AUDIT REPORT (Notes for CA Final, ICAI Compiled from ICAI Study Material) -covering SA 700, 705,706

CA Piyali Parashari

CA, CWA, BCOM (Hons)

CA Piyali Parashari

AUDIT REPORT

What is Audit Report?

The report is the medium of communication of the auditor's expert views on the FS and it has a significant bearing on the credibility of such statements.

By expressing views in the report, the auditor takes a great responsibility because a large number of people are likely rely on the FSs.

Auditors report is linked with the terms of his engagement. a. In statutory audit terms are mentioned in the concerned law b. In non statutory audit it is mentioned in the agreement

Hence the terms of the engagement should be in writing so that possibilities of ambiguities or different interpretations of the terms can be eliminated.

What is the Auditors objectives regarding Audit Report?

Significance of the nature of audit examination:

The nature of the audit examination carried out also has a very great impact on the audit opinion.

Standards issued by the AASB constitute auditing standards which the auditor has to follow in performing his audit.

Also as per Section 143 of the Companies Act, 2013 the auditor in our country is required to state certain facts like whether he has obtained all the information and explanations considered necessary by him and whether the balance sheet and the statement of profit and loss are in agreement with the books of account. This helps in indicating the nature of examination carried out.

In the audit report of partnerships and sole traders, we see reports stating that the audit has been carried out by reference to the "books of account and the vouchers produced" This highlights the nature of audit carried out, it will suggest proper evidence collection and arithmetic agreement. The famous case of Deputy Secretary to the Govt. of India, Ministry of Finance v. S.N. Das Gupta. In this case, apparently to disown responsibility, the auditor indicated that he had not carried out certain procedures. This ultimately resulted in his being charged with

form an opinion on the FS on the basis of audit evidence

Express opinion through a written report which states the basis of forming opinion

Audit is verificatory in nature. Opinion formed through verification and evaluation

Report have a fact para and an opinion para: facts should be stated as they are and should be separated from opinion para

Report should also state the scope and the limitations.

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professional misconduct and being found guilty. The statement in the report that he had not carried out certain procedures suggested the nature of examination actually carried out by him and that established the meaninglessness of the opinion.

Significance of obtaining information and explanation from management (Sec 143(3) of Companies Act 2013) casts a duty on the auditor to state whether the

information and explanations considered necessary by him for the purpose of his audit has been obtained.

MANAGEMENT RESPONSIBILITY

AUDITORS RESPONSIBILITY

The management of the company is expected to have thorough understanding of the implications of all material transactions and therefore auditors have a right to ask for information and explanation from the management so that they clearly understand the impact of the transactions on the accounts.

Therefore, if any vital information is deliberately withheld from the auditor and he had no means to know the existence of such information, and in case the accounts turn to be wrong for that reason, the auditor should not be held guilty or negligent.

If, however, the auditor has means to know of the existence of such vital information but he ignored it, he would be held guilty on that account.

The information and explanations given to the auditor by the management should be relied upon if the auditor is satisfied that they are prima facie reliable, having regard to the circumstances.

Where some basic documentary evidence is available the auditor should insist that it is shown to him. He should not reject the information and explanations as fabricated unless he has noticed something suspicious about them.

The auditor should also see whether the information and explanations made available to him have come from the company's records or they have been specially formulated.

If they have been specially formulated the auditor should exercise a little more care to examine them for any apparent unreasonableness or inconsistency.

However, no information and explanations should be accepted as reliable without subjecting that a scrutiny, based on available evidence and common sense.

In the audit report there will be a part devoted to recommendations. If an auditor feels that certain improvements in the accounting control or in the records are called for, he shall make a separate report as suggestions for improvements.

Nature of Auditor's Opinion: He should prefix the expression "in my opinion" to the opinion part of the report. Then he will

be able to separate the facts and opinion. If the auditor is satisfied that the FS under report correctly summarise the year's transactions

and are truthfully and fairly presented he will issue an opinion that will make the FS credible. On the other hand, if the auditor is not satisfied about the proper presentation of facts in the

FS or is of the opinion that inappropriate classification, aggregation, etc. have been used or important information has been withheld, he has to issue a qualified opinion.

