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CHAPTER a
AUDIT REPORT
LEARNING OUTCOMES
After studying this chapter, you would be able to understand:

 The objectives of the auditor as per SA 700 (Revised), “Forming an Opinion
and Reporting on Financial Statements.” Also, whether the auditor has
obtained reasonable assurance. Understand the evaluation by the auditor
and Qualitative Aspects of the Entity’s Accounting Practices. Elements of
Auditor’s report.
 The basics of Standard on Auditing (SA) 705 “Modifications to the
Opinion in the Independent Auditor’s Report”.
 The basics of SA 701- “Communicating Key Audit Matters in the
Independent Auditor’s Report”.
 The Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor’s Report as per SA 706.
 SA 710 - “Comparative Information- Corresponding figures and
Comparative financial statements”.
 The basics of SA 600 – “Using the work of Another Auditor”.
 SA 299 – “Joint Audit of Financial Statements”.
 Reporting requirements under the Companies Act, 2013
 Companies (Auditor’s Report) Order, 2020.
 Practicality of above concepts by studying through examples and case
studies.
© The Institute of Chartered Accountants of India

a 8.2 AUDITING AND ETHICS
CHAPTER OVERVIEW
Audit process culminates in formation of opinion by an auditor and expression of

the same by means of audit report. Audit report, therefore, is the final outcome of
an audit exercise. It is the document on which reliance is placed by users of
financial statements as it contains auditor’s opinion. Audit evidence obtained by
performing various audit procedures, ultimately, leads to crystallization of opinion
by auditor contained in audit report.
Understanding enormous significance of audit report, Sameer was unequivocal in

his mind regarding some kind of consistency and comparability in reporting. It
logically led him to next question- What are basic elements of an audit report? How
does it look like? Is it necessary for an auditor to prepare audit report using these
elements?
A counter question struck his mind in no time. If there is consistency and
comparability in reporting, how does an auditor report in specific situations?

AUDIT REPORT 8.3
Shouldn’t there be flexibility in reporting in particular situations? How do auditors

do that? If an auditor wants to highlight some matters which are necessary to
understanding of users of financial statements, how the same can be ensured?
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.
1. FORMING AN OPINION AND REPORTING ON

FINANCIAL STATEMENTS
SA 700 (Revised)- “Forming an Opinion and Reporting on Financial Statements”,
deals with the auditor’s responsibility to form an opinion on the financial
statements. It also deals with the form and content of the auditor’s report issued
as a result of an audit of financial statements.
The requirements of this SA are aimed at addressing an appropriate balance

between the need for consistency and comparability in auditor reporting globally
and the need to increase the value of auditor reporting by making the information
provided in the auditor’s report more relevant to users. This SA promotes
consistency in the auditor’s report, but recognizes the need for flexibility to
accommodate particular circumstances of individual jurisdictions. Consistency in
the auditor’s report, when the audit has been conducted in accordance with SAs,
promotes credibility in the global marketplace by making more readily identifiable
those audits that have been conducted in accordance with globally recognized
standards. It also helps to promote the user’s understanding and to identify unusual
circumstances when they occur.
1.1 Objective of the Auditor

The objectives of the auditor as per SA 700 (Revised) 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.

AUDIT REPORT 8.5
1.2 To Form Opinion – Auditor to Obtain Reasonable

Assurance
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.
In order to form that opinion, the auditor shall conclude as to whether the auditor has
obtained reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error.
That conclusion shall take into account:
(a) Whether sufficient appropriate audit evidence has been obtained;
(b) Whether uncorrected misstatements are material, individually or in
aggregate;
(c) The evaluations.
1.3 Evaluations by the Auditor

The auditor shall evaluate whether the financial statements are prepared 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.
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:

(i) The selective correction of misstatements brought to management’s

attention during the audit.
Example
 Correcting misstatements with the effect of increasing reported

earnings, but not correcting misstatements that have the effect of
decreasing reported earnings.
(ii) Possible management bias in the making of accounting estimates.

4. SA 540 addresses possible management bias in making accounting estimates.
Indicators of possible management bias do not constitute misstatements for
purposes of drawing conclusions on the reasonableness of individual
accounting estimates. They may, however, affect the auditor’s evaluation of
whether the financial statements as a whole are free from material
misstatement.
1.4 Specific Evaluations by the Auditor

In particular, the auditor shall evaluate whether:
(a) The financial statements adequately disclose the significant accounting
policies selected and applied;
(b) The accounting policies selected and applied are consistent with the
applicable financial reporting framework and are appropriate;
(c) The accounting estimates made by management are reasonable;
(d) The information presented in the financial statements is relevant, reliable,
comparable, and understandable;
(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.

AUDIT REPORT 8.7
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
Checkbox Specific evaluations by the auditor

✓ Selected and applied significant accounting policies are adequately
disclosed.
✓ Accounting policies are consistent with applicable financial reporting
framework.
✓ Accounting estimates by management are reasonable.
✓ Information in financial statement is relevant, reliable, comparable
and understandable.
✓ Disclosures in financial statements are adequate to enable the
intended users to understand the effect of material transactions and
events on the information conveyed in the financial statements.
✓ Terminology used in financial statements is appropriate.
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.

(b) General purpose framework – A financial reporting framework designed to

meet the common financial information needs of a wide range of users. The
financial reporting framework may be a fair presentation framework or a
compliance framework.
The term “fair presentation framework” is used to refer to a financial

reporting framework that requires compliance with the requirements of the
framework and:
(i) Acknowledges explicitly or implicitly that, to achieve fair presentation

of the financial statements, it may be necessary for management to
provide disclosures beyond those specifically required by the
framework; or
(ii) Acknowledges explicitly that it may be necessary for management to

depart from a requirement of the framework to achieve fair
presentation of the financial statements. Such departures are expected
to be necessary only in extremely rare circumstances.
The term “compliance framework” is used to refer to a financial reporting

framework that requires compliance with the requirements of the framework,
but does not contain the acknowledgements in (i) or (ii) above.
(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
Unmodified Opinion: 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.

AUDIT REPORT 8.9
Modified Opinion: If the auditor:
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.
3.1 Auditor’s Report for Audits Conducted in Accordance

with Standards on Auditing
•Title
•Addressee
•Auditor's Opinion
•Basis for Opinion
•Going Concern
•Key Audit Matters
•Responsibilities for the Financial Statements
•Auditor's Responsibilities for the Audit of the Financial Statements
•Location of the description of the auditor's responsibilities
•Other Reporting Responsibilities
•Signature of the Auditor
•Place of Signature
•Date of the Auditor's Report

Basic Elements of an Audit Report are given below:

1. Title: The auditor’s report shall have a title that clearly indicates that it is the
report of an independent auditor.
For example, “Independent Auditor’s Report,” distinguishes the independent

auditor’s report from reports issued by others.
2. Addressee: 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. In case of a company, the
report is addressed to the shareholders of the company.
ILLUSTRATION 1
M/s Smart & Associates are the statutory auditors of Hotmeals Ltd. for the FY 2021-
22. How will the auditor address the audit report issued on the financial statements
for the FY 2021-22? Also give a title to the report.
SOLUTION
INDEPENDENT AUDITOR’S REPORT
To the Members of Hotmeals Ltd.
ILLUSTRATION 2
Richa International is a partnership firm dealing in export of blankets. The partners
of the firm are Richa and Ashish. Explain how the statutory auditor of the firm will
address the auditor’s report.
SOLUTION
To the Partners of Richa International
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:

AUDIT REPORT 8.11
Identify the entity whose financial statements

have been audited;
State that the financial statements have been

audited;
Identify the title of each statement comprising

the financial statements;
Refer to the notes, including the summary of

significant accounting policies; and
Specify the date of, or period covered by, each

financial statement comprising the financial
statements.
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
When the auditor expresses an unmodified opinion, it is not appropriate to use

phrases such as “with the foregoing explanation” or “subject to” in relation to the
opinion, as these suggest a conditional opinion or a weakening or modification of
opinion.

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.

AUDIT REPORT 8.13
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.
5. Going Concern: Where applicable, the auditor shall report in accordance

with SA 570 (Revised).
 Under the going concern basis of accounting, the financial statements are
prepared on the assumption that the entity is a going concern and will
continue its operations for the foreseeable future. General purpose financial
statements are prepared using the going concern basis of accounting, unless
management either intends to liquidate the entity or to cease operations, or
has no realistic alternative but to do so.
 When the use of the going concern basis of accounting is appropriate, assets
and liabilities are recorded on the basis that the entity will be able to realize
its assets and discharge its liabilities in the normal course of business.
 The auditor shall evaluate whether sufficient appropriate audit evidence has
been obtained regarding, and shall conclude on, the appropriateness of

management’s use of the going concern basis of accounting in the

preparation of the financial statements.
 Based on the audit evidence obtained, the auditor shall conclude whether, in
the auditor’s judgement, a material uncertainty exists related to events or
conditions that, individually or collectively, may cast significant doubt on the
entity’s ability to continue as a going concern.
 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
Entities characterized in such law or regulation as public interest entities.
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.

