal and Regulatory Requirements” is not
applicable.
2
Where applicable
3
Where applicable
4 Where applicable
these standalone financial statements that give a true and fair view of the financial
position, financial performance, (changes in equity) 5 and cash flows of the Company
in accordance with6 the accounting principles generally accepted in India, including
the accounting Standards specified under section 133 of the Act. This responsibility
also includes maintenance of adequate accounting records in accordance with the
provisions of the Act for safeguarding of the assets of the Company and for
preventing and detecting frauds and other irregularities; selection and application
of appropriate implementation and maintenance of accounting policies; making
judgements and estimates that are reasonable and prudent; and design,
implementation and maintenance of adequate internal financial controls, that were
operating effectively for ensuring the accuracy and completeness of the accounting
records, relevant to the preparation and presentation of the financial statement
that give a true and fair view and are free from material misstatement, whether due
to fraud or error.
In preparing the financial statements, management is responsible for assessing the
Company’s ability to continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of accounting unless
management either intends to liquidate the Company or to cease operations, or
has no realistic alternative but to do so.
Those Board of Directors are also responsible for overseeing the Company’s
financial reporting process.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud
or error, and to issue an auditor’s report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that an audit conducted
in accordance with SAs will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial statements.
5 Where applicable
6 Where management’s responsibility is to prepare financial statements that give a true and fair view, this
may read: “Management is responsible for the preparation of financial statements that give a true and fair
view in accordance with International Financial Reporting Standards, and for such ...”
Paragraph 40(b) of this SA explains that the shaded material below can be located
in an Appendix to the auditor’s report. Paragraph 40(c) explains that when law,
regulation or applicable auditing standards expressly permit, reference can be made
to a website of an appropriate authority that contains the description of the auditor’s
responsibilities, rather than including this material in the auditor’s report, provided
that the description on the website addresses, and is not inconsistent with, the
description of the auditor’s responsibilities below.
As part of an audit in accordance with SAs, we exercise professional judgement and
maintain professional skepticism throughout the audit. We also:
Other Matter
We did not audit the financial statements/ information of ………………. (number)
branches included in the stand alone financial statements of the Company whose
financial statements/financial information reflect total assets of ` ……........…as at
31st March 20XX and the total revenue of ` ………........… for the year ended on that
date, as considered in the standalone financial statements/information of these
branches have been audited by the branch auditors whose reports have been
furnished to us, and our opinion in so far as it relates to the amounts and
disclosures included in respect of branches, is based solely on the report of such
branch auditors.
Our opinion is not modified in respect of these matters.
7 Where applicable
8 Where applicable
9 Where applicable
(i) With respect to the adequacy of the internal financial controls over financial
reporting of the Company and the operating effectiveness of such controls,
refer to our separate Report in “Annexure A”.
(j) With respect to the other matters to be included in the Auditor’s Report in
accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014,
in our opinion and to the best of our information and according to the
explanations given to us:
(1) The Company has disclosed the impact of pending litigations on its
financial position in its financial statements – Refer Note XX to the
financial statements; [or the Company does not have any pending
litigations which would impact its financial position10]
(2) The Company has made provision, as required under the applicable law
or accounting standards, for material foreseeable losses, if any, on long-
term contracts including derivative contracts – Refer Note XX to the
financial statements; [or the Company did not have any long-term
contracts including derivative contracts for which there were any material
foreseeable losses. 11]
(3) There has been no delay in transferring amounts, required to be
transferred, to the Investor Education and Protection Fund by the
Company {or, following are the instances of delay in transferring
amounts, required to be transferred, to the Investor Education and
Protection Fund by the Company or there were no amounts which were
required to be transferred to the Investor Education and Protection Fund
by the Company12}.
(4) (i) The management has represented that, to the best of its
knowledge and belief, other than as disclosed in the notes to the
accounts, no funds have been advanced or loaned or invested
(either from borrowed funds or share premium or any other
sources or kind of funds) by the company to or in any other
person(s) or entity(ies), including foreign entities
(“Intermediaries”), with the understanding, whether recorded in
writing or otherwise, that the Intermediary shall, whether, directly
or indirectly lend or invest in other persons or entities identified
in any manner whatsoever by or on behalf of the company
10 As may be applicable
11 As may be applicable
12 As may be applicable
This SA also deals with how the form and content of the auditor’s report is affected
when the auditor expresses a modified opinion.
(a) The auditor concludes, based on the audit evidence obtained, that the
financial statements as a whole are not free from material misstatement; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence to
conclude that the financial statements as a whole are free from material
misstatement.
2. An adverse opinion
3. A disclaimer of opinion
Disclaimer of
Qualified Opinion Adverse Opinion
Opinion
Qualified Opinion
The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes
that misstatements, individually or in the aggregate, are material, but not
pervasive, to the financial statements; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence on which
to base the opinion, but the auditor concludes that the possible effects on
the financial statements of undetected misstatements, if any, could be
material but not pervasive.
IILUSTRATION 9
Super Duper Ltd. is a company engaged in the manufacture of office furniture. M/s
Young Old & Associates are the statutory auditors of the company for the FY 2021-
22. During the year under audit, the engagement partner CA Young noticed that the
company has not bifurcated its loans into long term and short term. CA Young
understands that such misstatement is not pervasive though the same is material.
Explain the type of opinion that should be given by M/s Young Old & Associates in
this case.
SOLUTION
M/s Young Old & Associates should give a qualified opinion as the effect of the
misstatement on account of the non-bifurcation of loans into long term and short
term loans, is material but not pervasive.
Adverse Opinion
The auditor shall express an adverse opinion when the auditor, having obtained
sufficient appropriate audit evidence, concludes that misstatements, individually or
in the aggregate, are both material and pervasive to the financial statements.
IILUSTRATION 10
M/s Taj Raj & Associates are the statutory auditors of Polex Ltd. engaged in the
manufacture of premium watches, for the FY 2021-22. During the course of audit, CA
Taj, the engagement partner found that the stocks and debtors of the company
constituting about 80% of the total assets of the company are not realisable. Further,
the cashier of the company has committed a fraud during the year under audit. Both
the facts are not reflected in the financial statements for the year ending 31.03.2022.