He may qualify the truth and fairness of the FS either on an overall basis or for some aspects specified in the report. This will put the readers of his report on guard and the auditor will remain protected to the extent he has qualified the report, from allegations of professional misconduct or negligence against him.

In the course of audit he takes care to see whether the FS are prepared and presented in accordance with the principles of accounting and these are applied consistently;

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Clauses (5), (6), (8), and (9) of Part l, Second Schedule to the Chartered Accountants Act, 1949

have a direct bearing on the reports of the chartered accountants in India. A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he

1. fails to disclose a material fact known to him which is not disclosed in FS but disclosure of which is necessary to make the FS not misleading;

2. fails to report a material misstatement known to him to appear in a FS with which he is concerned in a professional capacity;

3. fails to obtain sufficient information to warrant the expression of an opinion or his exceptions are sufficiently material to negate the expression of an opinion, and

4. fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances.

STANDARDS OF AUDITING

GENERAL REPORTING FRAMEWORK

FAIR PRESENTATION FRAMEWORK COMPLIANCE FRAMEWORK

A. It refers to the FRF that requires compliance with requirements of the framework.

B. Acknowledges explicitly/implicitly that the following may be necessary for fair presentation of FS a. Management may need to provide

disclosures beyond that required by FRF.

b. Management may depart (in rare cases) from a requirement of the framework

Refers to FRF that requires compliance with the requirements of the framework but does not contain the acknowledgement as in the FRF.

SA 700 (Revised)- Forming an opinion and reporting on FS

SA 705 – Modifications to the opinion in the Independent Auditors Report

SA 706 – Emphasis of Matter Paragraph and Other Matters Paragraph in the Independent Auditors Report

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AUDITORS RESPONSIBILITY STATEMENT (WORDINGS USED)

I) An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the FSs.

II) The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the FSs, whether due to fraud or error. In making those risk assessments, the auditor considers IC relevant to the entity's preparation of the FSs in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's IC.

III) When the auditor also has to express an opinion on the effectiveness of IC together with the audit of the FSs, the auditor shall omit the phrase “that the auditor's consideration of IC is not for the purpose of expressing an opinion on the effectiveness of IC”; and

IV) An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made by management, as well as the overall presentation of the FSs.

BASIC ELEMENTS OF THE AUDIT REPORT

• The TITLE should clearly indicate that the report is of the Independent Auditor

TITLE

• The report must be addressed as per the circumstances of theengagement.ADDRESSEE

• Identify the entity whose FS have been audited• State that the FS have been audited,• Identify the title of each statement that comprises the financial

statements,• Refer to the summary of significant accounting policies and other

explanatory information, and• Specify the date or period covered by each FS.

Introductory Paragraph

• It prescribes that the management/ TCWG is responsible for thepreparation of the FS as per the applicable FRF.

• This responsibility includes the design, implementation andmaintenance of ICs relevant for the preparation of the FS that arefree from material misstatements due to fraud and error.

• Management's responsibility shall be described as stated in the• Where the FS are prepared in accordance with a fair presentation

framework, the the auditor's report shall refer to "the preparationand fair presentation of these FS" or "the preparation of FS that give atrue and fair view", as appropriate in the circumstances.

Management's responsibility

for the FS

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• The report shall state that• it is the auditors responsibility to express an opinion on the FS based

on the audit.• audit was conducted as per the Standards of Auditing issued by ICAI

and governing laws and regulations. That the SAs require the auditor tocomply with ethical requirements and that the auditor has planned andperformed the audit to obtain reasonable assurance about whether theFS are free from material misstatements.

• Also state whether he believes that SAAE has been obtained for formingan opinion.

Auditorsresponsibility

•The auditor should use the following phrases in the Audit Report•In case of Unmodified Opinion on FS prepared as per Fair PresentationFramework:•(a) The FSs present fairly, in all material respects, in accordance with theapplicable FRF or

•(b) The FSs give a true and fair view in accordance with the applicable FRF•In case of Unmodified Opinion that FS are prepared as per ComplianceFramework:•(a) The FSs give a true and fair view in accordance with the applicable FRF

AuditorsOpinion

•The other reporting responsibilities in the auditor's report on the FSs, shallbe addressed in a separate section in the auditor's report that shall be sub-titled "Report on Other Legal and Regulatory Requirements," orotherwise as appropriate to the content of the section

•If the auditor's report contains a separate section on other reportingresponsibilities, the headings, statements and explanations shall be underthe sub-title "Report on the Financial statements." The "Report on OtherLegal and Regulatory Requirements" shall follow the "Report on theFSs".