AUDIT REPORT 8.15
7. Responsibilities for the Financial Statements: The auditor’s report shall

include a section with a heading “Responsibilities of Management for the Financial
Statements.”
This section of the auditor’s report shall describe management’s responsibility for:
• Preparing the financial statements in accordance with the applicable
financial reporting framework, and for such internal control as
management determines is necessary to enable the preparation of
(a) financial statements that are free from material misstatement, whether
due to fraud or error.
• Assessing the entity’s ability to continue as a going concern and whether

the use of the going concern basis of accounting is appropriate as well as
(b) disclosing, if applicable, matters relating to going concern.
(a) Preparing the financial statements in accordance with the applicable

financial reporting framework, and for such internal control as management
determines is necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error;[because
of the possible effects of fraud on other aspects of the audit, materiality does
not apply to management’s acknowledgement regarding its responsibility for
the design, implementation, and maintenance of internal control (or for
establishing and maintaining effective internal control over financial
reporting) to prevent and detect fraud.] and
(b) Assessing the entity’s ability to continue as a going concern and whether
the use of the going concern basis of accounting is appropriate as well as
disclosing, if applicable, matters relating to going concern. The explanation of
management’s responsibility for this assessment shall include a description
of when the use of the going concern basis of accounting is appropriate.
SA 200 explains the premise, relating to the responsibilities of management and,
where appropriate, those charged with governance, on which an audit in
accordance with SAs is conducted. Management and, where appropriate, those
charged with governance accept responsibility for the preparation of the financial
statements. Management also accepts responsibility for such internal control as it
determines is necessary to enable the preparation of financial statements that are
free from material misstatement, whether due to fraud or error. The description of

management’s responsibilities in the auditor’s report includes reference to both

responsibilities as it helps to explain to users the premise on which an audit is
conducted.
SA 210 requires the auditor to agree management’s responsibilities in an

engagement letter or other suitable form of written agreement.
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

AUDIT REPORT 8.17
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.
8. Auditor’s Responsibilities for the Audit of the Financial Statements: The
auditor’s report shall include a section with the heading “Auditor’s
Responsibilities for the Audit of the Financial Statements.”
I. This section of the auditor’s report shall state:
Objectives of the auditor
That reasonable level of assurance is

Auditors responsibility section
high level of assurance and not
to state
gaurantee
That misstatements can arise from

fraud and error
(a) That the objectives of the auditor are to:

(i) Obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement,
whether due to fraud or error; and
(ii) Issue an auditor’s report that includes the auditor’s opinion.
(b) That 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; and
(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

(ii) Provide a definition or description of materiality in accordance with

the applicable financial reporting framework.
II. The Auditor’s Responsibilities for the Audit of the Financial Statements
section of the auditor’s report shall further:
State that auditor

exercises To identify and assess the
professional risks of material
judgement and misstatement
maintains
professional
To obtain an
skepticism
understanding of the
internal control system
Auditor's
responsibility section Describe an audit
by stating that To evaluate the
to further auditors appropriateness of
responsibilities accounting policies
are:
To conclude the
appropriateness of
Describe auditor's management's use of
responsibility in going concern
group audit To evaltuate the overall
presentation, structure
and content of financial
statements
(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.

AUDIT REPORT 8.19
(ii) To obtain an understanding of internal control relevant to the

audit in order to design audit procedures that are appropriate in
the circumstances.
(iii) To evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related
disclosures made by management.
(iv) To conclude on the appropriateness of management’s use of the
going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related
to events or conditions that may cast significant doubt on the
(v) When the financial statements are prepared in accordance with a
fair presentation framework, to evaluate the overall presentation,
structure and content of the financial statements, including the
disclosures, and whether the financial statements represent the
underlying transactions and events in a manner that achieves fair
presentation.
(c) When SA 600 applies, further describe the auditor’s responsibilities in a
group audit engagement by stating:
The division of responsibility for the financial information of the entity
by indicating the extent to which the financial information of
components is audited by the other auditors have been included in the
financial information of the entity, e.g., the number of divisions
/branches/subsidiaries or other components audited by other auditors
III. The Auditor’s Responsibilities for the Audit of the Financial Statements
section of the auditor’s report also shall:
(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

matters that may reasonably be thought to bear on the auditor’s

independence, and where applicable, related safeguards; and
(c) For audits of financial statements of listed entities and any other entities
for which key audit matters are communicated in accordance with SA
701, state that, from the matters communicated with those charged
with governance, the auditor determines those matters that were of
most significance in the audit of the financial statements of the current
period and are therefore the key audit matters. The auditor describes
these matters in the auditor’s report unless law or regulation precludes
public disclosure.
9. Location of the description of the auditor’s responsibilities for the audit

of the financial statements: The description of the auditor’s responsibilities for the
audit of the financial statements shall be included:
Within the body of the auditor’s report
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
By a specific reference within the auditor’s report to the location of such a

description on a website of an appropriate authority, where law, regulation or
national auditing standards expressly permit the auditor to do so.
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

AUDIT REPORT 8.21
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.
10. Other Reporting Responsibilities:
• If the auditor addresses other reporting responsibilities in the auditor’s

report on the financial statements that are in addition to the auditor’s
responsibilities under the SAs, these other reporting responsibilities
shall be addressed in a separate section in the auditor’s report with a
heading titled
“Report on Other Legal and Regulatory Requirements” or otherwise
as appropriate to the content of the section, unless these other
reporting responsibilities address the same topics as those presented
under the reporting responsibilities required by the SAs in which case
the other reporting responsibilities may be presented in the same
section as the related report elements required by the SAs.
• If other reporting responsibilities are presented in the same section as
the related report elements required by the SAs, the auditor’s report
shall clearly differentiate the other reporting responsibilities from the
reporting that is required by the SAs.
• If the auditor’s report contains a separate section that addresses other
reporting responsibilities, the requirements stated above shall be included
under a section with a heading “Report on the Audit of the Financial
Statements.” The “Report on Other Legal and Regulatory Requirements”
shall follow the “Report on the Audit of the Financial Statements.”
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:
All the statements that comprise the financial

statements, including the related notes, have
been prepared; and
Those with the recognized authority have

asserted that they have taken responsibility for
those financial statements
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.

AUDIT REPORT 8.23
Chartered Accountants having full-time Certificate of Practice can register on UDIN

Portal and generate UDIN by registering the certificates attested/certified by them.
Accordingly, an auditor is required to mention the UDIN with respect to each
audit report being signed by him, along with his membership number while
signing an audit report. The same is shown in the below illustration.
IILUSTRATION 7
M/s TUV & Associates are the statutory auditors of Venus Ltd. for the FY 202 1-22.
At the time of finalising the auditor’s report, one of the audit team members asked
the engagement partner, CA Tarun, to explain as to how the auditor’s report will be
signed. Help CA Tarun in explaining the same.
SOLUTION
The following is the correct way of signing an audit report.

M/s TUV & Associates
Chartered Accountants
(Firm’s Registration No.)
Signature
(Name of the Member Signing the Audit Report)
(Designation)
(Membership No. XXXXX)

Place of Signature: UDIN: 20037320AAAAAH1111
Date:
Test Your Understanding 1

Maithili Thakur, a CA student, was perusing audit report of a company. Her eyes fell
on an 18-digit alpha numeric number stated at end of audit report below the
signatures of auditor and membership number. Make her understand objective and
significance of such a randomly generated number. Is it required to be stated in
case of audit reports only?


CA. Maya Memani has conducted audit of a company. She has asked Sana, a CA
student undergoing training in her office, to prepare draft audit report. Sana was
part of engagement team conducting the audit. She has been further told to
prepare draft report expressing unmodified opinion. After drafting para comprising
unmodified opinion, Sana feels no need to provide basis for opinion. Discuss why
her thinking is not proper.
4. AUDITOR’S REPORT PRESCRIBED BY LAW OR

REGULATION
SA 200 explains that the auditor may be required to comply with legal or regulatory
requirements in addition to SAs. When the differences between the legal or
regulatory requirements and SAs relate only to the layout and wording of the
auditor’s report, the requirements stated below in points (a)–(m) set out the
minimum elements to be included in the auditor’s report to enable a reference to
the Standards on Auditing. In those circumstances, the requirements stated in
paragraph 3.1 above that are not included in points (a)–(m) need not be applied.
For example, the required ordering of the Opinion and the Basis of Opinion
sections need not be applied.
Where specific requirements in a particular law or regulation do not conflict with
SAs, the layout and wording required by this SA assist users of the auditor’s report
in more readily recognizing the auditor’s report as a report of an audit conducted
in accordance with SAs.
If the auditor is required by law or regulation to use a specific layout, or wording
of the auditor’s report, the auditor’s report shall refer to Standards on Auditing only
if the auditor’s report includes, at a minimum, each of the following elements:
(a) A title.
(b) An addressee, as required by the circumstances of the engagement.

(c) An Opinion section containing an expression of opinion on the financial
statements and a reference to the applicable financial reporting framework
used to prepare the financial statements.

AUDIT REPORT 8.25
(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).

 The financial statements are prepared by management of the entity in

accordance with the accounting Standards prescribed under section 133 of the
Companies Act, 2013.
 The terms of the audit engagement reflect the description of management’s

responsibility for the financial statements in SA 210.
 The auditor has concluded an unmodified (i.e., “clean”) opinion is appropriate
based on the audit evidence obtained.
 The relevant ethical requirements that apply to the audit comprise the Code
of Ethics issued by ICAI together with the other relevant ethical requirements
relating to the audit and the auditor refers to both.
 Based on the audit evidence obtained, the auditor has concluded that a
material uncertainty does not exist related to events or conditions that may cast
significant doubt on the entity’s ability to continue as a going concern in
accordance with SA 570 (Revised).
 Key audit matters have been communicated in accordance with SA 701.
 Those responsible for oversight of the financial statements differ from those
responsible for the preparation of the financial statements.
 In addition to the audit of the financial statements, the auditor has other
reporting responsibilities required under the Companies Act, 2013.

