CHAPTER SIX

AUDIT REPORT
6.1. Introduction to Audit Report
Audit report prepared in accordance with standards of audit report. Standard of audit report
is a general guide line developed by AICPA (American Institution of Certified Public
Accountant) in 1947. This standard includes four guidelines that must be followed in
preparing audit report. These are:
o The report should state whether financial statement stated in accordance with GAAP.

o The report should identify circumstance in which such principles have not been
consistently observed in the current period in relation to the preceding period.

o In formation disclosed in the financial statement is to be regarded as reasonably

adequate unless either wise stated in the report.

o The report should either contain an expression of opinion regarding the financial
statement taken as a whole, or an assertion to the effect that an opinion cannot be
expressed.

The auditor report is the end product of an audit examination to communicate the users of
financial statements, and auditor’s inclusions regarding:
 Whether financial statement portray a true and fair view of the organizations financial
position and performance.

 Whether financial statement comply with relevant legislation. E.g. company law

The auditing profession recognizes the needs for uniformity in reporting to avoid
confusion. Users have considerable difficult in interpreting the meaning of an auditor’s
report if each were an original creation. The professional standards, therefore, have
enumerated type of report that should be included with financial statement. The wording of
audit report reasonably uniform, but different audit reports is appropriate for different
circumstance.
In preparing audit report the auditor must consider the following important points:
 S/he has to objective in preparing audit report. It should have to be factual, unbiased and
free from distortion.

 The report must be clear. Clear report is easily understandable and logical. Therefore,
avoiding unnecessary technical language provide sufficient supportive information.

 Make the report concise and to the point.

The most type of audit report is the standard unqualified audit report. Auditors issue the
standard unqualified audit report when the following conditions have been met:

 All auditing standard have been followed in performing audit activity.

 Sufficient and appropriate evidence have been accumulated.

 All business organizations financial statement is presented in accordance with generally

accepted accounting principles.

 There are no circumstances requiring the addition of an explanatory paragraph or

modification of the report.

9.1.2. Parts or Contents of Audit Report

The standard unqualified audit report includes the following contents.
Title: audit report should be addressed to the members of the company.

Address: the address of the company to whom the audit accomplished.

Introductory Paragraph: introductory paragraph contain in three important points.

Simple statement that the auditor performed an ‘audit’.

Lists the financial statement audited including balance sheet dates and accounting period
for income statement and statement of cash flow.
States that the financial statements are the responsibility of management and the auditor
responsibility is to express an opinion on the statements based on an audit finding.

Scope paragraph: is the factual statement about what the auditor did in the audit. This
paragraph states:

Whether the auditor followed GAAS.

Whether audit design to obtain reasonable assurance about the statements are free of
material misstatement.

Discuss the audit evidence accumulated and accumulated evidence is appropriate to

express opinion.

Opinion paragraph: include the auditor conclusions based on the results of examination.

Auditor signature: the signature may be signed by audit firm or by the individual auditor
or by both.

Date: the appropriate date for the report is the one on which the auditor has completed the
most audit procedure in the field. This date is important to users because it indicates the
last day of auditor’s responsibility for reviewing of significant events that occurred after
the date of the financial statement.

9.2. Types of audit Report

Based on the opinion that the auditor give about the how the financial statement of the
organization presented and compliance with the required regulation, the auditor prepare
different audit reports.
An auditor’s examination under GAAS may produce one of the four types of the opinion.
1. . Unqualified Audit Opinion/report

An unqualified audit opinion communicates a favorable signal and means of the financial
statements present financial position, operational result, change in financial position in
conformity with GAAP. This type of report cannot be issued if any of GAAS is violated.
However, when an auditor emphasize in the report a particular matter of another auditor,
when there is inconsistency of accounting principle and methods but properly disclosed in
the financial statements, and when auditor’s have hesitation on the going concern of the
business the middle paragraph like introductory paragraph, scope and opinion paragraph
may be changed and additional explanatory paragraph can be added. Such opinion termed
as unqualified opinion with explanatory paragraph. But the additional paragraph does not
change the meaning of unqualified opinion.