Other Reporting Responsibilties

•It should be signed by the auditor in his personal name.•If firm is appointed as auditor- report signed in personal name andname of firm.

•The firm registration number and membership number of ICAIshould be mentioned.

Signature of theAuditor

•It is the date on which the auditor signs the report expressing anopinion on the FS

•The date of report informs the user that the auditor has considered theeffect on the FSs and effect on the report, of the events and transactionsof which the auditor became aware and that occurred up to that date.

•The date should not be prior to the date of auditor obtaining SAAEincluding evidence that• All statements comprising the FS including notes have been prepared.•Those with authority have asserted that they have taken responsibilityfor the FS.

Date of theAuditor's Report

•The report shall name specific location which is ordinarily the city whereaudit report is signed.

Place of signature

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EVALUATIONS TO CONCLUDE ON REASONABLE ASSURANCE

SUPPLEMENTARY INFORMATION PRESENTED WITH THE FS

SI that is not required by the applicable FRF but is an integral part of the FS because it cannot be clearly differentiated from the audited FS due to its nature and how it is presented shall be covered by the auditor’s opinion.

Modified Opinions:

SA 705 is applicable when the auditor concludes that a modification to the auditor's opinion on the FS is necessary. Types of modified opinion as per SA 705.

1. Qualified opinion 2. Adverse Opinion

Supplementary Information (SI)

Auditor to evaluate whether SI is differentiated from audited FS.

Not required as per FS but presented in FS If not

differentiated

Auditor shall request management to differentiate it.

If management

refuses Auditor shall state in Audit Report that such information is not audited.

If FS adequately disclose significant accounting policies

Accounting policies are consistent & appropriate as per FRF

Accounting estimates are reasonable

Information in FS is relevant, reliable, comparable, understandable

Disclosures are adequate to enable users to understand effect of material transactions/ events on info in FS.

Terminology used in FS is appropriate.

FS adequately describe/ refer the applicable FRF

FS prepared in all material respects as per FRF

Qualitative aspects of accounting practices and possible bias in management judgement considered.

Materiality of uncorrected misstatements individually or in aggregate (SA 450) considered

SAAE has been obtained (SA 330)

Conclusion on reasonable assurance

AUDIT OPINION

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3. Disclaimer of Opinion When modification is required?

1. When auditor concludes that based on AE obtained FS as a whole are not free from material misstatements

2. Auditor is not able to obtain that SAAE to conclude that FS as a whole are free from material misstatements.

How to determine which Modified Opinions to be given?

Qualified Opinion to be issued when: misstatements are MATERIAL BUT NOT PERVASIVE

1.

2. Qualified opinion should be expressed as “ except for” for matters requiring qualification. Adverse Opinion to be issued when: misstatements are BOTH MATERIAL AND PERVASIVE Disclaimer of Opinion to be issued when

I. misstatements are MATERIAL AND PERVASIVE & SAAE NOT OBTAINED

a.

Auditor has SAAE Concludes that misstatements as a individually or in aggregate are material but not pervasive to the FS

Auditor not able to obtain SAAE on which to base his opinion.

Concludes that possible effects of undetected misstatements on the FS could be material but not pervasive.

Auditor has SAAE Concludes that misstatements as a individually or in aggregate are material AND pervasive to the FS

Auditor not able to obtain SAAE on which to base his opinion.

Concludes that possible effects of undetected misstatements on the FS could be BOTH material & pervasive.

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II. RARE CIRCUMSTANCES WHERE THERE ARE MULTIPLE UNCERTAINTIES

a.

MANAGEMENT IMPOSED LIMITATION AFTER ACCEPTANCE OF AUDIT

When auditor issues Adverse Opinion or Disclaimer of Opinion on FS as a whole, his report shall NOT HAVE any Unmodified Opinion on either of the following

i) On a single FS ii) One or more specific elements, items or accounts of the FS

This unmodified opinion will contradict the auditor adverse opinion or disclaimer of opinion on the FS as whole.