To the Members of ABC Company Limited
Report on the Audit of the Standalone Financial Statements
1
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

AUDIT REPORT 8.27
a summary of significant accounting policies and other explanatory information [in

which are included the Returns for the year ended on that date audited by the branch
auditors of the Company’s branches located at (location of branches)]3.
In our opinion and to the best of our information and according to the explanations
given to us, the aforesaid standalone 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 March 31, 20XX, and profit/loss, (changes in equity)4
and its cash flows for the year ended on that date.
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
Key Audit Matters
Key audit matters are those matters that, in our professional judgement, were of
most significance in our audit of the financial statements of the current period. These
matters were addressed in the context of our audit of the financial statements as a
whole, and in forming our opinion thereon, and we do not provide a separate
opinion on these matters.
[Description of each key audit matter in accordance with SA 701.]

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”) 4 with respect to the preparation of
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 ...”

AUDIT REPORT 8.29
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:
 Identify and assess the risks of material misstatement of the financial

statements, whether due to fraud or error, design and perform audit
procedures responsive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our 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.
 Obtain an understanding of internal control relevant to the audit in order to
design audit procedures that are appropriate in the circumstances. Under
section 143(3)(i) of the Companies Act, 2013, we are also responsible for
expressing our opinion on whether the company has adequate internal
financial controls system in place and the operating effectiveness of such
controls.
 Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by
management.
 Conclude on the appropriateness of management’s use of the going concern
basis of accounting and, based on the audit evidence obtained, whether a
material uncertainty exists related to events or conditions that may cast
significant doubt on the Company’s ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw
attention in our auditor’s report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our

auditor’s report. However, future events or conditions may cause the

Company to cease to continue as a going concern.
 Evaluate the overall presentation, structure and content of the financial
statements, including the disclosures, and whether the financial statements
represent the underlying transactions and events in a manner that achieves
fair presentation.
We communicate 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 we identify during our
audit.
We also provide those charged with governance with a statement that we have
complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably be
thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine
those matters that were of most significance in the audit of the financial statements
of the current period and are therefore the key audit matters. We describe these
matters in our auditor’s report unless law or regulation precludes public disclosure
about the matter or when, in extremely rare circumstances, we determine that a
matter should not be communicated in our report because the adverse
consequences of doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
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.

AUDIT REPORT 8.31
Report on Other Legal and Regulatory Requirements

As required by the Companies (Auditor’s Report) Order, 2020 (“the Order”), issued
by the Central Government of India in terms of sub-section (11) of section 143 of
the Companies Act, 2013, we give in the Annexure a statement on the matters
specified in paragraphs 3 and 4 of the Order, to the extent applicable.
[For detailed discussion on CARO 2020, refer Chapter 10, The Company Audit]
As required by Section 143(3) of the Act, we report that:
(a) We have sought and obtained all the information and explanations which to the
best of our knowledge and belief were necessary for the purposes of our audit.
(b) In our opinion, proper books of account as required by law have been kept
by the Company so far as it appears from our examination of those books
[and proper returns adequate for the purposes of our audit have been received
from the branches not visited by us7]
(c) [The reports on the accounts of the branch offices of the Company audited
under Section 143(8) of the Act by branch auditors have been sent to us and
have been properly dealt with by us in preparing this report8.]
(d) The Balance Sheet, the Statement of Profit and Loss, and the Cash Flow
Statement dealt with by this Report are in agreement with the books of
account [and with the returns received from the branches not visited by us9].
(e) In our opinion, the aforesaid standalone financial statements comply with the
Accounting Standards specified under Section 133 of the Act, read with Rule 7
of the Companies (Accounts) Rules, 2014.
(f) We do not have any observation or comment on the financial statements or
matters which have any adverse effect on the functioning of the company.
(g) On the basis of the written representations received from the directors as on
31st March, 20XX taken on record by the Board of Directors, none of the
directors is disqualified as on 31 st March, 20XX from being appointed as a
director in terms of Section 164 (2) of the Act.
(h) We do not have any qualification, reservation or adverse remark relating to
the maintenance of accounts and other matters connected herewith.
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

AUDIT REPORT 8.33
(“Ultimate Beneficiaries”) or provide any guarantee, security or the

like on behalf of the Ultimate Beneficiaries;
(ii) 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 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
(iii) Based on such audit procedures that we have considered
reasonable and appropriate in the circumstances, nothing has
come to our notice that has caused us to believe that the
representations under sub-clause (i) and (ii) contain any material
mis-statement.
(5) The dividend declared or paid during the year by the company is in
compliance with section 123 of the Companies Act, 2013.
(6) The company has used such accounting software for maintaining its books
of account which has a feature of recording audit trail (edit log) facility and
the same has been operated throughout the year for all transactions
recorded in the software and the audit trail feature has not been tampered
with and the audit trail has been preserved by the company as per the
statutory requirements for record retention.
For XYZ & Co
Chartered Accountants
(Firm’s Registration No.)
Signature
(Name of the Member Signing the Audit Report)
(Designation13)
(Membership No. XXXXX)
UDIN: 20037320AAAAAH1111
Place of Signature:
Date:
13 Partner or Proprietor, as the case may be

5. MODIFICATIONS TO THE OPINION IN THE

Standard on Auditing (SA) 705 “Modifications to the Opinion in the Independent
Auditor’s Report” deals with the auditor’s responsibility to issue an appropriate
report in circumstances when, in forming an opinion in accordance with SA 700
(Revised) “Forming an Opinion and Reporting on Financial Statements”, the auditor
concludes that a modification to the auditor’s opinion on the financial statements
is necessary.
This SA also deals with how the form and content of the auditor’s report is affected
when the auditor expresses a modified opinion.
5.1 Circumstances When a Modification to the Auditor’s

Opinion Is Required
The auditor shall modify the opinion in the auditor’s report in the following
circumstances:

AUDIT REPORT 8.35
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.
5.2 Objective of the Auditor- To Express Clearly an

Appropriately Modified Opinion
As per Standard on Auditing (SA) 705 “Modifications To The Opinion In The
Independent Auditor’s Report”, the objective of the auditor is to express clearly
an appropriately modified opinion on the financial statements that is necessary
when:
(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.
5.3 Types of Modified Opinions:

There are three types of modified opinions, namely-
1. A qualified opinion
2. An adverse opinion
3. A disclaimer of opinion

Disclaimer of
Qualified Opinion Adverse Opinion
Opinion
The auditor, having

obtained sufficient
appropriate audit The auditor
evidence, shall express an The auditor
concludes that adverse opinion shall disclaim an
misstatements, are when the opinion when
material, but not he is unable to
auditor, having
pervasive or obtain sufficient
obtained
appropriate
The auditor is sufficient audit evidence
unable to obtain appropriate on which to
sufficient audit evidence, base the
appropriate audit concludes that opinion, and he
evidence on which concludes that
misstatements,
to base the the possible
opinion, but the individually or
in the effects on the
auditor concludes financial
that the possible aggregate, are
statements of
effects on the both material
undetected
financial statements and pervasive to misstatements,
of undetected the financial if any, could be
misstatements, if statements. both material
any, could be and pervasive.
material but not
pervasive.
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.

AUDIT REPORT 8.37
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.
Definition of Pervasive – A term used, in the context of misstatements, to describe

the effects on the financial statements of misstatements or the possible effects on the
financial statements of misstatements, if any, that are undetected due to an inability
to obtain sufficient appropriate audit evidence.
Pervasive effects on the financial statements are those that, in the auditor’s
judgement:
(i) Are not confined to specific elements, accounts or items of the financial
statements;
(ii) If so confined, represent or could represent a substantial proportion of the
financial statements; or
(iii) In relation to disclosures, are fundamental to users’ understanding of 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

AUDIT REPORT 8.39
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.
5.4 Which type of opinion is appropriate?

The decision regarding which type of modified opinion is appropriate depends upon:
(a) The nature of the matter giving rise to the modification, that is, whether the
financial statements are materially misstated or, in the case of an inability to
obtain sufficient appropriate audit evidence, may be materially misstated; and
(b) The auditor’s judgement about the pervasiveness of the effects or possible
effects of the matter on the financial statements.
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.

Nature of Matter Giving Rise to the Auditor’s Judgement about the

Modification Pervasiveness of the Effects or
Possible Effects on the Financial
Statements
Material but not Material and
Pervasive Pervasive
Financial statements are materially Qualified opinion Adverse opinion
misstated
Inability to obtain sufficient appropriate Qualified opinion Disclaimer of
audit evidence opinion
5.5 Consequence of an Inability to Obtain Sufficient

Appropriate Audit Evidence Due to a Management-
Imposed Limitation after the Auditor Has Accepted the
Engagement
• 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.
• If management refuses to remove the limitation referred above, the auditor

shall communicate the matter to those charged with governance, unless all
of those charged with governance are involved in managing the entity and
determine whether it is possible to perform alternative procedures to obtain
sufficient appropriate audit evidence.
• If the auditor is unable to obtain sufficient appropriate audit evidence, the

auditor shall determine the implications as follows:
(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

AUDIT REPORT 8.41
(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.
• If the auditor withdraws as contemplated by point (b)(i) above, before

withdrawing, the auditor shall communicate to those charged with
governance any matters regarding misstatements identified during the audit
that would have given rise to a modification of the opinion.