Accordingly, CA Taj is of the view that the impact of both the situations on the
financial statements is material and pervasive and thus, the financial statements
represent a distorted view of the state of affairs of the company. Explain the reporting
requirements of CA Taj.
SOLUTION
The auditor shall express an adverse opinion when the auditor, having obtained
sufficient appropriate audit evidence, concludes that misstatements, individually or
in the aggregate, are both material and pervasive to the financial statements.
In the case Polex Ltd., CA Taj found that the stocks and debtors of the company
constituting about 80% of the total assets of the company are not realisable.
Further, the cashier of the company has committed a fraud during the year under
audit. Such situations are not reflected in the financial statements of the company
despite having a material and pervasive impact on the financial statements. As such,
CA Taj should give an adverse opinion.
Further, CA Taj should also consider the reporting responsibilities under CARO 2020
and section 143(12) of the Companies Act, 2013.
Disclaimer of Opinion The auditor shall disclaim an opinion when the auditor is
unable to obtain sufficient appropriate audit evidence on which to base the
opinion, and the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be both material and
pervasive.
The auditor shall disclaim an opinion when, in extremely rare circumstances
involving multiple uncertainties, the auditor concludes that, notwithstanding
having obtained sufficient appropriate audit evidence regarding each of the
individual uncertainties, it is not possible to form an opinion on the financial
statements due to the potential interaction of the uncertainties and their possible
cumulative effect on the financial statements.
ILLUSTRATION 11
Delightful Ltd. is a company engaged in the production of smiley balls. During the FY
2021-22 the company transferred its accounts to computerised system (SAP) from
manual system of accounts. Since the employees of the company were not well versed
with the SAP system, there were many errors in the accounting during the transition
period. As such the statutory auditors of the company were not able to extract correct
data and reports from the system. Such data was not available manually also.
Further, the employees and the management of the company were not supportive in
providing the requisite information to the audit team. Explain the kind of audit report
that the statutory auditor of the company should issue in this case.
SOLUTION
When the statutory auditor of the company is unable to obtain sufficient and
appropriate audit evidence, the auditor should give disclaimer of opinion as per
SA 705.
In the present case, the statutory auditor of the company is unable to extract correct
data and reports from the SAP system for conduct of audit. Also, such data and
reports are not available manually. As such, the statutory auditor of Delightful Ltd.
should give a disclaimer of opinion.
The table below illustrates how the auditor’s judgement about the nature of the
matter giving rise to the modification, and the pervasiveness of its effects or
possible effects on the financial statements, affects the type of opinion to be
expressed.
(a) If the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be material but
not pervasive, the auditor shall qualify the opinion; or
(b) If the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be both material
and pervasive so that a qualification of the opinion would be inadequate
to communicate the gravity of the situation, the auditor shall:
(i) Withdraw from the audit, where practicable and possible under
applicable law or regulation; or
(ii) If withdrawal from the audit before issuing the auditor’s report is
not practicable or possible, disclaim an opinion on the financial
statements.
He was not able to verify revenues of entity due to lack of complete details. For
verifying expenses, he has been asking for bills on a sample basis, but staff has
been making lame excuses. The matter was brought to knowledge of higher
echelons of management, but of no avail. The auditor feels that there could be
misstatements and their possible effects would be material and affecting many
aspects of financial statements.
ILLUSTRATION 12
M/s Daisy & Associates are the statutory auditors of Zebra Ltd. for the FY 2021-22. CA
Daisy, the engagement partner wants to verify the cash in hand as on 31.03.2022. The
cash balance of the company as on 31.03.2022 is ` 1,00,000/- and the turnover of the
company for the year is ` 6 crores. The management of the company informs CA Daisy
that such cash verification is not possible as the cashier is on leave for his marriage and
no other employee of the company is available as all are busy in year ending activities.
Explain the relevant provisions to deal with such a situation.
SOLUTION
If, after accepting the engagement, the auditor becomes aware that management
has imposed a limitation on the scope of the audit that the auditor considers is
likely to result in the need to express a qualified opinion or to disclaim an opinion
on the financial statements, the auditor shall request that management remove the
limitation.
In the present case CA Daisy, the statutory auditor is unable to verify the cash in
hand of Zebra Ltd. as on 31.03.2022. The same is due to a limitation imposed by
the management of Zebra Ltd. which is due to the non availability of the cashier. In
such situation, CA Daisy should perform alternate procedures to verify the cash on
hand of the company. Further, CA Daisy should consider the impact on the auditor’s
report and may consider issuing a qualified opinion in this case.
When the modification arises from an inability to obtain sufficient appropriate audit
evidence, the auditor shall use the corresponding phrase “except for the possible
effects of the matter(s) ...” for the modified opinion.
Adverse Opinion.
When the auditor expresses an adverse opinion, the auditor shall state that, in the
auditor’s opinion, because of the significance of the matter(s) described in the
Basis for Adverse Opinion section,
Disclaimer of Opinion
(a) State that the auditor does not express an opinion on the accompanying
financial statements;
(b) State that, because of the significance of the matter(s) described in the Basis
for Disclaimer of Opinion section, the auditor has not been able to obtain
sufficient appropriate audit evidence to provide a basis for an audit
opinion on the financial statements; and
(c) Amend the statement required by SA 700 (Revised), which indicates that the
financial statements have been audited, to state that the auditor was engaged
to audit the financial statements.
Within this section, include a description of the matter giving rise to the
modification.
When the auditor expresses a qualified or adverse opinion, the auditor shall
amend the statement about whether the audit evidence obtained is sufficient
and appropriate to provide a basis for the auditor’s opinion required by
SA 700 (Revised) to include the word “qualified” or “adverse”, as appropriate.
When the auditor disclaims an opinion on the financial statements, the auditor’s
report shall not include the following elements required by SA 700 (Revised).
(a) A reference to the section of the auditor’s report where the auditor’s
responsibilities are described; and
(b) A statement about whether the audit evidence obtained is sufficient and
appropriate to provide a basis for the auditor’s opinion.
Even if the auditor has expressed an adverse opinion or disclaimed an opinion
on the financial statements, the auditor shall describe in the Basis for Opinion
section the reasons for any other matters of which the auditor is aware that
would have required a modification to the opinion, and the effects thereof.