FORM AND CONTENT OF AUDITORS REPORT WHEN OPINION IS MODIFIED

BASIS OF MODIFICATION PARAGRAPH

To be PLACED BEFORE OPINION PARAGRAPH & DESCRIBE THE MATTER THAT GAVE RISE TO MODIFICATION A. Material misstatement is of specific amounts in the FS this para should provide

• a description and quantification of the financial effect of the misstatements. • if quantification is not possible then he shall state so in the para

B. For misstatement relating to narrative disclosures, para should provide explanation of how disclosures are misstated.

C. If misstatement relates to non disclosure of information, auditor shall discuss with i. TCWG

ii. Describe in Basis of Modification para the nature of the omitted information iii. Include the omitted disclosures if

a. allowed by law b. he has obtained SAAE about the information.

Auditor has SAAE on all possible uncertainties

Concludes that it is NOT POSSIBLE to form an opinion on the FS due to potential interaction of the uncertainties and possible cumulative effect on the FS.

Auditor accepts the audit

After acceptance by auditor, management puts limitation on scope of the audit

Auditor concludes that qualified / disclaimer of opinion on FS will be required.

Request the management to remove limitation.

If the management refuses auditor to communicate matter to TCWG

Auditor has to determine if it is possible to perform alternate procedures to obtain SAAE.

If Auditor is not able to obtain SAAE he has to determine the implications.

If he concludes that the effect of undetected misstatements on the FS is material but not pervasive he should qualify his opinion

If he concludes that the effect of undetected misstatements on the FS is material AND pervasive and qualification of his opinion will not communicate the gravity of situation he shall i)Resign (if not prohibited by law) OR ii) Disclaim his opinion if resignation is not possible.

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D. If modification is due to inability to obtain SAAE give reasons for that inability E. Even when auditor has given an Adverse Opinion or Disclaimer the Basis of Opinion para

should provide reasons for the Modification.

OPINION PARAGRAPH

When auditor modifies audit opinion he shall use headings “Qualified Opinion”, “Adverse Opinion” or “Disclaimer of Opinion” as appropriate. Also communicate with TCWG in all cases.

Qualified Opinion Adverse Disclaimer of Opinion Basis of qualification State the

i) Qualified opinion ii) Impact on “true and

fair view” comment

Basis of adverse opinion Adverse Opinion; Negative

comment on “true and fair view”

Basis for disclaimer Factual statement of “no

opinion” is given

Statement: In the auditors opinion , except for matters stated in the Basis for Qualified Opinion para, i) the FS present fairly (or give a true & fair view) in all material respects in accordance with the applicable FRF – when reporting as per Fair Presentation Framework ii) the FS have been prepared in all material respects as per applicable FRF- when reporting as per compliance framework.

Statement: In the auditors opinion , because of the significance of the matters stated in the Basis for Adverse Opinion para, i) the FS do not present fairly (or give a true & fair view) in all material respects in accordance with the applicable FRF – when reporting as per Fair Presentation ii) the FS have not been prepared in all material respects as per applicable FRF- when reporting as per compliance framework.

Statement: In the auditors opinion , because of the significance of the matters stated in the Basis for Disclaimer of Opinion para, i) The auditor has

not been able to obtain SAAE to provide a basis for forming an opinion. AND

ii) The auditor does not express an opinion on the FS.

AMENDMENT OF AUDITOR’S RESPONSIBILITY STATEMENT WHEN AUDITOR MODIFIES REPORT: The auditor shall amend the description of auditors responsibility statement to state that

QUALIFIED OPINION ADVERSE OPINION DISCLAIMER OF OPINION

-the auditor believes that the AE the auditor has obtained is SAAE to provide a basis for the modified opinion.

the auditor believes that the AE the auditor has obtained is SAAE to provide a basis for the modified opinion.

“Because of the matters described in the Basis for Disclaimer of Opinion para we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.”

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EMPHASIS OF MATTER PARA (SA 706)

It deals with additional communication which auditor considers necessary for drawing attention of users to a matter presented in the FS that is necessary for users to understand the FS. Condition for using EoM: Auditor has obtained SAAE that matter is not materially misstated in the FS. EoM only highlights/gives further information of matters presented in the FS. It does not affect the auditors opinion. When EoM is to be given: a. If matter is adequately disclosed in FS for points under YES, then EoM given. b. If matter not adequately disclosed in FS for points under YES, then Modified Opinion c. If extreme situations involving multiple uncertainties that are significant to FS then

Disclaim opinion d. For matters under NO, give Modified report or Disclaimer

YES NO .