CA. Sarasbhai Patel, while conducting audit of an entity, feels that there is an
atmosphere of non-cooperation all around. He has not been provided with
necessary support for attending inventory count process of entity as at year end.
Besides, CFO is not providing him present addresses of customers as well as
suppliers for sending external confirmations. Even mail ids have not been provided
on the pretext of business confidentiality.
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.
Assuming it is not possible to withdraw from engagement, what type of opinion

should be expressed by auditor?
• The above matter is depicted in the following diagram:

Inability to Obtain Sufficient Appropriate Audit Evidence Due to a

Management-Imposed Limitation after the Auditor Has Accepted the
Engagement
Request the management to

remove the limitation
Management removes Management refuses to

the limitation remove the limitation
Proceed with audit Communicate with TCWG and

procedures perform alternative procedures
Still unable to obtain sufficient

and appropriate audit evidence
Possible effects material

Possible Effects Material
and pervasive
but not pervasive
Withdraw from audit

engagement or disclaimer of
Qualified Opinion opinion
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.

AUDIT REPORT 8.43
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.
5.6 Form and Content of the Auditor’s Report When the

Opinion is Modified
Auditor’s Opinion
When the auditor modifies the audit opinion, the auditor shall use the heading
“Qualified Opinion,” “Adverse Opinion,” or “Disclaimer of Opinion,” as appropriate,
for the Opinion section.
Qualified Opinion
When the auditor expresses a qualified opinion due to a material misstatement in
the financial statements, the auditor shall state that, in the auditor’s opinion, except
for the effects of the matter(s) described in the Basis for Qualified Opinion
section,
(a) When reporting in accordance with a fair presentation framework, the
accompanying financial statements present fairly, in all material respects (or
give a true and fair view of) […] in accordance with [the applicable financial
reporting framework]; or
(b) When reporting in accordance with a compliance framework, the
accompanying financial statements have been prepared, in all material
respects, in accordance with [the applicable financial reporting framework].

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,
(a) When reporting in accordance with a fair presentation framework, the

accompanying financial statements do not present fairly (or give a true and fair
view of) […] in accordance with [the applicable financial reporting framework];
or
(b) When reporting in accordance with a compliance framework, the

accompanying financial statements have not been prepared, in all material
respects, in accordance with [the applicable financial reporting framework].
Disclaimer of Opinion
When the auditor disclaims an opinion due to an inability to obtain sufficient

appropriate audit evidence, the auditor shall:
(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.
5.7 Basis for Opinion

When the auditor modifies the opinion on the financial statements, the auditor
shall, in addition to the specific elements required by SA 700 (Revised):

AUDIT REPORT 8.45
Amend the heading “Basis for Opinion” required by SA 700 (Revised) to

“Basis for Qualified Opinion,” “Basis for Adverse Opinion,” or“Basis for
Disclaimer of Opinion,” as appropriate; and
Within this section, include a description of the matter giving rise to the
modification.
 If there is a material misstatement of the financial statements that relates to

specific amounts in the financial statements (including quantitative
disclosures in the notes to the financial statements), the auditor shall include
in the Basis for Opinion section a description and quantification of the
financial effects of the misstatement, unless impracticable.
 If it is not practicable to quantify the financial effects, the auditor shall so
state in this section.
narrative disclosures, the auditor shall include in the Basis for Opinion section
an explanation of how the disclosures are misstated.
the non-disclosure of information required to be disclosed, the auditor shall:
(a) Discuss the non-disclosure with those charged with governance;
(b) Describe in the Basis for Opinion section the nature of the omitted
information; and
(c) Unless prohibited by law or regulation, include the omitted disclosures,
provided it is practicable to do so and the auditor has obtained
sufficient appropriate audit evidence about the omitted information.
 If the modification results from an inability to obtain sufficient appropriate
audit evidence, the auditor shall include in the Basis for Opinion section the
reasons for that inability.

 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.
5.8 Description of Auditor’s Responsibilities for the Audit

of the Financial Statements When the Auditor
Disclaims an Opinion on the Financial Statements
When the auditor disclaims an opinion on the financial statements due to an
inability to obtain sufficient appropriate audit evidence, the auditor shall amend
the description of the auditor’s responsibilities required by SA 700 (Revised) to
include only the following:
(a) A statement that the auditor’s responsibility is to conduct an audit of the

entity’s financial statements in accordance with Standards on Auditing and to
issue an auditor’s report;
(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).

AUDIT REPORT 8.47
5.9 Considerations When the Auditor Disclaims an Opinion

on the Financial Statements
Unless required by law or regulation, when the auditor disclaims an opinion on the
financial statements, the auditor’s report shall not include a Key Audit Matters
section in accordance with SA 701.
5.10 Communication with Those Charged with Governance

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.
ILLUSTRATION 13
M/s Sun Moon & Associates are the statutory auditors of Venus Ltd. for the FY
2021-22. Owing to the pervasive nature of material misstatements in the financial
statements of the company, CA Moon, the engagement partner decided to give an
adverse opinion. Explain the responsibility of CA Moon with respect to
communication with those charged with governance.
SOLUTION
CA Moon, being the statutory auditor of Venus Ltd. should communicate with those
charged with governance about the circumstances that led to the expected
modification i.e. an adverse opinion. Further the wording of such modification also
needs to be discussed.
6. EMPHASIS OF MATTER PARAGRAPHS AND

OTHER MATTER PARAGRAPHS IN THE
INDEPENDENT AUDITOR’S REPORT.
SA 706 deals with additional communication in the auditor’s report when the
auditor considers it necessary to:
(a) Draw users’ attention to a matter or matters presented or disclosed in the
financial statements that are of such importance that they are fundamental
to users’ understanding of the financial statements; or

(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.
6.1 Objective of the Auditor as per SA 706

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,
having formed an opinion on the financial statements, is to draw users’ attention,
when in the auditor’s judgement it is necessary to do so, by way of clear additional
communication in the auditor’s report, to:
(a) 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
(b) As appropriate, any other matter that is relevant to users’ understanding of
the audit, the auditor’s responsibilities or the auditor’s report.
Definition of Emphasis of Matter Paragraph
that, in the auditor’s

Emphasis of Matter that refers to a matter judgement, is of such
paragraph is a appropriately presented importance that it is
paragraph included in or disclosed in the fundamental to users’
the auditor’s report financial statements understanding of the
financial statements.
Definition of Other Matter paragraph
that, in the auditor’s

that refers to a matter judgement, is relevant to
Other Matter paragraph is
other than those users’ understanding of the
a paragraph included in audit, the auditor’s
presented or disclosed in
the auditor’s report responsibilities or the
the financial statements
auditor’s report.

AUDIT REPORT 8.49
6.2 Emphasis of Matter Paragraphs in the Auditor’s Report

If the auditor considers it necessary to draw users’ attention to a matter 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, the auditor shall include an Emphasis of Matter paragraph in the
auditor’s report provided:
(a) The auditor would not be required to modify the opinion in accordance with
SA 705 (Revised) as a result of the matter; and
(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.
Some examples of circumstances where the auditor may consider it necessary

to include an Emphasis of Matter paragraph.
• An uncertainty relating to the future outcome of exceptional litigation or
regulatory action.
• A significant subsequent event that occurs between the date of the financial
statements and the date of the auditor’s report.
• Early application (where permitted) of a new accounting standard that has a

material effect on the financial statements.
• A major catastrophe that has had, or continues to have, a significant effect on
the entity’s financial position.

6.3 The inclusion of an Emphasis of Matter paragraph in the

auditor’s report does not affect the auditor’s opinion
An Emphasis of Matter paragraph is not a substitute for:
(a) A modified opinion in accordance with SA 705 (Revised) when required by

the circumstances of a specific audit engagement;
(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
(c) Reporting in accordance with SA 570 (Revised) when a material uncertainty

exists relating to events or conditions that may cast significant doubt on an
ILLUSTRATION 14
Lomaxe Ltd. is a company engaged in the business of manufacture of candles.

CA Kamalnath is the statutory auditor of the company for the FY 2021-22. During
the year under audit, there was a fire in the company’s factory as a result of which,
some of the company’s plant and machinery was destroyed. The same was disclosed
by the company in the notes to accounts annexed to the financial statements for the
year ending 31.03.2022. CA Kamalnath decided to communicate this matter in the
auditor’s report as he is of the view that the matter is of such importance that it is
fundamental to the user’s understanding of the financial statements. Help
CA Kamalnath to deal with this situation in the auditor’s report.
SOLUTION
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:
Emphasis of Matter – Effects of Fire in Company’s Factory
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.

AUDIT REPORT 8.51
6.4 Other Matter Paragraphs in the Auditor’s Report

If the auditor considers it necessary to communicate a matter other than those that
are presented or disclosed in the financial statements that, in the auditor’s
judgement, is relevant to users’ understanding of the audit, the auditor’s
responsibilities or the auditor’s report, the auditor shall include an Other Matter
paragraph in the auditor’s report, provided:
(a) This is not prohibited by law or regulation; and
(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.