9.2.2. Qualified Audit Opinion/report

An auditor issues qualified audit opinion when there is significant limitation on the scope
of the audit or when financial statement is not in accordance with GAAP or when there is
inconsistence of GAAP but the overall financial statement are fairly presented.
Whenever auditor issues a qualified report, s/he use the term ‘except for’ in the opinion
paragraph. The implication is that the auditor is satisfied that the overall financial
statement are fairly stated ‘except for’ a particular aspects expressed.
E.g. if accounting for inventory or accounting for cash or GAAP is not followed; and if the
auditor believes that this does not over shadow fairness of the financial statement s/he may
issue qualified audit opinion.

6.3. Adverse Audit report/ Opinion

An adverse audit opinion is issued when the auditors believe that the overall financial
statements are so materially misstated or misleading that they do not present fairly the
picture of the organization. The auditor issues adverse opinion when s/he has gathered
sufficient evidence and conclude that the financial statement are materially misstated.
E.g., disagreement with accounting policy.

9.2.4. Disclaimer Audit Opinion

Disclaimer audit opinion issued when the auditor has been unable to satisfy himself/herself
that the overall financial statements are fairly presented. This type of opinion issued when
there is several limitations on the scope of the audit examination which prevents the
auditor from expressing an opinion on the financial statement as a whole.
Disclaimer audit opinion is different from adverse opinion because it is issued when there
is no sufficient evidence to conclude whether financial statements are fairly presented or
not.
CHAPTER VII: AUDIT OF COOPERATIVE SOCIETIES
Introduction

7.1. Definition, objectives and Nature of Audit in Cooperatives

Cooperatives are basically socio-economic organizations to promote the economic
interests of their members with democratic management as its key principle. These
cooperatives have uneducated members especially at the primary level and the
cooperatives are managed by ill paid personnel / employees. Hence the handling of
the business and money inherits certain temptations by both the vested interests and
employees. These conditions call for certain precautions, which require many hard
and fast rules with superior powers. To ensure the proper use of funds and their
accounts, there needs constant and vigilant scrutiny of the accounts and examination
of the general management. So examination of accounts or auditing the accounts of
cooperatives is considered essential.

Definition of Cooperative Audit

According to O.R.Krishnaswami, “Cooperative Audit is an examination of

accounts and an inquiry into the affairs of the society in order to ascertain the
correctness of accounts and the extent of which the activities of the society were
useful in promoting the socio-economic welfare of its members through the
satisfaction of their needs in accordance with the principles of cooperation”.

Objectives of cooperative audit

 To ascertain the correctness of accounts and records maintained by the

cooperative enterprise;
 To ascertain the actual financial conditions and earning of the cooperative society;
 To detect and prevent the occurrence of errors and frauds;
 To assess how far the cooperative society has been able to carry on business on
sound cooperative lines and secure economic benefit to its members; and
  To examine whether the affairs of the society have been carried on in accordance
with the principles of cooperation and the provisions of cooperative law.
Needs of Auditing for Cooperative organization
Need for Cooperative Audit

1. Protection of members: The representatives from among the members are

expected to carry on the administration of the society in accordance with the
principles of cooperation. For this purpose they have to institute a check system
over them. Audit is such check on the representatives in the interest of members.
2. Protection of creditors: Audit is needed to know the credit worthiness of
cooperatives. The creditors know the credit worthiness only through audit reports
and financial statements published by the cooperatives.
3. Protection of investors: Cooperatives accept deposits from the members and
public. The depositors attach much importance to audit of accounts of the
cooperatives. Audit gives them much confidence in the management of the
societies and protects their interests by making the actual state of the affairs of the
cooperatives known.
4. Prevention of frauds: The accounts are maintained by the accountants and the
affairs by the managers of the cooperative society. Audit acts as a check on those
responsible persons, makes them to be regular and efficient in their work, and
prevents the occurrence of frauds and errors.
5. Successful management: The cooperatives are chiefly composed of uneducated
members. So the danger of their perversion to wrong ends is no means less and
handling of money involves certain temptations. These factors call for certain
precautions. Auditing is one of such precautions.
6. Maintenance of public image: Audit is necessary to maintain the public image.
By publicizing the financial statements and audit report through the media, the
public image of cooperatives can be maintained.
Difference between Cooperative audit and general Audit
The differences between cooperative audit and General Auditor audit of private
enterprises are given below:

Point of difference Cooperative Audit General / Private Audit

Statutory obligation Statutory audit but Statutory audit but

responsibility of taking up responsibility is of the board
audit is of the Registrar of of directors.
Cooperative Societies

Appointment of auditor By the Government By the shareholders

Act and Rules As per the Cooperative As per Company Law

Proclamation and bylaws,
and instructions by the
Registrar

Scope The scope is much as the The auditor has to report the
auditor has to examine the correctness of the profit and
overdue and verify & value loss, and the balance sheet.
the assets and liabilities.

Audit report Auditor has to submit report The auditor has to report to
to the Registrar through the the shareholders only
cooperative audit officer

Role of the auditor The auditor is required to be The shareholders and board
educative besides a critical members are mostly
to be the philosopher and businessmen and the auditor
guide as the members are is not expected to guide
not shrewd businessmen them.

Responsibility of the The auditor is expected to There is no such

auditor look after rules and bylaws responsibility of taking any
and if there are any
 financial losses due to action by the auditor.
negligence, he has to report
specifically to the Registrar
for instituting proceedings
for assessing damages.

Audit fee Fixed by the Registrar Fixed by the general body

by specific contract.

Qualification of the Auditor Determined by the Registrar Auditor should be a Charted

Accountant

Power of the Auditor Cooperative auditor is given Auditor has no such power
power to summon the
person for producing the
records and receive
statements from employees
as well as members.

Nature or Aspects of cooperative audit

There are two aspects of cooperative audit viz., Statutory audit and State controlled audit.

Statutory Audit: When the audit of a cooperative is compulsory and statute, it is said to
be a statutory audit. The audit of a cooperative society is compulsory according to the
Cooperative Proclamation and it should be conducted at least once in a year. Thus the
audit of a cooperative society is annual legal obligations more over cooperatives are
public concerns with public importance.

State controlled audit: Cooperative movement in most of the developing countries is a

sponsored one. The government helps the cooperatives both financially and managerially.
The cooperatives registered under the Cooperative Proclamation are having the onerous
task of safeguarding the interests of the members and ensuring proper management. On
this basis, the Government from its Cooperative (Audit) Department appoints auditors to
conduct audit in cooperatives. The functioning and control of auditors are vested with the
department and a copy of audit should be submitted to the government.

6.2. Types of Cooperative Audit

Cooperative audit can be of four types. They are:

Interim Audit: Interim audit is a concurrent system of audit as applied to the audit of
certain types of cooperative societies such as rural / village credit societies. It is
conducted in the interim period between one final audit and the other. During this audit
process the auditor checks the financial transactions from the date of the previous final
audit to the date of his visit and verifies the ledger balances. A statement of receipts and
payments for the period is prepared; administrative check is done in great detail. It
involves a detailed investigation into the affairs of the cooperative. Verification of loans
and examination of the items in the property statements of members are carried out
extensively. A detailed list of defects noticed is also prepared. The auditor report is
prepared in duplicate in the prescribed printed format. The original is given to the society
and the duplicate is submitted to the office of the district cooperative audit officer.
Interim audit minimizes the work of the final audit to a great extent with respect to
mechanical checking and administrative investigation. This audit process is done by the
junior auditors.

Concurrent Audit: Concurrent audit is one which is done during the course of the period
under review. The auditor is engaged continuously through out the year or in the
alternative, attending to his work at frequent intervals or a tleast once in a quarter during
the period. It is not an audit commenced after the end of the period. Hence it is termed as
concurrent audit.