Inclusion of EoM does not affect the OPINION given. EoM is not a substitute for either

i) Auditor expressing a qualified/ adverse / disclaimer of opinion ii) Disclosures in FS as per applicable FRF

Procedure for including EoM in audit report

i) Immediately after opinion para in audit report ii) Use the head “Emphasis of Matter” paragraph iii) Include clear reference to matter being emphasized and where they are disclosed in the

FS. iv) Indicate that Audit Opinion is not modified due to matter stated in EoM.

EoM Other Matter

1. Matters presented or disclosed in FS or notes also

Matters not presented or disclosed in notes.

2. Matters of fundamental importance or matter is unusual.

Matters relevant to users for understanding the audit.

When should Other Matter paragraph be used?

i) PY audit was conducted by another CA firm. ii) Auditor is not able to resign from assignment even though scope limitation is pervasive iii) Reporting on more than 1 set of FS iv) Restriction on distribution and use of auditor’s report.

Going concern

Material Misstatement in opening balances not disclosed

Scope Limitation

Non provision for contravening with applicable laws

Significant uncertainty: future outcome of litigation

Non compliance with Accounting Standards

Insufficient appropriate audit evidence for opening balances

Early adoption of new AS with pervasive effect to FS

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Unqualified Report

It is to be ISSUED IN THE FOLLOWING CIRCUMSTANCES.

Modified Report: a. Issued when there is Scope Limitation b. Issued when there are material disagreements with the Management.

SIGNATURE ON AUDIT REPORT

A CA in practice signs the report in the name he is registered as a practitioner.

For a firm: The partner should sign his own name in his own hand for and on behalf of the firm appointed to audit the records. Clause 12 of Part I of First Schedule of Chartered Accountants Act 1949 provides that a CA in practice shall be guilty of professional misconduct if he allows a person

a. Not being a member of the Institute or b. A member not being his partner

To sign on his behalf or on behalf of his firm any FS. This ensures that the line of professional responsibility is clear.

Auditors report is considered Modified when it includes

Matters that do not affect audit opinion

Emphasis of matter

Matters that affect Audit Opinion

Qualified opinion

Adverse opinion

Disclaimer of opinion

Changes in accounting principles/methods of their application and effects of changes have been properly disclosed

Auditor concludes that FS give a true and fair view as per applicable FRF

FS have been prepared as per GAAP (Generally Accepted Accounting Principles) and have been consistently applied.

FS comply with related statutory regulations

All relevant matters relevant for proper presentation of FS have been disclosed.

If firm appointed for audit: The partner of the firm who is a CA may sign (sec 145 & 141(2) of Companies Act 2013

Individual: His name/ name of firm of which he is sole proprietor

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AUDIT REPORT UNDER COMPANIES ACT 2013

SEC 143: Auditors have to report to the members as per this section. Audit report should be classified into 2 categories.

i. Statement of Facts ii. Opinion

Sec 143(3): The auditor has to state the following in his report

The OPINIONS which the auditor is required to express are. (i) Whether proper books of account as required by law have been kept by the company so far as it appears from the examination of the books and proper returns adequate for the purposes or the audit have been received from branches not visited by him; (ii) Whether the accounts give the information required by the Act in the manner so required,’ (iii) Whether in his opinion, the statement of profit and loss and balance sheet complied with the accounting standards referred to in Section 133,’ (iv) Whether the FS gve 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.

Whether he has sought and obtained all the information and explanations which in his

opinion is necessary for the audit and if not details thereof & the effect of such info on FS

If in his opinion

a. proper books as per law have been kept as appears from his examination on those books

b. proper returns have been received from branches not visited by him

Whether the report on the A/cs of any branch office audited

under sub-section (8) by a person other than the

company's auditor has been sent to him & how he has dealt

with it in preparing his report;

Whether the company's BS & P&L dealt with in the report are in agreement with the books of

account and returns;

the observations or comments of the auditors on financial transactions or

matters which have any adverse effect on the functioning of the company;

whether, in his opinion, the FS

comply with the AS;

Whether any director is disqualified from being

appointed as a director as per sec 164(2)

Any qualification or adverse remark

regarding maintenance of

accounts

Whether company has adequate Internal Financial Controls &

their effectiveness

Other matters (as per Rule 11 of Companies (audit and auditors) Rules 2014

a. whether CO has disclosed impact of pending litigations on its financial position in the FS

b. whether CO has made provision for material forseeable loss under long term contracts and derivative

contracts as per AS/Law

c. Whether there has been delay in transferring funds to the Investor Education and Protection Fund.