If the auditor expects to include an Emphasis of Matter or an Other Matter
paragraph in the auditor’s report, the auditor shall communicate with those
charged with governance regarding this expectation and the wording of this
paragraph.
7. COMMUNICATING KEY AUDIT MATTERS IN

THE INDEPENDENT AUDITOR’S REPORT
(SA 701)
SA 701 deals with the auditor’s responsibility to communicate key audit matters in
the auditor’s report. It is intended to address both the auditor’s judgement as to
what to communicate in the auditor’s report and the form and content of such
communication.

Definition of Key Audit Matter
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.
7.1 Purpose of Communicating Key Audit Matters

As per SA 701, “Communicating Key Audit Matters in the Auditor’s Report”, the
purpose of communicating key audit matters is to enhance the communicative
value of the auditor’s report by providing greater transparency about the audit that
was performed. Communicating key audit matters provides additional information
to intended users of the financial statements to assist them in understanding those
matters that, in the auditor’s professional judgement, were of most significance in
the audit of the financial statements of the current period. Communicating key audit
matters may also assist intended users in understanding the entity and areas of
significant management judgement in the audited financial statements.
7.2 Objectives of the Auditor regarding Key Audit Matters

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.
7.3 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

AUDIT REPORT 8.53
performing the audit. In making this determination, the auditor shall take into
account the following:
Areas of higher assessed risk of material misstatement, or significant risks

identified in accordance with SA 315.
Significant auditor judgements relating to areas in the financial statements

that involved significant management judgement, including accounting
estimates that have been identified as having high estimation uncertainty.
The effect on the audit of significant events or transactions that occurred

during the period.
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.
7.4 Communicating Key Audit Matters

The auditor shall describe each key audit matter, using an appropriate subheading,
in a separate section of the auditor’s report under the heading “Key Audit Matters”.
The introductory language in this section of the auditor’s report shall state that:
(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.

7.5 Communicating Key Audit Matters- not a substitute

for disclosure in the Financial Statements etc.
Communicating key audit matters in the auditor’s report is in the context of the
auditor having formed an opinion on the financial statements as a whole.
Communicating key audit matters in the auditor’s report is not:
(a) A substitute for disclosures in the financial statements that the applicable
financial reporting framework requires management to make, or that are
otherwise necessary to achieve fair presentation;
(b) 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);
(c) A substitute for reporting in accordance with SA 570 when a material
uncertainty exists relating to events or conditions that may cast significant
doubt on an entity’s ability to continue as a going concern; or
(d) A separate opinion on individual matters.

The auditor shall communicate with those charged with governance:
(a) Those matters the auditor has determined to be the key audit matters; or
(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:
Key Audit Matters
[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.

AUDIT REPORT 8.55
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 :
listed entities and

circumstances when the auditor
otherwise decides to communicate
key audit matters in the auditor’s
report and
required by law or regulation to
communicate key audit matters in
the auditor’s report
However, SA 705 (Revised) prohibits the
auditor from communicating key audit matters
when the auditor disclaims an opinion on the
financial statements, unless such reporting is
required by law or regulation
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:
(b) Significant auditor judgments

relating to areas in the financial
(a)Areas of higher assessed risk (c) The effect on the audit
statements that involved significant
of material misstatement, or of significant events or
management judgment, including
significant risks identified in transactions that occurred
accounting estimates that have been
accordance with SA 315 during the period.
identified as having high estimation
uncertainty.

COMMUNICATING KEY The introductory language in this section of

AUDIT MATTERS: the auditor’s report shall state that:
(a) Key audit matters are those matters that, in the
auditor’s professional judgment, 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.
AUDITOR’S REPORT ON THE FINANCIAL STATEMENTS- A BIRD’S EYE

VIEW
The following table gives a summary of the Standards on Auditing related to audit
reporting:
Standard on Name of SA Matters dealt with (Scope)

Auditing
SA 700 Forming an Opinion • The auditor’s responsibility to
(Revised) and Reporting on form an opinion on financial
Financial Statements statements.
• The form and content of the
Auditor’s Report.
SA 705 Modifications to the • Auditor’s responsibility to issue
(Revised) Opinion in the an appropriate report in
Independent circumstances when auditor
Auditor’s Report concludes that a modification to
auditor’s opinion is necessary.
• Three types of modified opinion
• A Qualified Opinion
• An adverse opinion
• A disclaimer of opinion
SA 701 Communicating Key • The auditor’s responsibility
Audit Matters in the to communicate key audit
Independent matters in the auditor’s
Auditor’s Report report.

AUDIT REPORT 8.57
• What to communicate and

the form and content of
such communication.
SA 706 Emphasis of Matter • Additional communication in the
(Revised) Paragraphs and auditor’s report when the auditor
Other Matter considers it necessary to draw
Paragraphs in the users’ attention to a matter:
Independent • Presented or disclosed in
Auditor’s Report the financial statements
and which is fundamental
for the user’s
understanding.
• Not presented or disclosed
in the financial statements
and which are relevant for
the user’s understanding.
8. STANDARD ON AUDITING - 710,

“COMPARATIVE INFORMATION -
CORRESPONDING FIGURES AND COMPARATIVE
FINANCIAL STATEMENTS”
This Standard on Auditing (SA) deals with the auditor’s responsibilities regarding
comparative information in an audit of financial statements. When the financial
statements of the prior period have been audited by a predecessor auditor or were
not audited, the requirements and guidance in SA 510 regarding opening balances
also apply.
8.1 The Nature of the Comparative Information

The nature of the comparative information that is presented in an entity’s financial
statements depends on the requirements of the applicable financial reporting
framework. There are two different broad approaches to the auditor’s reporting
responsibilities in respect of such 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.
The essential audit reporting differences between the approaches are:
(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.
Definition of Comparative Information:
in respect of one or more

The amounts and disclosures
prior periods in accordance
included in the financial
with the applicable financial
statements
reporting framework.
8.2 Audit Procedures regarding comparative information

 The auditor shall determine whether the financial statements include the
comparative information required by the applicable financial reporting
framework and whether such information is appropriately classified. For this
purpose, the auditor shall evaluate whether:

AUDIT REPORT 8.59
(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.
8.3 Audit Reporting regarding Corresponding Figures
Definition of Corresponding figures:
The level of detail

and are intended to be
Comparative information presented in the
read only in relation to
where amounts and other corresponding
the amounts and other
disclosures for the prior amounts and
disclosures relating to
period are included as an disclosures is dictated
the current period primarily by its
integral part of the current
(referred to as “current
period financial statements relevance to the
period figures”).
current period figures.

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.
Prior Period Financial Statements Audited by a Predecessor Auditor

If the financial statements of the prior period were audited by a predecessor
auditor and the auditor is permitted by law or regulation to refer to the

AUDIT REPORT 8.61
predecessor auditor’s report on the corresponding figures and decides to do

so, the auditor shall state in an Other Matter paragraph in the auditor’s report:
(a) That the financial statements of the prior period were audited by the
predecessor auditor;
(b) The type of opinion expressed by the predecessor auditor and, if the
opinion was modified, the reasons therefore; and
(c) The date of that report.
8.4 Comparative Financial Statements

Definition: Comparative information where amounts and other disclosures for the
prior period are included for comparison with the financial statements of the current
period but, if audited, are referred to in the auditor ’s opinion. The level of information
included in those comparative financial statements is comparable with that of the
financial statements of the current period.
Auditor’s opinion- to refer each period: When comparative financial statements

are presented, the auditor’s opinion shall refer to each period for which financial
statements are presented and on which an audit opinion is expressed.
When reporting on prior period financial statements in connection with the
current period’s audit, if the auditor’s opinion on such prior period financial
statements differs from the opinion the auditor previously expressed, the auditor
shall disclose the substantive reasons for the different opinion in an Other Matter
paragraph in accordance with SA 706.
Prior Period Financial Statements Audited by a Predecessor Auditor
If the financial statements of the prior period were audited by a predecessor
auditor, in addition to expressing an opinion on the current period’s financial
statements, the auditor shall state in an Other Matter paragraph:
(a) That the financial statements of the prior period were audited by a
predecessor auditor;
(b) The type of opinion expressed by the predecessor auditor and, if the opinion
was modified, the reasons therefor; and
(c) The date of that report,

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.
9. AUDIT OF BRANCH OFFICE ACCOUNTS

As per section 128(1) of the Companies Act, 2013, every company shall prepare
and keep at its registered office books of account and other relevant books and
papers and financial statement for every financial year which give a true and fair
view of the state of the affairs of the company, including that of its branch office
or offices, if any, and explain the transactions effected both at the registered office
and its branches and such books shall be kept on accrual basis and according to
the double entry system of accounting.
It may be noted that all or any of the books of account aforesaid and other relevant
papers may be kept at such other place in India as the Board of Directors may
decide and where such a decision is taken, the company shall, within 7 days thereof,
file with the Registrar a notice in writing giving the full address of that other place.
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-

AUDIT REPORT 8.63
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.

• Component means a division, branch, subsidiary, joint venture, associated

enterprises or other entity whose financial information 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

AUDIT REPORT 8.65
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.