(b) A statement that, however, because of the matter(s) described in the Basis for
Disclaimer of Opinion section, the auditor was not able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on the
financial statements; and
(c) The statement about auditor independence and other ethical responsibilities
required by SA 700 (Revised).
(b) Draw users’ attention to any matter or matters other than those presented or
disclosed in the financial statements that are relevant to user’s understanding
of the audit, the auditor’s responsibilities or the auditor’s report.
(b) When SA 701 applies, the matter has not been determined to be a key audit
matter to be communicated in the auditor’s report.
6.2.1 Separate section for Emphasis of Matter paragraph
When the auditor includes an Emphasis of Matter paragraph in the auditor’s
report, the auditor shall:
(a) Include the paragraph within a separate section of the auditor’s report with
an appropriate heading that includes the term “Emphasis of Matter”;
(b) Include in the paragraph a clear reference to the matter being emphasized
and to where relevant disclosures that fully describe the matter can be found
in the financial statements. The paragraph shall refer only to information
presented or disclosed in the financial statements; and
(c) Indicate that the auditor’s opinion is not modified in respect of the matter
emphasized.
(b) Disclosures in the financial statements that the applicable financial reporting
framework requires management to make, or that are otherwise necessary to
achieve fair presentation; or
In the present case there is a need to add Emphasis on Matter Paragraph in the
Auditor’s Report. The draft of the same is as under:
We draw attention to Note Y of the financial statements, which describes the effects
of a fire in the Company’s factory. Our opinion is not modified in respect of this
matter.
(b) When SA 701 applies, the matter has not been determined to be a key audit
matter to be communicated in the auditor’s report.
6.4.1 Separate section for Other Matter paragraph
When the auditor includes an Other Matter paragraph in the auditor’s report, the
auditor shall include the paragraph within a separate section with the heading
“Other Matter,” or other appropriate heading.
Key Audit Matters are were of most Key audit matters are
those matters that, in significance in the selected from matters
the auditor’s audit of the financial communicated with
professional statements of the those charged with
judgement current period. governance.
performing the audit. In making this determination, the auditor shall take into
account the following:
The auditor shall determine which of the matters determined, as stated above, were
of most significance in the audit of the financial statements of the current period
and therefore are the key audit matters.
(a) Key audit matters are those matters that, in the auditor’s professional
judgement, were of most significance in the audit of the financial statements
[of the current period]; and
(b) These matters were addressed in the context of the audit of the financial
statements as a whole, and in forming the auditor’s opinion thereon, and the
auditor does not provide a separate opinion on these matters.
(b) If applicable, depending on the facts and circumstances of the entity and the
audit, the auditor’s determination that there are no key audit matters to
communicate in the auditor’s report.
Example:
The following illustrates the presentation in the auditor’s report if the auditor has
determined there are no key audit matters to communicate:
[Except for the matter described in the Basis for Qualified (Adverse) Opinion section
or Material Uncertainty Related to Going Concern section,] We have determined
that there are no [other] key audit matters to communicate in our report.
SA 701 AT A GLANCE
APPLICABILITY OF SA 701 ➢ It is intended to address both the
auditor’s judgment as to what to
communicate in the auditor’s report and
the form and content of such
communication
➢ This SA applies to audits of complete sets
of general purpose financial statements
of :
DETERMINING KEY AUDIT MATTERS: The auditor shall determine, from the
matters communicated with those charged with governance, those matters that
required significant auditor attention in performing the audit. In making this
determination, the auditor shall take into account the following:
(a) For corresponding figures, the auditor’s opinion on the financial statements
refers to the current period only; whereas
(b) For comparative financial statements, the auditor’s opinion refers to each
period for which financial statements are presented.
Objectives
As per SA 710, the objectives of the auditor are:
(a) To obtain sufficient appropriate audit evidence about whether the
comparative information included in the financial statements has been
presented, in all material respects, in accordance with the requirements for
comparative information in the applicable financial reporting framework; and
(b) To report in accordance with the auditor’s reporting responsibilities.
(a) The comparative information agrees with the amounts and other
disclosures presented in the prior period; and
(b) The accounting policies reflected in the comparative information are
consistent with those applied in the current period or, if there have been
changes in accounting policies, whether those changes have been
properly accounted for and adequately presented and disclosed.
If the auditor becomes aware of a possible material misstatement in the
comparative information while performing the current period audit, the
auditor shall perform such additional audit procedures as are necessary in the
circumstances to obtain sufficient appropriate audit evidence to determine
whether a material misstatement exists. If the auditor had audited the prior
period’s financial statements, the auditor shall also follow the relevant
requirements of SA 560.
As required by SA 580, the auditor shall request written representations for
all periods referred to in the auditor’s opinion. The auditor shall also obtain a
specific written representation regarding any prior period item that is
separately disclosed in the current year’s statement of profit and loss.
When corresponding figures are presented, the auditor’s opinion shall not
refer to the corresponding figures except in the following circumstances:
1. If the auditor’s report on the prior period, as previously issued, included
a qualified opinion, a disclaimer of opinion, or an adverse opinion and
the matter which gave rise to the modification is unresolved, the auditor shall
modify the auditor’s opinion on the current period’s financial statements. In
the Basis for Modification paragraph in the auditor’s report, the auditor shall
either:
(a) Refer to both the current period’s figures and the corresponding figures in
the description of the matter giving rise to the modification when the
effects or possible effects of the matter on the current period’s figures are
material; or
(b) In other cases, explain that the audit opinion has been modified because of
the effects or possible effects of the unresolved matter on the comparability
of the current period’s figures and the corresponding figures.
2. If the auditor obtains audit evidence that a material misstatement exists
in the prior period financial statements on which an unmodified opinion
has been previously issued, the auditor shall verify whether the misstatement
has been dealt with as required under the applicable financial reporting
framework and, if that is not the case, the auditor shall express a qualified
opinion or an adverse opinion in the auditor’s report on the current period
financial statements, modified with respect to the corresponding figures
included therein.