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Statement of Facts

They are complimentary to the opinion If facts are adverse favourable opinion cannot be given Only very important and basic facts about the accounts are to be stated. The Statement of facts indicates the credibility of the accounts.

REPORT UNDER SECTION 143(1) OF COMPANIES ACT 2013

1. Auditor has to make certain enquiries (& not investigation of matters specified here) during the course of his audit.

2. He does not have to report on matters specified in this section unless he has special comments to make on items specified here.

3. If he is satisfied with the result of the enquiries he does not have to report that he is satisfied.

Inquiries Explanation

a) Loans & Advances given: Whether loans and advances made by the company on the basis of security have been properly secured & whether the terms are prejudicial to the interests of the company or its members

b)Transactions:

Whether transactions of the company represented merely by book entries are prejudicial to interests of company

All loans and advances as per Part I of Schedule III of the Act (which are not ‘deposits’) should be considered here.

Such loans and advances should be made on the basis of security (movable/immovable, belonging to borrower /not, of which physical possession is given/ only charge is given to lender)

•The charge should be registered as per Sec 77

Terms imply the security, interest and repayment schedule.

•Other considerations: credit standing of borrower, market rate of interest, type of security, purpose of loan

Loans to entities in which directors/ their associates are interested: to be checked for prejudicial terms

Members: refers to the class of members (viewpoint of reasonable return & safety of capital)

•Loan approved by members and/or Government: it is prima facie evidence that loan is not prejudicial.

Book entries should correctly record transactions that have taken place.

•if not they should be corrected/ reported by auditor

•No entries should be made of transactions not taken place

Auditor should inquire about transactions only recorded as book entries for which there is no other evidence

•Auditor should inquire if transactions actually taken place & whether they are prejidicial to interest of company.

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c)Investments: Whether the Co not being an Investment/Banking Co has sold assets consisting of shares, debenture and other securities at a price less than purchase price

d) Deposits: Whether Loans and Advances made by the Co have been shown as Deposits.

e) Personal Expenses Whether personal expenses

have been charged to revenue.

f) Allotment of Shares Where any shares have been allotted for cash, if cash has been received for such allotment and if no cash has been received whether position as stated in the books/BS is correct, regular and not misleading.

AUDIT REPORT VS AUDIT CERTIFICATE

AUDIT REPORT AUDIT CERTIFICATE

It is used where expression of opinion is involved. Certificate is used when the auditor comments on or verifies facts such as verification of investment by inspection

Reasonable Assurance Absolute Assurance

Eg: Audit Report u/s 143 of Companies Act 2013 is an opinion based report.

Eg: Certificate is required from an auditor when a company proposes reduction of capital. (Sec 66 of Companies Act 2013)

Payment of Bonus Act 1965- CA is required to issue report on computation of bonus.

Regulation 54 of SEBI (Mutual Funds) Regulations 1993- Auditors Report All MFs are required to get their a/cs audited by a CA. The auditor shall report to the Board of Trustees and not to unit holders.

Certificate from a CA towards Application for grant of Export/Trading Star Trading House Certificate vide Appendix 19 of the Handbook of Procedures (Export and Import Policy) 1997- 2002.

Auditor has to inquire whether shares, debentures & other securities have been sold at a price less than cost.

•If sale is bonafide, price realised is reasonable as per circumstances he has no further duty to report

Deposit means placing money or moneys's worth with a third party for safe keeping or for earning interest or as security for performance of depositor's obligation

•Enquiry to be made whether Loans & Advances have been shown under deposits & not vice versa

Certain personal expenses of employees met by Co is recognised by IT Act & Company Law Board. Charging of such personal expenses to revenue as per Co's contract or generally accepted practice is Normal and is not to be reported.