CA. Dicky Yadav is auditor of a company having four branches. The four branches
are audited by another auditor CA. Yamini Jain. The reports in respect of accounts
of branches examined by her have already been sent to company auditor. During
the course of audit, CA Dicky Yadav asks the branch auditor to share with her
summary of audit procedures and findings in respect of accounts of branches
examined. CA. Yamini Jain feels it as encroachment of her domain. Discuss the issue.
10. 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.
(vi) In respect of multi-national companies, the work can be spread using the
expertise of the local firms which are in a better position to deal with detailed
work and the local laws and regulations.
(vii) Lower staff development costs.
(viii) Lower costs to carry out the work.

(ix) A sense of healthy competition towards a better performance.

The general disadvantages may be the following:
(i) The fees being shared.
(ii) Psychological problem where firms of different standing are associated in the
joint audit.
(iii) General superiority complex of some auditors.
(iv) Problems of co-ordination of the work.

(v) Areas of work of common concern being neglected.
(vi) Uncertainty about the liability for the work done.
The Institute of Chartered Accountants of India has issued Standard on Auditing
(SA) 299 (Revised), “Joint Audit of Financial Statements” which lays down the
principles for effective conduct of joint audit to achieve the overall objectives of
the auditor as laid down in SA 200 “Overall Objectives of the Independent Auditor
and the conduct of an audit in accordance with Standards on Auditing”. This
Standard deals with the special considerations in carrying out audit by joint
auditors. It requires that–
(i) the engagement partner and other key members of the engagement team
from each of the joint auditors should be involved in planning the audit.
(ii) the joint auditors should jointly establish an overall audit strategy which sets
the scope, timing and direction of the audit, and also guides the development
of the audit plan.
(iii) 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.

AUDIT REPORT 8.67
(e) ascertain the nature, timing and extent of resources necessary to

accomplish the engagement.
(iv) each of the joint auditors should consider and assess the risks of material
misstatement and communicate to other joint auditors.
(v) the joint auditors should discuss and document the nature, timing, and the
extent of the audit procedures for (I) common and (II) specific allotted areas
of audit to be performed.
(vi) the joint auditors should obtain common engagement letter and common
management representation letter.
(vii) the work allocation document should be signed by all the joint auditors and
communicated to those charged with governance.
It further states that, in respect of audit work divided among the joint auditors,
each joint auditor shall be responsible only for the work allocated to such joint
auditor including proper execution of the audit procedures. On the other hand, all
the joint auditors shall be jointly and severally responsible for:
(i) the audit work which is not divided among the joint auditors and is carried out
by all joint 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.]
11. REPORTING REQUIREMENTS UNDER THE

COMPANIES ACT, 2013
Section 143 of Companies Act, 2013 contains, inter alia, reporting requirements of
auditor of a company in form of duties.
(1) Reporting requirement relating to matters stated in section 143(1)
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;

AUDIT REPORT 8.69
(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
(ii) Small company; or

(iii) Company having turnover less than ` 50 crore as per latest
audited financial statement and having aggregate borrowings
from banks or financial institutions or any body corporate at any
point of time during the financial year less than ` 25 crore.
(j) such other matters as are prescribed in Rule 11 of the Companies
(Audit and Auditors) Rules, 2014 which are as under:-

AUDIT REPORT 8.71
(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

(iii) Based on such audit procedures that the auditor has

considered reasonable and appropriate in the
circumstances, nothing has come to their notice that has
caused them to believe that the representations under sub-
clause (1) and (2) contain any material misstatement.
(e) Whether the dividend declared or paid during the year by the
company is in compliance with section 123 of the Companies Act,
2013.
(f) Whether the company has used such accounting software for
maintaining its books of account which has a feature of recording
audit trail (edit log) facility and the same has been operated
throughout the year for all transactions recorded in the software
and the audit trail feature has not been tampered with and the
audit trail has been preserved by the company as per the statutory
requirements for record retention.
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.
[Note: Students may note that Companies (Auditor’s Report) Order,

2020 has been notified in this perspective which is discussed later in this
chapter as Reporting under Companies (Auditor’s Report) Order, 2020]
(4) Reporting on frauds:
A. Reporting to the Central Government- As per section 143(12) of the
Companies Act, 2013 read with Rule 13 of the Companies (Audit and
Auditors) Rules, 2014, if an auditor of a company in the course of the
performance of his duties as auditor, has reason to believe that an

AUDIT REPORT 8.73
offence of fraud, which involves or is expected to involve individually

an amount of ` 1 crore or above, is being or has been committed in the
company by its officers or employees, the auditor shall report the
matter to the Central Government within such time and in such manner
as prescribed.
B. Reporting to the Audit Committee or Board- In case of a fraud
involving lesser than the specified amount [i.e. less than ` 1 crore], the
auditor shall report the matter to the audit committee constituted
under section 177 or to the Board in other cases within such time and
in such manner as prescribed.
Besides, auditor has also to report matters pertaining to fraud at point
(xi) of paragraph 3 of CARO,2020 which is discussed subsequently.
12. REPORTING UNDER COMPANIES

AUDITOR’S REPORT ORDER, 2020 [CARO,
2020]
In exercise of the powers conferred by sub-section (11) of section 143 of the
Companies Act, 2013 (18 of 2013 ) and in supersession of the Companies (Auditor's
Report) Order, 2016, published in the Gazette of India, Extraordinary, Part II,
Section 3, Sub-section (ii), vide number S.O. 1228 (E), dated the 29th March, 2016,
except as respects things done or omitted to be done before such supersession,
the Central Government, after consultation with the National Financial Reporting
Authority constituted under section 132 of the Companies Act, 2013, hereby makes
the following Order, namely:—
Short title, application and commencement. –
Short title: This Order may be called the Companies (Auditor's Report) Order,
2020.
Application: It shall apply to every company including a foreign company as
defined in clause (42) of section 2 of the Companies Act, 2013 (18 of 2013)
[hereinafter referred to as the Companies Act], except–
(i) a banking company as defined in clause (c) of section 5 of the Banking
Regulation Act, 1949 (10 of 1949);

(ii) an insurance company as defined under the Insurance Act,1938 (4 of 1938);
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company as defined in clause (62) of section 2 of the

Companies Act and a small company as defined in clause (85) of section 2 of
the Companies Act; and
(v) a private limited company, not being a subsidiary or holding company of a

public company, having a paid up capital and reserves and surplus not more
than one crore rupees as on the balance sheet date and which does not have
total borrowings exceeding one crore rupees from any bank or financial
institution at any point of time during the financial year and which does not
have a total revenue as disclosed in Scheduled III to the Companies Act
(including revenue from discontinuing operations) exceeding ten crore
rupees during the financial year as per the financial statements.
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

AUDIT REPORT 8.75
Example
‘Educating Child’ is a limited company registered under section 8 of the Companies

Act, 2013.
In the given case, ‘Educating Child’ is licensed to operate under section 8 of the
Companies Act, 2013. Therefore, CARO, 2020 shall not be applicable to ‘Educating
Child’ accordingly.
Auditor's report to contain matters specified in paragraphs 3 and 4. - Every

report made by the auditor under section 143 of the Companies Act on the
accounts of every company audited by him, to which this Order applies, for the
financial years commencing on or after the 1st April, 2019, shall in addition, contain
the matters specified in paragraphs 3 and 4, as may be applicable: Provided this
Order shall not apply to the auditor’s report on consolidated financial statements
except clause (xxi) of paragraph 3.
Paragraph 3
Matters to be included in auditor's report. - The auditor's report on the accounts
of a company to which this Order applies shall include a statement on the following
matters, namely:-
(i) (a) (A) whether the company is maintaining proper records showing full
particulars, including quantitative details and situation of
Property, Plant and Equipment;
(B) whether the company is maintaining proper records showing full
particulars of intangible assets;
(b) whether these Property, Plant and Equipment have been physically
verified by the management at reasonable intervals; whether any
material discrepancies were noticed on such verification and if so,
whether the same have been properly dealt with in the books of
account;
(c) whether the title deeds of all the immovable properties (other than
properties where the company is the lessee and the lease agreements
are duly executed in favour of the lessee) disclosed in the financial
statements are held in the name of the company, if not, provide the
details thereof in the format below:-

Description Gross Held in Whether Period held Reason for

of property carrying name of promoter, –indicate not being
value director or their range, held in
relative or where name of
employee appropriate company*
*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,

AUDIT REPORT 8.77
secured or unsecured, to companies, firms, Limited Liability Partnerships or

any other parties, if so,-
(a) whether during the year the company has provided loans or provided
advances in the nature of loans, or stood guarantee, or provided
security to any other entity [not applicable to companies whose
principal business is to give loans], if so, indicate-
(A) the aggregate amount during the year, and balance outstanding
at the balance sheet date with respect to such loans or advances
and guarantees or security to subsidiaries, joint ventures and
associates;
(B) the aggregate amount during the year, and balance outstanding
at the balance sheet date with respect to such loans or advances
and guarantees or security to parties other than subsidiaries, joint
ventures and associates;
(b) whether the investments made, guarantees provided, security given
and the terms and conditions of the grant of all loans and advances in
the nature of loans and guarantees provided are not prejudicial to the
company’s interest;
(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

or period of repayment, if so, specify the aggregate amount,

percentage thereof to the total loans granted, aggregate amount of
loans granted to Promoters, related parties as defined in clause (76)
of section 2 of the Companies Act, 2013;
(iv) in respect of loans, investments, guarantees, and security, whether
provisions of sections 185 and 186 of the Companies Act have been
complied with, if not, provide the details thereof;
(v) in respect of deposits accepted by the company or amounts which are
deemed to be deposits, whether the directives issued by the Reserve Bank
of India and the provisions of sections 73 to 76 or any other relevant
provisions of the Companies Act and the rules made thereunder, where
applicable, have been complied with, if not, the nature of such
contraventions be stated; if an order has been passed by Company Law
Board or National Company Law Tribunal or Reserve Bank of India or any
court or any other tribunal, whether the same has been complied with or
not;
(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;
(vii) (a) whether the company is regular in depositing undisputed statutory

dues including Goods and Services Tax, provident fund, employees'
state insurance, income tax, sales-tax, service tax, duty of customs,
duty of excise, value added tax, cess and any other statutory dues to
the appropriate authorities and if not, the extent of the arrears of
outstanding statutory dues as on the last day of the financial year
concerned for a period of more than six months from the date they
became payable, shall be indicated;
(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);