This kind of audit is followed and adopted in big cooperatives like central cooperative
banks, urban cooperative banks, wholesale consumer stores, sugar mills, spinning mills,
etc., where the work involved is considerable and where it would be disadvantageous to
commence the audit after the period.

Final Audit: Final audit is the statutory annual audit conducted in every registered
cooperative society every cooperative year. It is a complete audit for the year leading to
closing the accounts for the particular year and the preparation of receipts and payments
statements, profit and loss account, and the balance sheet. The work involved in the final
audit consists of a mechanical check and administrative examination of books of
accounts, registers, etc., from the date up to which the interim or concurrent audit has
been completed till the last date of the cooperative year. It also includes verification of
cash balance and securities, verification and valuation of assets and liabilities, and
examination of overdue debts, if any, with special reference to the statutory obligation
under the cooperative proclamation. A thorough investigation into the affairs of the
society should be made in order to gauge the benefit rendered by the society to its
members.

The final audit report is prepared in a prescribed format. The format varies according to
the type of cooperative. One copy of the audit report is submitted to the district
cooperative audit officer with the various schedules prepared by the auditor. The auditor
should also furnish a certificate of audit in the prescribed format.
Test Audit: Test audit is an audit conducted in order to test the correctness of the final
audit done by the auditor. It is a re-audit process of the accounts of a certain number of
societies which an auditor has audited. Test audit is not an examination of accounts at
random; it is a full re-audit of all accounts of a cooperative society. But all societies are
not test audited during a year; only a certain percentage of societies are test audited. The
objectives of test audit are as follows:

 To check the efficiency of audit staff;

 To find out the mistakes committed by the audit staff so as to guide them to do
with work property; and
 To ensure correct and efficient audit of societies.

6.3. Right, duties and powers of Cooperative Auditors

Cooperative Auditors’ Rights and Duties

The auditor has various detailed duties to perform in order to achieve the overall duty to
report on the true and fair view. In order to fulfill these duties, various legal rights are
given to the auditor.

Duties of the auditor

The duties of the auditor under national legislation generally fall under the following
headings:
 To report to the shareholders or directors on whether financial statements of the
company show a true and fair view or present fairly and have been properly
prepared in accordance with legislation
 To consider whether the information in the Management report is consistent with
the financial statement
 To give various details required by legislation in his report, if not given in the
financial statements themselves.
 To form an opinion as to whether:
 o Proper accounting records have been kept by the company
o The profit for the year and balance sheet totals are fairly stated
o Such information and explanations as the auditor thinks necessary for the
performance of his duties have been received from the company’s officers
 To report on any violation of law or the company’s constitution
 To ma a statement of circumstances when he ceases to hold the office of auditor
for any reason.

Rights of the auditor

The rights given to the auditor under national legislation are designed to ensure that he is
able to fulfill his duties and responsibilities to the members. These rights are fundamental
to his independence. In countries with a well-developed auditing profession, auditors
generally have unrestricted rights of access to books and records of a company, subject
only perhaps, to considerations of national security. In those countries where there is no
tradition of reporting in true and fair terms, it often comes as a surprise to directors and
employees to find auditors asking for documents that previously, only the tax auditors
had a right to see. The list of rights set out below reflects the position in countries in
which the profession is mature.

Legal rights:
 The rights of access t the books, records, documents and accounts of the company
 The right to require from the officers of the company such information and
explanations as he thinks necessary for the performance of his duties.
 The rights to:
o Receive all notices relating to any general meetings of the company
o Attend any general meetings, and
o Be heard at any general meeting on any part of the business, which
concerns his as auditor.
 The right to be sent by the company a copy of a notice of intention to propose his
removal or replacement and the right to make written or oral representations
 The right to require the directors to requisition a general meeting on his
resignation and to attend and be heard at that and any other meeting that concerns
him.