•Eg rent free quarters, conveyance for personal use, medical expenses, maternity benefits, canteen facilities, leave expenses

•Where personal expenses not covered by contract/ generally accepted principles are charged to revenue , auditor is bound to disclose.

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AUDIT REPORTS AND CERTIFICATES FOR SPECIAL PURPOSES (Covered by Guidance Note, SA 800,805,810)

CIRCUMSTANCES WHEN SUCH AUDIT REPORT IS REQUIRED

1. Under various laws/government authorities may require reports, certificates from auditor in support of statements/information prepared by an enterprise.

2. An enterprise may require certificates on specific matters from auditors for its own special purposes.

3. For an audit report or certificate for special purposes the format of general purpose audit report is not applicable.

Scope of Special Purpose Audit Reports and Certificates: Audit reports or certificates for special purposes may be issued in connection with:

(a) financial statements which are prepared in addition to general purpose FS. (b) specified elements, accounts or items of financial statements: (c) compliance with requirements of any agreement or statute or regulation; (d) financial information given in special purpose formats or schedules: or (e) compilation of statistics or ascertainment of basic figures e.g., for the purposes of fixed quotas or

levies.

Responsibility for Preparation of Special Purpose Statements

The primary responsibility for the contents of special purpose statement rests with the enterprise and this should be mentioned on the face of the statement by a suitable declaration or authentication by the management.

Scope of Reporting Auditor's Function

(a) A reporting auditor should have a clear understanding of the scope and nature of the terms of his assignment.

(b) He should obtain the terms in writing to avoid any misunderstanding. (c) A reporting auditor is not an expert on purely technical matters and as such, when he is required

to report on or certify such matters (e.g., composition or quality of a product) which constitute the very basis of the figures contained in the statement, he should state his limitations clearly in the report or certificate.

(d) At the same time he should indicate the extent to which he has been able to exercise his own professional skill and judgment. Eg he may state that he has relied on the certificate of technical experts but he should satisfy himself about the technical qualifications of the expert and also review the certificate of the expert.

Content of Reports and Certificates for Special Purposes

Depends on 1. Auditors choice 2. Specified by statute

Consider the following while drafting report/certificate. (a) Where specific elements, accounts or items covered by the report/certificate it should be identified (b) The manner in which the audit was conducted e.g.. by the application of generally accepted

auditing practices, or any other specific tests. (c) If there was any limitations in scope it should be mentioned. (d) Assumptions on which the statement is based should be clearly indicated, if they are fundamental to

the interpretation of the statement. (e) Reference should be given to the information and explanations obtained (general reference to

information obtained and also specific information obtained)

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(f) The title should clearly indicate its nature, i.e., whether it is a report or a certificate. Hence the language should be unambiguous, i.e., it should state clearly whether the reporting auditor is expressing an opinion (as in the case of a report) or whether he is only confirming the accuracy of certain facts (as in the case of a certificate). The choice of proper words and phrases is important.

(g) If the special purposes statement is based on general purpose FS the report or certificate should

contain a reference to such statements. It should be state whether the statutory audit of the general purpose FS has been completed and also whether such audit has been conducted by the reporting auditor or by another auditor. In case the general purposes FS have been audited by another auditor, the reporting auditor should specify the extent to which he has relied on them. He may communicate with the statutory auditor for taking his co-operation also to discuss relevant matters with him.

(h) Where a report requires the interpretation of statute the reporting auditor should state that he is

merely expressing his opinion in the matter. When matters which are capable of more than one interpretation, his report is should not be wrongly interpreted as representing a settled legal position.

(i) The report/certificate should be a self-contained document. It should not merely refer to another

report or certificate issued by the reporting auditor but should include all relevant information contained in such other report or certificate.

(j) The reporting auditor should clearly state the extent of responsibility which he assumes. When the

statement on which he has to report/ issue certificate includes some information which has not been audited by him, he should clearly indicate such information.

Common issues encountered under reports covered under special considerations.

1. Analysis of the requirement 2. Applicability of the Standards and Guidance Note on Audit Reports and Certificates for Special

Purposes 3. Form of the Report 4. Modifications by way of:

•Emphasis of Matter • Other Matter Qualifications

Reports covered under SA 800, SA 805 and SA 810

Audit of FS prepared in accordance with special purpose framework

SA 800 SA 805

Covers audit of single FS or a special element, account or item of FS.

SA 810

Audit of summary FS

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Applicability: Some Examples

1. Amalgamated accounts for tax purposes 2. Determining the financial position before a Scheme of Arrangement/ Acquisition 3. Reports on single FS

How much reliance is to be placed on general purpose audit for special purpose audit?

Reports/Certificates on specified items of accounts of FS- Considerations

1. Test of materiality that the reporting auditor will use for special purpose audit may be different from the test he would use in a general purpose audit

2. Examination of records in a special purpose audit will be more intensive than examination of records by statutory auditor in a general purpose audit.

3. Communication of report/certificate in special purpose audit maybe to the client/government authority/ person requiring it.

4. Communication with previous reporting auditor is required when the work was previously done by a different member.

Special purpose framework- An FRF designed to meet the financial information needs of specific users.

A single FS (eg Cash Flow Statement) or specific element of an FS (eg. Cash and bank balances). It includes related notes. The related notes comprise the significant accounting policies and other explanatory information relevant to the FS/ specific element.

Summary FS derived from audited FS.

Special purpose audit is taken after statutory audit is completed.

Reporting auditor should review the statutory auditor report to find out if there are matters which have a bearing on his report.

When a reporting auditor is required to report /certify certain specific matter arising from the FS taken as a whole

Report should be issued only after statutory audit is completed.

Eg; computation of gross profit under Payment of Bonus Act 1965

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REPORTING REQUIREMENTS IN CASE OF COMPARATIVE INFORMATION (SA 710 REVISED) Comparative information-Corresponding Figures and Comparative Financial Statements

There are 2 different approaches to auditor’s responsibility regarding comparative information in audit of FS. Audit Procedures for comparative Information:

AUDIT REPORTING

Corresponding figures

Comparative FS

Here the auditor’s opinion on the FS refers to the current period only

Here the auditor’s opinion refers to each period for which FS are presented

The essential audit

reporting differences

are

Perform specific audit procedures to determine that the comparative info is properly classified

Steps: Ensure that comparative information agrees with the amount

and other disclosure presented in the prior period. • The accounting policies are applied consistently in both periods and in case of change they are properly disclosed.

Evaluating the impact on FS if he becomes aware of a possible misstatement in the comparative information

Steps: Perform necessary audit procedures to obtain SAAE If auditor had audited the prior period FS he should follow

SA560

Written Representation

Steps: As per SA580 obtain Written Representation regarding any

prior period item that is disclosed in current year’s FS.

With reference to corresponding figures

Auditors opinion should not refer to corresponding figs EXCEPT when Previous period audit report had a modified opinion or disclaimer. If in auditor’s opinion he has sufficient SAAE that a material

misstatement exists in prior period report which was not addressed earlier.

If prior period FS are not audited he should obtain SAAE that opening balances do not have material misstatement

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With reference to comparative FS

Auditors opinion should refer to each period for which FS is presented • Previous year audit report issued by same auditor: When reporting on current period’s audit, if the auditor's opinion on the prior period FS is different from the opinion previously issued on that FS the auditor shall disclose the reason for the different opinion in “other matter paragraph” in his report. • Previous year audit report issued by different auditor: If the auditor concludes that there is a material misstatement in the previously audited figures of FS, he should report it to the appropriate level of management and request that the predecessor auditor be informed. If then the prior years statements are amended with new report by the predecessor auditor, then the auditor shall report only on the current period.

Reporting treatment common to both (CI & CF)

(i) When FS of prior period were audited by a predecessor auditor, the auditor (is permitted by law or regulation to refer to the predecessor audit report for corresponding figures) shall state in his audit report: • That the FS of the prior period were audited by a predecessor auditor; • The type of the opinion expressed by the predecessor auditor; • The date of that audit report (ii) If the prior period FS were not audited than he shall report the same in “other matter paragraph” in his audit report that the corresponding/ comparative figures are unaudited. The disclosure does not relieve him from his responsibility of obtaining SAAE that the opening balances do not contain misstatements that materially affect the current period's FS

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DECISION TREE-COMPARATIVE INFORMATION & CORRESPONDING FIGURES

Courtsey: ICAI Study Materials on Auditing FOR CA FINAL Compiled by: CA Piyali Parashari CA, CWA, BCOM (Hons) 98’88 piyali.sinha1@gmail.com