AUDIT REPORT 8.79
(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:-
Nature of Name of lender Amount Whether No. of Remarks,

borrowing, not principal days if any
including paid on or delay or
debt due interest unpaid
securities date
lender wise details
to be provided in
case of defaults to
banks, financial
institutions and
Government.
(b) whether the company is a declared wilful defaulter by any bank or

financial institution or other lender;
(c) whether term loans were applied for the purpose for which the loans
were obtained; if not, the amount of loan so diverted and the purpose
for which it is used may be reported;
(d) whether funds raised on short term basis have been utilised for long
term purposes, if yes, the nature and amount to be indicated;
(e) whether the company has taken any funds from any entity or person on
account of or to meet the obligations of its subsidiaries, associates or
joint ventures, if so, details thereof with nature of such transactions and
the amount in each case;
(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

AUDIT REPORT 8.81
been disclosed in the financial statements, etc., as required by the applicable

accounting standards;
(xiv) (a) whether the company has an internal audit system commensurate with
the size and nature of its business;
(b) whether the reports of the Internal Auditors for the period under audit
were considered by the statutory auditor;
(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

company is capable of meeting its liabilities existing at the date of balance

sheet as and when they fall due within a period of one year from the balance
sheet date;
(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.

CA. Ravi Patnaik is conducting audit of a company for which reporting requirements
under CARO, 2020 are applicable. He finds that cash credit facilities amounting to
` 4 crores were released to the company by branch of a bank for meeting its
working capital requirements. He finds that out of above funds, ` 1 crore have been
used by company for installing effluent treatment plant to meet State pollution
control Board requirements.
Is there any reporting obligation upon him under CARO,2020?

AUDIT REPORT 8.83
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.
Based on above, answer following questions:

1. In case of M/s Persistent & Company, what would be an ideal Audit Opinion?
(a) Unmodified
(b) Qualified
(c) Mention the fact in Emphasis of Matter Paragraph
(d) Disclaimer
2. In case of M/s Dubious Brothers, what Audit Opinion should the Auditor give?
(a) Qualified
(b) Adverse
(c) Disclaimer
(d) Unmodified
3. According to you, what would be appropriate course to take in case of M/s
Honest & Associates?
(a) Issue Qualified Opinion
(b) Issue Adverse Opinion

AUDIT REPORT 8.85
(c) Mention the fact of change in method in Emphasis of Matter Paragraph

(d) Issue Disclaimer of Opinion
4. When the Auditor, after conclusion of an Audit exercise, is of the opinion that
there are material misstatements in the Financial Statements, but they are not
pervasive, then what should an Auditor do?
(a) Issue Unmodified Opinion
(b) Issue Qualified Opinion
(c) Issue Disclaimer of Opinion
(d) Mention it in Emphasis of Matter Paragraph
5. When the Auditor concludes that the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting
framework, Auditor shall give:
(a) Modified Opinion
(b) Qualified Opinion
(c) Disclaimer of Opinion
(d) Unmodified Opinion
Answers to Questions involving case study

1. (b) 2. (c) 3. (c) 4. (b) 5. (d)
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.

AUDIT REPORT 8.87
TEST YOUR KNOWLEDGE

MCQs based Questions
1. While expressing an unmodified opinion on financial statements, the auditor
shall not use which of the following phrases?
(a) present fairly in all material respects
(b) give a true and fair view
(c) with the foregoing explanation

(d) All of the above
2. …………………… is 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 the
user’s understanding of the financial statements.
(a) Emphasis of Matter Paragraph
(b) Other Matter Paragraph
(c) Key Audit Matter
(d) Management Responsibility Paragraph.

3. Statement 1: Communicating key audit matter in the auditor’s report
constitutes a substitute for disclosure in the financial statements.
Statement 2: Instead of modifying an opinion in accordance with SA 705, the
statutory auditor can use Key Audit Matter paragraph in the audit report with
an unmodified opinion.
(a) Only Statement 1 is correct
(b) Only Statement 2 is correct
(c) Both the statements are correct
(d) None of the statement is correct

4. Which of the following is not correct?
(a) SA 700 - Forming an Opinion and Reporting on the Financial Statements
(b) SA 701- Key Audit Matters in the Independent Auditor’s Report

(c) SA 705- Comparative Information- Corresponding figures and

Comparative Financial Statements
(d) SA 706- Emphasis of Matter Paragraphs and Other Matter Paragraphs in
the Independent Auditor’s Report
5. Responsibilities of Joint Auditors are governed by:
(a) SA 200
(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.

AUDIT REPORT 8.89
(vii) Instead of modifying an opinion in accordance with SA 705, the statutory

auditor can use Key Audit Matter paragraph in the audit report with an
unmodified opinion.
(viii) The concept of “joint audit” has legal foothold under the Companies Act, 2013.
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”.
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?

8 "An auditor is required to make specific evaluations while forming an opinion

in an audit report." State those evaluations.
9. The auditor’s report shall include a section with a heading “Responsibilities of
Management for the Financial Statements.” SA 200 explains the premise,
relating to the responsibilities of management and, where appropriate, those
charged with governance, on which an audit in accordance with SAs is
conducted. Explain
10. Communicating Key Audit Matter is not a substitute for disclosure in the
Financial Statements rather Communicating key audit matters in the auditor’s
report is in the context of the Auditor having formed an opinion on the financial
statements as a whole. Analyse.
11. The auditor’s report shall include a section, directly following the Opinion
section, with the heading “Basis for Opinion”. Explain what is included in this
“Basis for Opinion” section.
12. Distinguish between an adverse opinion and a qualified opinion. Also draft an
opinion paragraph for both types of opinion.
13. ABC Ltd is a company incorporated in India. It has branches within and outside
India. Explain who can be appointed as an auditor of these branches within and
outside India. Also explain to whom branch auditor is required to report.
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 identify division of audit areas and common audit areas. Explain stating
the other relevant considerations in this regard.
15. The practice of appointing Chartered Accountants as joint auditors is quite
widespread in big companies and corporations. Explain stating the advantages
of the joint audit.
16. Discuss the reporting requirements under 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.
17. Discuss which class of companies are specifically exempt from the applicability
of CARO 2020?

AUDIT REPORT 8.91
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
(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.
(iv) Incorrect: 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.
(v) Incorrect: Communicating key audit matters in the auditor’s report is in the
context of the auditor having formed an opinion on the financial statements
as a whole. Communicating key audit matters in the auditor’s report is not a
substitute for disclosures in the financial statements that the applicable
financial reporting framework requires management to make, or that are
otherwise necessary to achieve fair presentation.

(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.
Answers to Theoretical Questions

1. Refer Para 1.2
2. Refer Para 1.3.
3. Refer Para 5.4
4. Refer Para 5.2

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.
Indicators of a lack of neutrality include the following:
(i) The selective correction of misstatements brought to management’s
attention during the audit.
Example
• Correcting misstatements with the effect of increasing reported
earnings, but not correcting misstatements that have the effect of
decreasing reported earnings.
• The combination of several deficiencies affecting the same
significant account or disclosure (or the same internal control
component) could amount to a significant deficiency (or material

AUDIT REPORT 8.93
weakness if required to be communicated in the jurisdiction). This

evaluation requires judgement and involvement of audit
executives.
(ii) Possible management bias in the making of accounting estimates.
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:

(a) Identify the entity whose financial statements have been audited;
(b) State that the financial statements have been audited;
(c) Identify the title of each statement comprising the financial statements;
(d) Refer to the notes, including the summary of significant accounting
policies; and
(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.