3. Prior Period Financial Statements Not Audited- If the prior period financial
statements were not audited, the auditor shall state in an Other Matter
paragraph in the auditor’s report that the corresponding figures are
unaudited. Such a statement does not, however, relieve the auditor of the
requirement to obtain sufficient appropriate audit evidence that the opening
balances do not contain misstatements that materially affect the current
period’s financial statements.
unless the predecessor auditor’s report on the prior period’s financial statements
is revised with the financial statements.
If the auditor concludes that a material misstatement exists that affects the prior
period financial statements on which the predecessor auditor had previously
reported without modification, the auditor shall communicate the misstatement
with the appropriate level of management and those charged with governance and
request that the predecessor auditor be informed. If the prior period financial
statements are amended, and the predecessor auditor agrees to issue a new
auditor’s report on the amended financial statements of the prior period, the
auditor shall report only on the current period.
Prior Period Financial Statements Not Audited
If the prior period financial statements were not audited, the auditor shall state in
an Other Matter paragraph that the comparative financial statements are
unaudited. Such a statement does not, however, relieve the auditor of the
requirement to obtain sufficient appropriate audit evidence that the opening
balances do not contain misstatements that materially affect the current period’s
financial statements.
Students may also note that the company may keep such books of account or other
relevant papers in electronic mode in such manner as may be prescribed.
Sub-section (2) provides that where a company has a branch office in India or
outside India, it shall be deemed to have complied with the provisions of sub-
section (1), if proper books of account relating to the transactions effected at the
branch office are kept at that office and proper summarised returns periodically are
sent by the branch office to the company at its registered office or the other place
referred in (1).
Further, sub-section (8) of section 143 of the Companies Act, 2013, prescribes the
duties and powers of the company’s auditor with reference to the audit of the
branch and the branch auditor. Where a company has a branch office, the accounts
of that office shall be audited either by the auditor appointed for the company
(herein referred to as the company's auditor) under this Act or by any other person
qualified for appointment as an auditor of the company under this Act and
appointed as such under section 139, or where the branch office is situated in a
country outside India, the accounts of the branch office shall be audited either by
the company's auditor or by an accountant or by any other person duly qualified to
act as an auditor of the accounts of the branch office in accordance with the laws of
that country and the duties and powers of the company' s auditor with reference to
the audit of the branch and the branch auditor, if any, shall be such as may be
prescribed:
It may be noted that the branch auditor shall prepare a report on the accounts of
the branch examined by him and send it to the auditor of the company who shall
deal with it in his report in such manner as he considers necessary.
Further as per rule 12 of the Companies (Audit and Auditors) Rules, 2014, the
branch auditor shall submit his report to the company’s auditor and reporting of
fraud by the auditor shall also extend to such branch auditor to the extent it relates
to the concerned branch.
For better understanding, let us now have a look at the following definitions:
• Principal auditor means the auditor with responsibility for reporting on the
financial information of an entity when that financial information includes the
financial information of one or more components audited by another auditor.
• Other auditor means an auditor, other than the principal auditor, with
responsibility for reporting on the financial information of a component
which is included in the financial information audited by the principal auditor.
Using the Work of another Auditor: When the accounts of the branch are audited
by a person other than the company’s auditor (or principal auditor), there is need
for a clear understanding of the role of such other auditor and the company’s
auditor in relation to the audit of the accounts of the branch and the audit of the
company as a whole; also, there is great necessity for a proper rapport between
these two auditors for the purpose of an effective audit. In recognition of these
needs, the Council of the Institute of Chartered Accountants of India has dealt with
these issues in SA 600, “Using the Work of another Auditor”. It makes clear that
in certain situations, the statute governing the entity may confer a right on the
principal auditor to visit a component and examine the books of account and other
records of the said component, if he thinks it necessary to do so. Where another
auditor has been appointed for the component, the principal auditor would
normally be entitled to rely upon the work of such auditor unless there are special
circumstances to make it essential for him to visit the component and/or to
examine the books of account and other records of the said component. Further, it
requires that the principal auditor should perform procedures to obtain sufficient
appropriate audit evidence, that the work of the other auditor is adequate for the
principal auditor's purposes, in the context of the specific assignment. When using
the work of another auditor, the principal auditor should ordinarily perform the
following procedures:
(a) advise the other auditor of the use that is to be made of the other auditor's
work and report and make sufficient arrangements for co-ordination of their
efforts at the planning stage of the audit. The principal auditor would inform
the other auditor of matters such as are as requiring special consideration,
procedures for the identification of inter -component transactions that may
require disclosure and the time-table for completion of audit; and
(b) advise the other auditor of the significant accounting, auditing and reporting
requirements and obtain representation as to compliance with them.
The principal auditor might discuss with the other auditor the audit procedures
applied or review a written summary of the other auditor’s procedures and findings
which may be in the form of a completed questionnaire or check-list. The principal
auditor may also wish to visit the other auditor. The nature, timing and extent of
procedures will depend on the circumstances of the engagement and the principal
auditor's knowledge of the professional competence of the other auditor. This
knowledge may have been enhanced from the review of the previous audit work of
the other auditor.
(ii) Psychological problem where firms of different standing are associated in the
joint audit.
(iii) General superiority complex of some auditors.
(ii) decisions taken by all the joint auditors under audit planning in respect of
common audit areas;
(iii) matters which are brought to the notice of the joint auditors by any one of them
and there is an agreement among the joint auditors on such matters;
(iv) examining that the financial statements of the entity comply with the
requirements of the relevant statutes;
(v) presentation and disclosure of the financial statements as required by the
applicable financial reporting framework;
(vi) ensuring that the audit report complies with the requirements of the relevant
statutes, applicable Standards on Auditing and other relevant
pronouncements issued by ICAI.
In case a joint auditor comes across matters which are relevant to the areas of
responsibility of other joint auditors and which deserve their attention, or which
require disclosure or require discussion with, or application of judgment by other
joint auditors, the said joint auditor shall communicate the same to all the other
joint auditors in writing prior to the completion of the audit.
It may be noted that the joint auditors are required to issue common audit report.
However, where the joint auditors are in disagreement with regard to the opinion or
any matters to be covered by the audit report, they shall express their opinion in a
separate audit report. In such circumstances, the audit report(s) issued by the joint
auditor(s) shall make a reference to each other’s audit report(s).
[Note: Student may refer SA 299 (revised) “Joint Audit of Financial
Statements” reproduced in “Auditing Pronouncements” for comprehensive
knowledge.]
Under section 143(1), auditor shall inquire into following matters given as
under: -
(a) whether loans and advances made by the company on the basis of
security have been properly secured and whether the terms on which
they have been made are prejudicial to the interests of the company or
its members;
(b) whether transactions of the company which are represented merely by
book entries are prejudicial to the interests of the company;
(c) where the company not being an investment company or a banking
company, whether so much of the assets of the company as consist of
shares, debentures and other securities have been sold at a price less
than that at which they were purchased by the company;
(d) whether loans and advances made by the company have been shown
as deposits;
(e) whether personal expenses have been charged to revenue account;
(f) where it is stated in the books and documents of the company that any
shares have been allotted for cash, whether cash has actually been
received in respect of such allotment, and if no cash has actually been
so received, whether the position as stated in the account books and
the balance sheet is correct, regular and not misleading.
However, the auditor is not required to report on the matters specified in
sub-section (1) unless he has any special comments to make on any of the
items referred to therein. If he is satisfied as a result of the inquiries, he has
no further duty to report that he is so satisfied. Therefore, it could be said
that the auditor should make a report to the members in case he finds answer
to any of these matters in adverse.
(2) Reporting on accounts examined
Under provisions of Section 143(2), the auditor shall make a report to the
members of the company on the accounts examined by him and on every
financial statements which are required by or under this Act to be laid before
the company in general meeting and the report shall after taking into account
the provisions of this Act, the accounting and auditing standards and matters
which are required to be included in the audit report under the provisions of
this Act or any rules made thereunder or under any order made under sub-
section (11).
Further, auditor has to report whether to best of his information and
knowledge, the said accounts, financial statements give a true and fair view
of the state of the company’s affairs as at the end of its financial year
and profit or loss and cash flow for the year and such other matters as
prescribed under Rule 11 of the Companies (Audit and Auditors) Rules,
2014.
Further, in terms of section 143(3), the auditor’s report shall also state
(a) whether he has sought and obtained all the information and
explanations which to the best of his knowledge and belief were
necessary for the purpose of his audit and if not, the details thereof and
the effect of such information on the financial statements;
(b) whether, in his opinion, proper books of account as required by law
have been kept by the company so far as appears from his examination
of those books and proper returns adequate for the purposes of his
audit have been received from branches not visited by him;
(c) whether the report on the accounts of any branch office of the company
audited under sub-section (8) by a person other than the company’s
auditors has been sent to him under the proviso to that sub-section and
the manner in which he has dealt with it in preparing his report;
(d) whether the company’s balance sheet and profit and loss account dealt
with in the report are in agreement with the books of account and
returns;
(e) whether, in his opinion, the financial statements comply with the
accounting standards;
(f) the observations or comments of the auditors on financial transactions or
matters which have any adverse effect on the functioning of the company;
(g) whether any director is disqualified from being appointed as a director
under sub- section (2) of the section 164;
(h) any qualification, reservation or adverse remark relating to the maintenance
of accounts and other matters connected therewith;
(i) whether the company has adequate internal financial controls with
reference to financial statements in place and the operating effectiveness
of such controls;
However, it may be noted that the reporting requirement on adequacy
of internal financial controls (IFCs) with reference to financial
statements shall not be applicable to a private company which is a–
(i) One person company; or
(a) whether the company has disclosed the impact, if any, of pending
litigations on its financial position in its financial statement;
(b) whether the company has made provision, as required under any
law or accounting standards, for material foreseeable losses, if
any, on long term contracts including derivative contracts;
(c) whether there has been any delay in transferring amounts,
required to be transferred, to the Investor Education and
Protection Fund by the company.
[(d) (i) Whether the management has represented that, to the best
of it’s knowledge and belief, other than as disclosed in the
notes to the accounts, no funds have been advanced or
loaned or invested (either from borrowed funds or share
premium or any other sources or kind of funds) by the
company to or in any other person(s) or entity(ies), including
foreign entities (“Intermediaries”), with the understanding,
whether recorded in writing or otherwise, that the
Intermediary shall, whether, directly or indirectly lend or
invest in other persons or entities identified in any manner
whatsoever by or on behalf of the company (“Ultimate
Beneficiaries”) or provide any guarantee, security or the like
on behalf of the Ultimate Beneficiaries;
(ii) Whether the management has represented, that, to the best
of it’s knowledge and belief, other than as disclosed in the
notes to the accounts, no funds have been received by the
company from any person(s) or entity(ies), including foreign
entities (“Funding Parties”) with the understanding, whether
recorded in writing or otherwise, that the company shall,
whether, directly or indirectly, lend or invest in other
persons or entities identified in any manner whatsoever by
or on behalf of the Funding Party (“Ultimate Beneficiaries”)
or provide any guarantee, security or the like on behalf of
the Ultimate Beneficiaries; and
While reporting, where any of the matters required to be included in the audit
report is answered in the negative or with a qualification, the report shall state
the reasons therefor in terms of Section 143(4). Further, every auditor shall
comply with the auditing standards as required under section 143(9).
(3) Reporting on any other matter specified by Central Government: As per
section 143(11), the Central Government may, in consultation with the National
Financial Reporting Authority, by general or special order, direct, in respect of such
class or description of companies, as may be specified in the order, that the
auditor’s report shall also include a statement on such matters as may be specified
therein.
Commencement: It shall come into force on the date of its publication in the
Official Gazette.
Banking
Company
Insurance Company
Private limited company subject
to fulfilment of specified
conditions
Exempted
Class of
Company licensed to operate
under section 8 of the
Comapnies Act
Small Company
One Person
Company
Example
*also
indicate if in
dispute
(d) whether the company has revalued its Property, Plant and Equipment
(including Right of Use assets) or intangible assets or both during the
year and, if so, whether the revaluation is based on the valuation by a
Registered Valuer; specify the amount of change, if change is 10% or
more in the aggregate of the net carrying value of each class of
Property, Plant and Equipment or intangible assets;
(e) whether any proceedings have been initiated or are pending against
the company for holding any benami property under the Benami
Transactions (Prohibition) Act, 1988 (45 of 1988) and rules made
thereunder, if so, whether the company has appropriately disclosed the
details in its financial statements;
(ii) (a) whether physical verification of inventory has been conducted at
reasonable intervals by the management and whether, in the opinion of
the auditor, the coverage and procedure of such verification by the
management is appropriate; whether any discrepancies of 10% or more
in the aggregate for each class of inventory were noticed and if so,
whether they have been properly dealt with in the books of account;
(b) whether during any point of time of the year, the company has been
sanctioned working capital limits in excess of five crore rupees, in
aggregate, from banks or financial institutions on the basis of security
of current assets; whether the quarterly returns or statements filed by
the company with such banks or financial institutions are in agreement
with the books of account of the Company, if not, give details;
(iii) whether during the year the company has made investments in, provided any
guarantee or security or granted any loans or advances in the nature of loans,
(c) in respect of loans and advances in the nature of loans, whether the
schedule of repayment of principal and payment of interest has been
stipulated and whether the repayments or receipts are regular;
(d) if the amount is overdue, state the total amount overdue for more
than ninety days, and whether reasonable steps have been taken by
the company for recovery of the principal and interest;
(e) whether any loan or advance in the nature of loan granted which has
fallen due during the year, has been renewed or extended or fresh
loans granted to settle the overdues of existing loans given to the
same parties, if so, specify the aggregate amount of such dues
renewed or extended or settled by fresh loans and the percentage of
the aggregate to the total loans or advances in the nature of loans
granted during the year [not applicable to companies whose principal
business is to give loans];
(f) whether the company has granted any loans or advances in the nature
of loans either repayable on demand or without specifying any terms
(vi) whether maintenance of cost records has been specified by the Central
Government under sub-section (1) of section 148 of the Companies Act and
whether such accounts and records have been so made and maintained;
(b) where statutory dues referred to in sub-clause (a) have not been
deposited on account of any dispute, then the amounts involved and
the forum where dispute is pending shall be mentioned (a mere
representation to the concerned Department shall not be treated as a
dispute);
(viii) whether any transactions not recorded in the books of account have been
surrendered or disclosed as income during the year in the tax assessments
under the Income Tax Act, 1961 (43 of 1961), if so, whether the previously
unrecorded income has been properly recorded in the books of account
during the year;
(ix) (a) whether the company has defaulted in repayment of loans or other
borrowings or in the payment of interest thereon to any lender, if yes,
the period and the amount of default to be reported as per the format
below:-
(f) whether the company has raised loans during the year on the pledge of
securities held in its subsidiaries, joint ventures or associate companies,
if so, give details thereof and also report if the company has defaulted
in repayment of such loans raised;
(x) (a) whether moneys raised by way of initial public offer or further public
offer (including debt instruments) during the year were applied for the
purposes for which those are raised, if not, the details together with
delays or default and subsequent rectification, if any, as may be
applicable, be reported;
(b) whether the company has made any preferential allotment or private
placement of shares or convertible debentures (fully, partially or
optionally convertible) during the year and if so, whether the
requirements of section 42 and section 62 of the Companies Act, 2013
have been complied with and the funds raised have been used for the
purposes for which the funds were raised, if not, provide details in
respect of amount involved and nature of noncompliance;
(xi) (a) whether any fraud by the company or any fraud on the company has
been noticed or reported during the year, if yes, the nature and the
amount involved is to be indicated;
(b) whether any report under sub-section (12) of section 143 of the
Companies Act has been filed by the auditors in Form ADT-4 as
prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014
with the Central Government;
(c) whether the auditor has considered whistle-blower complaints, if any,
received during the year by the company;
(xii) (a) whether the Nidhi Company has complied with the Net Owned Funds
to Deposits in the ratio of 1:20 to meet out the liability;
(b) whether the Nidhi Company is maintaining ten per cent. unencumbered
term deposits as specified in the Nidhi Rules, 2014 to meet out the
liability;
(c) whether there has been any default in payment of interest on deposits
or repayment thereof for any period and if so, the details thereof;
(xiii) whether all transactions with the related parties are in compliance with
sections 177 and 188 of Companies Act where applicable and the details have
(xv) whether the company has entered into any non-cash transactions with
directors or persons connected with him and if so, whether the provisions of
section 192 of Companies Act have been complied with;
(xvi) (a) whether the company is required to be registered under section 45-IA
of the Reserve Bank of India Act, 1934 (2 of 1934) and if so, whether the
registration has been obtained;
(b) whether the company has conducted any Non-Banking Financial or
Housing Finance activities without a valid Certificate of Registration
(CoR) from the Reserve Bank of India as per the Reserve Bank of India
Act, 1934;
(c) whether the company is a Core Investment Company (CIC) as defined in
the regulations made by the Reserve Bank of India, if so, whether it
continues to fulfil the criteria of a CIC, and in case the company is an
exempted or unregistered CIC, whether it continues to fulfil such criteria;
(d) whether the Group has more than one CIC as part of the Group, if yes,
indicate the number of CICs which are part of the Group;
(xvii) whether the company has incurred cash losses in the financial year and in the
immediately preceding financial year, if so, state the amount of cash losses;
(xviii) whether there has been any resignation of the statutory auditors during the
year, if so, whether the auditor has taken into consideration the issues,
objections or concerns raised by the outgoing auditors;
(xix) on the basis of the financial ratios, ageing and expected dates of realisation
of financial assets and payment of financial liabilities, other information
accompanying the financial statements, the auditor’s knowledge of the Board
of Directors and management plans, whether the auditor is of the opinion
that no material uncertainty exists as on the date of the audit report that
(xx) (a) whether, in respect of other than ongoing projects, the company has
transferred unspent amount to a Fund specified in Schedule VII to the
Companies Act within a period of six months of the expiry of the
financial year in compliance with second proviso to sub-section (5) of
section 135 of the said Act;
(b) whether any amount remaining unspent under subsection (5) of section
135 of the Companies Act, pursuant to any ongoing project, has been
transferred to special account in compliance with the provision of sub-
section (6) of section 135 of the said Act;
(xxi) whether there have been any qualifications or adverse remarks by the
respective auditors in the Companies (Auditor's Report) Order (CARO) reports
of the companies included in the consolidated financial statements, if yes,
indicate the details of the companies and the paragraph numbers of the
CARO report containing the qualifications or adverse remarks.
Paragraph 4. Reasons to be stated for unfavourable or qualified answers. –
(1) Where, in the auditor's report, the answer to any of the questions referred to
in paragraph 3 is unfavourable or qualified, the auditor's report shall also
state the basis for such unfavourable or qualified answer, as the case may be.
(2) Where the auditor is unable to express any opinion on any specified matter,
his report shall indicate such fact together with the reasons as to why it is not
possible for him to give his opinion on the same.
Example
The company has dispensed with the practice of taking inventory of their inventories
at the year-end as in their opinion the exercise is redundant, time consuming and
intrusion to normal functioning of the operations. Explain reporting requirement
under CARO, 2020.
Reporting for Physical Verification of Inventory:
Clause (ii) of Para 3 of CARO, 2020, requires the auditor to report (a) whether
physical verification of inventory has been conducted at reasonable intervals by the
management and whether, in the opinion of the auditor, the coverage and procedure
of such verification by the management is appropriate; whether any discrepancies of
10% or more in the aggregate for each class of inventory were noticed and if so,
whether they have been properly dealt with in the books of account;
(b) whether during any point of time of the year, the company has been sanctioned
working capital limits in excess of five crore rupees, in aggregate, from banks or
financial institutions on the basis of security of current assets; whether the quarterly
returns or statements filed by the company with such banks or financial institutions
are in agreement with the books of account of the Company, if not, give details;
In the given case, the above requirement of physical verification of inventory by the
management has not been taken place and therefore the auditor should point out
the same under CARO, 2020. He may consider the impact on financial statement and
report accordingly.
CASE STUDY
M/s AB & Company is a firm of Chartered Accountants based in Mumbai. Mr. A and
Mr. B are the Partners of the Firm. The Firm is engaged in various assignments
including Audits. The partners are taking a summary of their work in order to
prepare themselves to finalize the Audit and issue the audit report to various
clients. You are requested to go through the following and answer the questions
that follow:
During the audit of M/s Persistent & Co, Mr. A found that the firm has
changed the method of Depreciation from WDV to SLM but has not given the
retrospective effect. Mr. A has calculated the difference of depreciation but
M/s Persistent & Co. has stated that they don’t want to change the financial
statements and if auditor persists they may give the effect in the next financial
year.
During the audit of M/s Dubious Brothers, Mr B observed that the firm had a
very large amount of cash sales and there were no details of the customers
to whom the sales were made. Further, cash generated was not even
deposited into bank regularly. When Mr. B asked the firm to give him an
opportunity to count cash, the manager of the firm said that the cash is with
the owner and it cannot be made available to the auditor for the checking
purpose. The manager also declined to give an opportunity for stock
verification to Mr B.
During the audit of M/s Honest & Associates, Mr. A came to know that the
firm has changed its method of valuation of stock. This change has a material
impact on the financial statement of the firm. The firm has made relevant
disclosures in the financial statements and has given proper accounting
treatment to this exercise.
SUMMARY
Management is responsible for the preparation of the financial statements. The
purpose of an audit is to enhance the degree of confidence of intended users
of the financial statements. The aforesaid purpose is achieved by the
expression of an independent reporting by the auditor.
The objectives of the auditor as per SA 700 (Revised), “Forming An Opinion
And Reporting On Financial Statements” are to form an opinion on the
financial statements based on an evaluation of the conclusions drawn from
the audit evidence obtained; and to express clearly that opinion through a
written report.
The auditor shall modify the opinion in the auditor’s report when the auditor
concludes that, based on the audit evidence obtained, the financial statements
as a whole are not free from material misstatement; or the auditor is unable to
obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement.
There are three types of modified opinions, namely-a qualified opinion, an
adverse opinion, and a disclaimer of opinion.
As per SA 706 (Revised) on “Emphasis of Matter Paragraphs and Other Matter
Paragraphs In The Independent Auditor’s Report”, the objective of the
auditor is to draw users’ attention by way of clear additional communication
in the auditor’s report, to a matter, although appropriately presented or
disclosed in the financial statements, that is of such importance that it is
fundamental to users’ understanding of the financial statements; or as
appropriate, any other matter that is relevant to users’ understanding of the
audit, the auditor’s responsibilities or the auditor’s report.
As per SA 701, “Communicating Key Audit Matters in The Independent Auditor’s
Report”, the objectives of the auditor are to determine key audit matters and,
having formed an opinion on the financial statements, communicate those
matters by describing them in the auditor’s report.
As per SA 710, there are two different broad approaches to the auditor’s
reporting responsibilities in respect of comparative information:
corresponding figures and comparative financial statements. The approach to
be adopted is often specified by law or regulation but may also be specified in
the terms of engagement.
As per SA 600, when the principal auditor uses the work of another auditor,
the principal auditor should determine how the work of the other auditor will
affect the audit.
SA 299 “Joint Audit of Financial Statements” deals with the professional
responsibilities which the auditors undertake in accepting appointments as
joint auditors.
CARO 2020, - Every report made by the auditor under section 143 of the
Companies Act on the accounts of every company audited by him, to which
CARO, 2020 applies, for the financial years commencing on or after the
1 st April, 2019, shall in addition, contain the matters specified in paragraphs
3 and 4, as may be applicable.
(b) SA 229
(c) SA 299
(d) SA 230
Correct/Incorrect
State with reasons (in short) whether the following statement is
correct or incorrect:
(i) The auditor shall express a qualified opinion when the auditor concludes that
the financial statements are prepared, in all material respects, in accordance
with the applicable financial reporting framework.
(ii) There is no need of addressee in the Auditor’s report.
(iii) The auditor shall modify the opinion in the auditor’s report only when the
auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement.
(iv) The auditor shall express a disclaimer of opinion when the auditor, having
obtained sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are both material and pervasive to the
financial statements.
(v) Communicating key audit matter in the auditor’s report constitutes a substitute
for disclosure in the financial statements.
(vi) When the auditor has to express an adverse opinion, he need not communicate
with those charged with governance as this may have an impact on payment
of his audit fees.
Theoretical Questions
1. “The auditor shall form an opinion on whether the financial statements are
prepared, in all material respects, in accordance with the applicable financial
reporting framework.” Explain
2. “The auditor shall evaluate whether the financial statements are prepared, in
all material respects, in accordance with the requirements of the applicable
financial reporting framework. This evaluation shall include consideration of
the qualitative aspects of the entity’s accounting practices, including indicators
of possible bias in management’s judgements.” Discuss stating clearly
qualitative aspects of the entity’s accounting practices
3. Discuss the factors affecting the decision of the auditor regarding which type
of modified opinion is appropriate.
4. Discuss the objective of the auditor as per Standard on Auditing (SA) 705
“Modifications to The Opinion in The Independent Auditor’s Report”.
5. In considering the qualitative aspects of the entity’s accounting practices, the
auditor may become aware of possible bias in management’s judgements. The
auditor may conclude that lack of neutrality together with uncorrected
misstatements causes the financial statements to be materially misstated.
Explain and analyse the indicators of lack of neutrality with examples, wherever
required.
6. The first section of the auditor’s report shall include the auditor’s opinion, and
shall have the heading “Opinion.” The Opinion section of the auditor’s report
shall also identify the entity whose financial statements have been audited. Apart
from the above, explain the other relevant points to be included in opinion
section.
7. Define Emphasis of Matter Paragraph and how it should be disclosed in the
Independent Auditor's Report?
17. Discuss which class of companies are specifically exempt from the applicability
of CARO 2020?
ANSWERS/SOLUTIONS
Answers to the MCQs based Questions
1. (c) 2. (a) 3. (d) 4. (c) 5. (c)
Answers to Correct/Incorrect
(i) Incorrect: The auditor shall express an unmodified opinion when the auditor
concludes that the financial statements are prepared, in all material respects,
in accordance with the applicable financial reporting framework.
(ii) Incorrect: The auditor’s report shall be addressed, as appropriate, based on
the circumstances of the engagement. Law, regulation or the terms of the
engagement may specify to whom the auditor’s report is to be addressed.
The auditor’s report is normally addressed to those for whom the report is
prepared, often either to the shareholders or to those charged with
governance of the entity whose financial statements are being audited.
(iii) Incorrect: The auditor shall modify the opinion in the auditor’s report when:
(a) The auditor concludes that, based on the audit evidence obtained, the
financial statements as a whole are not free from material
misstatement; or
(vi) Incorrect: When the auditor expects to modify the opinion in the auditor’s
report, the auditor shall communicate with those charged with governance
the circumstances that led to the expected modification and the wording of
the modification.
(vii) Incorrect: Communicating key audit matters in the auditor’s report is not a
substitute for the auditor expressing a modified opinion when required by
the circumstances of a specific audit engagement in accordance with SA 705
(Revised).
(viii) Correct: Under provisions of section 139(3), the members of a company may
resolve to provide that audit shall be conducted by more than one auditor.
Hence, the concept of “joint audit” has legal foothold also under Companies
Act, 2013.
(e) Specify the date of, or period covered by, each financial statement
comprising the financial statements.
7. Emphasis of Matter paragraph: A paragraph included in the auditor’s report
that refers to a matter appropriately presented or disclosed in the financial
statements that, in the auditor’s judgement, is of such importance that it is
fundamental to users’ understanding of the financial statements.
When the auditor includes an Emphasis of Matter paragraph in the
auditor’s report, the auditor shall:
(i) Include the paragraph within a separate section of the auditor’s report
with an appropriate heading that includes the term “Emphasis of
Matter”;
(ii) Include in the paragraph a clear reference to the matter being
emphasized and to where relevant disclosures that fully describe the
matter can be found in the financial statements. The paragraph shall
refer only to information presented or disclosed in the financial
statements; and
(iii) Indicate that the auditor’s opinion is not modified in respect of the
matter emphasized.
(b) Refers to the section of the auditor’s report that describes the auditor’s
responsibilities under the SAs;
It may be noted that the branch auditor shall prepare a report on the accounts
of the branch examined by him and send it to the auditor of the company
who shall deal with it in his report in such manner as he considers necessary.
Further as per rule 12 of the Companies (Audit and Auditors) Rules, 2014, the
branch auditor shall submit his report to the company’s auditor and reporting
of fraud by the auditor shall also extend to such branch auditor to the extent
it relates to the concerned branch.
14. Before the commencement of the audit, the joint auditors should discuss
and develop a joint audit plan. In developing the joint audit plan, the joint
auditors should:
(a) identify division of audit areas and common audit areas;
(b) ascertain the reporting objectives of the engagement;
(c) consider and communicate among all joint auditors the factors that are
significant in directing the engagement team’s efforts;
(d) consider the results of preliminary engagement activities, or similar
engagements performed earlier.
(e) ascertain the nature, timing and extent of resources necessary to
accomplish the engagement.
15. Joint Audit: The practice of appointing Chartered Accountants as joint
auditors is quite widespread in big companies and corporations. Joint audit
basically implies pooling together the resources and expertise of more than
one firm of auditors to render an expert job in a given time period which may
be difficult to accomplish acting individually. It essentially involves sharing of
the total work. This is by itself a great advantage.
In specific terms the advantages that flow may be the following:
(i) Sharing of expertise.
(ii) Advantage of mutual consultation.
(iii) Lower workload.
(iv) Better quality of performance.
(v) Improved service to the client.
16. The following are the disclosure requirements as per CARO 2020, with respect
to the moneys raised by the company by way of initial public offer or further
public offer and where the company has made any preferential allotment or
private placement of shares.
(a) whether moneys raised by way of initial public offer or further public
offer (including debt instruments) during the year were applied for the
purposes for which those are raised, if not, the details together with
delays or default and subsequent rectification, if any, as may be
applicable, be reported;
(b) whether the company has made any preferential allotment or private
placement of shares or convertible debentures (fully, partially or
optionally convertible) during the year and if so, whether the
requirements of section 42 and section 62 of the Companies Act, 2013
have been complied with and the funds raised have been used for the
purposes for which the funds were raised, if not, provide details in
respect of amount involved and nature of noncompliance;
17. CARO 2020 shall apply to every company including a foreign company as
defined in clause (42) of section 2 of the Companies Act, 2013, except–