8. Specific Evaluations by the auditor: In particular, the auditor shall evaluate

whether :
(i) The financial statements adequately disclose the significant accounting
policies selected and applied;
(ii) The accounting policies selected and applied are consistent with the
applicable financial reporting framework and are appropriate;
(iii) The accounting estimates made by management are reasonable;
(iv) The information presented in the financial statements is relevant,
reliable, comparable, and understandable;
(v) 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
(vi) The terminology used in the financial statements, including the title of
each financial statement, is appropriate.
9. Responsibilities for the Financial Statements: The auditor’s report shall
include a section with a heading “Responsibilities of Management for the
Financial Statements.”
SA 200 explains the premise, relating to the responsibilities of management
and, where appropriate, those charged with governance, on which an audit in
accordance with SAs is conducted. Management and, where appropriate,
those charged with governance accept responsibility for the preparation of
the financial statements. Management also accepts responsibility for such
internal control as it determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due
to fraud or error. The description of management’s responsibilities in the
auditor’s report includes reference to both responsibilities as it helps to
explain to users the premise on which an audit is conducted.
This section of the auditor’s report shall describe management’s
responsibility for:
(a) Preparing the financial statements in accordance with the applicable
financial reporting framework, and for such internal control as
management determines is necessary to enable the preparation of

AUDIT REPORT 8.95
financial statements that are free from material misstatement, whether

due to fraud or error;[because of the possible effects of fraud on other
aspects of the audit, materiality does not apply to management’s
acknowledgement regarding its responsibility for the design,
implementation, and maintenance of internal control (or for
establishing and maintaining effective internal control over financial
reporting) to prevent and detect fraud.] and
(b) Assessing the entity’s ability to continue as a going concern and
whether the use of the going concern basis of accounting is appropriate
as well as disclosing, if applicable, matters relating to going concern.
The explanation of management’s responsibility for this assessment
shall include a description of when the use of the going concern basis
of accounting is appropriate.
10. Communicating key audit matters in the auditor’s report is not:
(i) A substitute for disclosures in the financial statements that the
applicable
Financial reporting framework requires management to make, or that
are otherwise necessary to achieve fair presentation;
(ii) 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);
(iii) A substitute for reporting in accordance with SA 570 when a material
uncertainty exists relating to events or conditions that may cast
significant doubt on an entity’s ability to continue as a going concern;
or
(iv) A separate opinion on individual matters
11. Basis for Opinion: The auditor’s report shall include a section, directly
following the Opinion section, with the heading “Basis for Opinion”, that:
(a) States that the audit was conducted in accordance with Standards on
Auditing;
(b) Refers to the section of the auditor’s report that describes the auditor’s
responsibilities under the SAs;

(c) 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.
(d) 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.
12. An auditor shall express an adverse opinion, when the auditor having
obtained sufficient and appropriate audit evidence, concludes that
misstatements, individually or in aggregate are both material and pervasive.
Whereas, when the auditor, having obtained sufficient and appropriate audit
evidence, concludes that misstatements are material but not pervasive, shall
express a qualified opinion.
SA705 – “Modifications To The Opinion In The Independent Auditor’s Report”
deals with the form and content of both types of report. The following are
the draft of the opinion paragraphs of the reports.
(a) Adverse Opinion
We have audited the accompanying consolidated financial statements
of ABC Company Limited (hereinafter referred to as the “Holding
Company”) and its subsidiaries (the Holding Company and its
subsidiaries together referred to as “the Group”), its associates and
jointly controlled entities, which comprise the consolidated balance
sheet as at March 31, 2021, the consolidated statement of profit and
Loss, (consolidated statement of changes in equity) and the
consolidated statement of cash flows for the year then ended, and
notes to the consolidated financial statements, including a summary of
significant accounting policies (hereinafter referred to as the
“consolidated financial statements”). In our opinion and to the best of
our information and according to the explanations given to us, because
of the significance of the matter discussed in the Basis for Adverse
Opinion section of our report, the accompanying consolidated financial
statements do not give a true and fair view in conformity with the
accounting principles generally accepted in India, of their consolidated
state of affairs of the Group, its associates and jointly controlled

AUDIT REPORT 8.97
entities, as at March 31, 2021, of its consolidated profit/loss,

(consolidated position of changes in equity) and the consolidated cash
flows for the year then ended.
(b) Qualified Opinion
We have audited the standalone financial statements of ABC Company
Limited (“the Company”), which comprise the balance sheet as at March
31, 2021, and the statement of Profit and Loss, (statement of changes
in equity) and the statement of cash flows for the year then ended, and
notes to the financial statements, including a summary of significant
accounting policies and other explanatory information (in which are
included the Returns for the year ended on that date audited by the
branch auditors of the Company’s branches located at (location of
branches)) . In our opinion and to the best of our information and
according to the explanations given to us, except for the effects of the
matter described in the Basis for Qualified Opinion section of our
report, the aforesaid financial statements 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 March 31st, 2021 and
profit/loss, (changes in equity) and its cash flows for the year ended on
that date.
13. 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.
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.

AUDIT REPORT 8.99
(vi) In respect of multi-national companies, the work can be spread using

the expertise of the local firms which are in a better position to deal
with detailed work and the local laws and regulations.
(vii) Lower staff development costs.
(viii) Lower costs to carry out the work.
(ix) A sense of healthy competition towards a better performance
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–
(i) a banking company as defined in clause (c) of section 5 of the Banking

Regulation Act, 1949 (10 of 1949);
(ii) an insurance company as defined under the Insurance Act,1938 (4 of
1938);
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company as defined in clause (62) of section 2 of the
Companies Act and a small company as defined in clause (85) of section
2 of the Companies Act; and

(v) a private limited company, not being a subsidiary or holding company

of a public company, having a paid up capital and reserves and surplus
not more than one crore rupees as on the balance sheet date and which
does not have total borrowings exceeding one crore rupees from any
bank or financial institution at any point of time during the financial
year and which does not have a total revenue as disclosed in Scheduled
III to the Companies Act (including revenue from discontinuing
operations) exceeding ten crore rupees during the financial year as per
the financial statements.
Answers to Test your Understanding

1. The 18-digit alpha numeric number noticed by her at end of audit report is
Unique Document Identification number (UDIN). It is a system generated
unique number. Its basic objective is to curb the malpractices of non-CAs
impersonating themselves as CAs. It helps in securing reports and documents
issued by practising CAs.
It is required to be stated in case of audit reports and certificates.
2. “Basis for Opinion” is one of basic elements of an audit report in accordance
with SA-700. Even in cases where unmodified opinion is expressed by auditor,
“Basis for opinion” has to be provided by auditor. Basis for opinion section
provides context about auditor’s opinion.
Therefore, Sana’s thinking is not proper.

3. In the given case, auditor has not been able to obtain sufficient appropriate
audit evidence relating to inventories, debtors, creditors, revenues and
expenses. The matter has brought to knowledge of management but no result
has been achieved. Besides, auditor opines that there could be misstatements
and their possible effects could be both material and pervasive.
In such circumstances, he should make disclaimer of opinion in accordance

with SA 705.
4. As per SA 600 - “Using the Work of Another Auditor”, 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. Such review of
audit procedures and findings can be undertaken if principal auditor feels

AUDIT REPORT 8.101
that it is necessary to apply such procedures to obtain sufficient appropriate

audit evidence. It is not an encroachment of another auditor’s domain.
5. Clause (ix) (d) of CARO, 2020 whether funds raised on short term basis have
been utilised for long term purposes, if yes, the nature and amount to be
indicated.
In the given situation, funds have been raised for meeting working capital
requirements for ` 4 crores. Cash credit facilities for meeting working capital
requirements are, by their very nature, short term borrowings. Out of above,
`1 crore have been used by the company for investment in effluent treatment
plant which is ostensibly for a long-term purpose.
Hence, the matter needs to be reported in accordance with requirements of
Clause (ix) (d) of CARO, 2020.


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CHAPTER a

After studying this chapter, you would be able to understand:

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Audit process culminates in formation of opinion by an auditor and expression of

Understanding enormous significance of audit report, Sameer was unequivocal in

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Shouldn’t there be flexibility in reporting in particular situations? How do auditors

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1. FORMING AN OPINION AND REPORTING ON

The requirements of this SA are aimed at addressing an appropriate balance

1.1 Objective of the Auditor

To express clearly that opinion through a written report.

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1.2 To Form Opinion – Auditor to Obtain Reasonable

1.3 Evaluations by the Auditor

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(i) The selective correction of misstatements brought to management’s

 Correcting misstatements with the eﬀect of increasing reported

(ii) Possible management bias in the making of accounting estimates.

1.4 Speciﬁc Evaluations by the Auditor

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Checkbox Specific evaluations by the auditor

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(b) General purpose framework – A financial reporting framework designed to

The term “fair presentation framework” is used to refer to a financial

(i) Acknowledges explicitly or implicitly that, to achieve fair presentation

(ii) Acknowledges explicitly that it may be necessary for management to

The term “compliance framework” is used to refer to a financial reporting

Unmodiﬁed Opinion: The auditor shall express an unmodiﬁed opinion when

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Modiﬁed Opinion: If the auditor:

3.1 Auditor’s Report for Audits Conducted in Accordance

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Basic Elements of an Audit Report are given below:

For example, “Independent Auditor’s Report,” distinguishes the independent

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Identify the entity whose ﬁnancial statements

State that the ﬁnancial statements have been

Identify the title of each statement comprising

Refer to the notes, including the summary of

Specify the date of, or period covered by, each

When the auditor expresses an unmodiﬁed opinion, it is not appropriate to use

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5. Going Concern: Where applicable, the auditor shall report in accordance

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management’s use of the going concern basis of accounting in the

Entities characterized in such law or regulation as public interest entities.

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7. Responsibilities for the Financial Statements: The auditor’s report shall

• Assessing the entity’s ability to continue as a going concern and whether

(a) Preparing the ﬁnancial statements in accordance with the applicable

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management’s responsibilities in the auditor’s report includes reference to both

SA 210 requires the auditor to agree management’s responsibilities in an

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financial statements, management is responsible for assessing the Company’s

I. This section of the auditor’s report shall state:

Objectives of the auditor

That reasonable level of assurance is

That misstatements can arise from

(a) That the objectives of the auditor are to: