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Developments in GAAPs

and
Audit reporting requirements
SA 700,705,706
Presented by
S. Sundaresan

New Developments in GAAP


IND-AS Budget speech by Finance Minister

IND AS implementation around the corner


Consolidation Mandatory in Companies Act.
Mandatory for unlisted companies also

Schedule II Depreciation

Depreciation under the Companies


Act
It is not to be treated as GAAP but a regulatory
requirement.
Important Points
1.Rates to useful life ( same as accounting standard)
2 One can follow different (i.e. more or less) useful lives
than prescribed but need to justify ( i.e if you follow the
useful lives prescribed you need not justify - but as per
standard you still need to review if the actual useful lives
are lower than prescribed)

Exposure Drafts and GN


ED of the GN on Accounting for Service Concession
Arrangements by Concessionaires
Guidance Notes issued in the past 3 years
GN on Accounting of Rate Regulated Activities
GN on Accounting for Self-generated Certified Emission
Reductions (CERs)
GN on Accounting and auditing of Political Parties
GN on Accounting for Oil and Gas Producing Activities

The Auditors Report on


Financial Statements
Overview of
Standards on
Auditing (SA)
-SA 700, SA 705
& SA706

Standards pertaining to Audit


Reports
SA 700

Forming an Opinion and Reporting on Financial Statements


- to be used only in case of unmodified opinion.

SA 705

Modifications to the Opinion in the Independent Auditors Report


- to be used only in case of modified opinion.

SA 706

Emphasis of Matter Paragraphs and Other Matter paragraphs in the


Independent Auditors Report
- to be used if there is an emphasis of matter and it also deals with Other
Matters

Replaces AAS 28 Auditors Report on Financials Statements.


Applicability to accounting periods beginning on or after April 1, 2012 vide ICAIs
announcement dated April 17, 2012
Not applicable in cases where reports formats are prescribed under various laws or
regulations - ICAIs Announcement July 29, 2013

Need appropriate reporting


In practice, one has to exercise a lot of judgement and the
standards only provide a framework.
The reporting is required to be appropriate and precise
considering the nature based on judgement--- Not qualify when an Emphasis of matter is appropriate
Not disclaim when qualification is appropriate
Not issue adverse opinion when disclaimer is appropriate

Standard on Auditing(SA)700
Forming an
Opinion and
Reporting on
Financial
Statements

Objective and Scope


This standard deals with the Auditors responsibility to form an opinion on
the financial statements and the form and content of the Auditors Report.

The Standard deals with Clean and unmodified opinion in Audit Report to
make it consistent.
Reporting on the financial statements per auditing standards clearly
demarcated from additional regulatory reporting under the law.
Applicable in case of General Purpose Financial Statements prepared in
accordance with a general purpose financial reporting framework (FRF).
Fair presentation framework
Compliance framework

Forming a Clean (Unmodified) Opinion


The financial statements are prepared, in all material respects, in accordance with the
applicable financial reporting framework including qualitative aspects of entitys
accounting policies and possible bias in managements judgments.
Has obtained reasonable assurance about whether the financial statements are free of
material misstatements due to Fraud or Error based on : Sufficient and appropriate
audit evidence;
Whether uncorrected misstatements are material, Individually or in aggregate in
accordance with SA 450.
Requirements of the reporting framework (eg., the Accounting Standards) have been
materially complied with
Disclose the accounting policies selected and applied and Consistency and
appropriateness of those policies
Reasonable estimates are used by the management
Information presented in relevant, reliable, comparable and understandable
Disclosures are adequate to enable users to understand the effect of material
transactions
Terminology used is appropriate.

Form of Opinion
When the auditors concludes that the financial statements are prepared, in
all material respects, in accordance the applicable financial reporting
framework, he shall express an Unmodified Opinion
If the auditor concludes: That based on audit evidence, the financial statements are NOT free of material
misstatements;
That he is unable to obtain sufficient appropriate audit evidence to conclude
that the financial statements are free of material misstatements;

then he shall issue a modified opinion in accordance with SA705.

Structure of the Auditors Report


Where the layout of the report is prescribed by a law or regulation, the auditor
shall refer to Standards of Auditing only if, at a minimum, each of the following
elements are included:
1) Title
2) Addressee
3) Introductory paragraph
4) Management Responsibility Paragraph
5) Auditors Responsibility Paragraph
6) Opinion Paragraph
7) Other Reporting Responsibilities
8) Auditors Signature
9) Date
10) Place

Structure of the Auditors Report


(Contd..)
1.
2.
3.

Title: Should have a clear title Independent Auditors Report


Addressee: Should be addressed as per the terms of Engagement ( Eg:- Shareholders, Board
of Directors, President of India, Specific Regulators)
Introductory Paragraph: The following information to be mentioned
Identify whose financial statements have been audited
State the financial statements have been audited
Identify the title of each statement in the financial statements
Balance Sheet
Statement of Profit and Loss Account
Cash Flow Statement
Significant Accounting Policies and Other explanatory Notes
Refer to the summary of significant accounting policies and explanatory information
Specify the date or period covered
Specimen of Introductory para:We have audited the accompanying financial statements of _____ Limited (the Company)
which comprise the Balance Sheet as at March 31, 20XX, and the Statement of Profit and
Loss and Cash Flow Statement for the year then ended, and a summary of significant
accounting policies and other explanatory information.

Structure of the Auditors Report


(contd..)
4.

Management Responsibility Statement:- Auditor shall describe the management


responsibility for the preparation of financial statements which includes design,
implementation and maintenance of internal control that the financial statements are free of
material misstatements due to fraud or error.
Specimen of Management Responsibility para:Management is responsible for the preparation of these financial statements that give a
true and fair view of the financial position, financial performance and cash flows of the
Company in accordance with the accounting standards referred to in sub-section (3C) of
section 211 of the Companies Act, 1956 (the Act) read with the General Circular 15/2013
dated September 13, 2013 of the Ministry of Corporate Affairs in respect of section 133 of the
Companies Act, 2013. This responsibility includes the design, implementation and
maintenance of internal control relevant to the preparation and fair presentation of the
financial statements that are free from material misstatement, whether due to fraud or
error.

Structure of the Auditors Report


(Contd..)
5. Auditors Responsibility: State that the auditors responsibility is to express an opinion on the
financial statements based on the audit. That the audit has been conducted in accordance
with the Standards on Auditing issued by the Institute of Chartered Accountants of India
(ICAI). He should also explain that he has to comply with ethical requirements and plan and
perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements.
Specimen of Auditors Responsibility para:Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our
audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India.
Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditors judgment, including the assessment of the
risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the Companys preparation and fair presentation
of the financial statements 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 entitys internal control. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of the accounting
estimates made by management, as well as evaluating the overall presentation of the financial statements..
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a reasonable basis
for our qualified opinion.

Structure of the Auditors Report


(Contd..)
6. Auditors Opinion: The Auditors opinion shall state that the financial statements
are prepared, in all material respects, in accordance with the applicable financial
reporting frame work.

The financial statements present fairly, in all material respects, in accordance with [the
applicable financial reporting framework]
The financial statements give a true and fair view of in accordance with [the applicable
financial reporting framework].

Necessary to identify the financial reporting framework so that users are aware of
the context in which the report is issued.
Framework:

Reporting standards i.e. IFRS / IGAAP


Legal / Regulatory requirements i.e. Companies Act, IRDA, RBI.

Structure of the Auditors Report


(Contd..)
7. Other reporting responsibilities: If other reporting responsibilities are addressed,
they should be reported separately in a separate section titled Report on Other
Legal & Regulatory requirements
Example
Section 227 and 274(1)(g) of the Companies Act, 1956
CARO / Physical verification certificates required by IRDA
May contain similar sub-headings as the main part of the report

8. Signature: The report shall be signed in the name of the partner and the
membership number and firm registration number should be mentioned.
9. Date: Report should be dated no earlier that the date when he obtains sufficient
appropriate audit evidence
10. Place: The place of signature should also be mentioned

Standard on Auditing (SA) 705

Modifications to
the Opinion in
the Independent
Auditors Report

Introduction and Scope


Deals with circumstances when the auditor concludes modification to the report is
necessary.
Types of modified opinions

Qualified Opinion
Adverse Opinion
Disclaimer of Opinion

The decision on the type of opinion depends upon:

The nature of the matter giving rise to the modification i.e. whether the financial statements
are materially misstated
Inability to obtain sufficient and appropriate audit evidence
Auditors judgment about the pervasiveness of the effects or possible effects of the matter

The auditor shall modify the opinion when:


He concludes that, based on audit evidence, the financial statements as a whole are
NOT free of material misstatements; or
The auditor is UNABLE to obtain sufficient appropriate audit evidence to conclude that
the financial statements are free of material misstatements

Modifications in the Report


QUALIFIED OPINION
The auditor shall express qualified opinion when :
He concludes that the misstatements, individually or in aggregate , are MATERIAL , BUT NOT
PERVASIVE to the financial statements
He is unable to obtain sufficient appropriate audit evidence but also concludes that the
possible effects of undetected misstatements could be MATERIAL, BUT NOT PERVASIVE
ADVERSE OPINION
When the auditor concludes that having obtained sufficient appropriate audit evidence, the
misstatements, individually or in aggregate, are BOTH MATERIAL AND PERVASIVE, he issues an
adverse opinion.
DISCLAIMER OF OPINION
When the auditor is unable to obtain sufficient appropriate audit evidence and concludes that
the possible effects of undetected misstatements are BOTH MATERIAL AND PERVASIVE, he
issues an disclaimer of opinion .
In extremely rare circumstances , having obtained sufficient appropriate audit evidence, BUT
due to multiple uncertainties , the auditor is not able to form an opinion , due to possible
interaction of those uncertainties and their possible cumulative outcomes , he issues a
disclaimer of opinion.

10

Sufficient appropriate
audit evidence obtained

Sufficient appropriate
audit evidence
not obtained

Auditor concludes
that FS as a whole are not
free from material misstatement

Auditor is unable to conclude


whether FS as a whole are
free from material misstatement

Qualified
opinion

Adverse
opinion

Disclaimer
of opinion

Depends on auditors judgement of


Whether FS are
materially misstated

In absence of evidence
whether FS may be
materially misstated

Whether misstatement
is or is likely to be
pervasive

What is
PERVASIVE?

Misstatements

That are not confined


to specific components
accounts or items

Possible misstatements

If so confined,
represent a
substantial portion

Where pertaining to
disclosures, are
fundamental to users
understanding of FS

11

After
obtaining
sufficient
appropriate
audit
evidence

Auditor
cannot
obtain
sufficient
appropriate
audit
evidence

After
obtaining
sufficient
appropriate
audit
evidence

Individual
misstatements
Auditor
concludes
that

OR
Aggregate of
misstatements

Auditor
concludes
that

Possible
effects of
undetected
misstatements

Individual
misstatements
Auditor
concludes
that

OR

Are
MATERIAL
but not
PERVASIVE

QUALIFIED
OPINION

Are
MATERIAL
but not
PERVASIVE

Are
MATERIAL
AND
PERVASIVE

Aggregate of
misstatements
ADVERSE
OPINION

12

Auditor
cannot
obtain
sufficient
appropriate
audit
evidence

Auditor
concludes
that

Auditor
concludes
that

Multiple
Uncertainties

Even after auditor has


obtained audit
evidence

After accepting
engagement,
management
imposes a
scope
limitation

Management does
not
remove it

Possible
effects of
undetected
misstatements

Are
MATERIAL
AND
PERVASIVE

He cannot form
an opinion on FS
due to potential
interaction of the
uncertainties and
their possible
cumulative effect

Auditor requests
management to
remove the scope
limitation

Auditor assesses
that this may
result in a
qualified opinion
or disclaimer

Auditor communicates
this to Those charged with
governance (TCWG)
Considers alternative
procedures

DISCLAIMER
OF
OPINION

If he cannot obtain
sufficient appropriate
audit evidence, and
concludes that
effect of undetected
misstatements is

QUALIFY
Material but not pervasive
Material and pervasive

RESIGN, if allowed to

GIVE DISCLAIMER

13

Modifications in the Report( Contd..)


Auditors Report Modification Matrix:
Nature of matter giving rise to the
modification

Auditors Judgment about the Pervasiveness of the


Effects or Possible Effects on the Financial
Statements
Material but not
pervasive

Material and Pervasive

Financial statements are materially


misstated

Qualified opinion

Adverse opinion

Inability to obtain sufficient appropriate


audit evidence

Qualified opinion

Disclaimer of opinion

Material Misstatements
A misstatement is the difference between the amount of classification, presentation, or disclosure
reported in the financial statements and the classification, presentation, or disclosure required as
per the applicable financial reporting framework.

This may arise in relation to :


1.

2.

Appropriateness of the selected accounting policies


Selected accounting policies are not consistent with the applicable financial reporting
framework ;
Financial statements , including notes thereon , do not represent underlying transactions
and events that achieves fair presentation
Application of selected accounting policies
When accounting policies are not applied consistently , including consistency between
periods , similar transactions and events ;
Method of application is erroneous

14

Material Misstatements (Contd..)


3. Appropriateness or adequacy of disclosures in the financial statements :

Financial statements do not include all disclosures required by the applicable financial
reporting framework

Disclosures are not presented in accordance with the applicable financial reporting frame
work

The financial statements do not provide the disclosures necessary to achieve fair
presentation

Inability to obtain Sufficient Appropriate


Audit Evidence
Auditors inability to obtain sufficient appropriate audit evidence may arise from :
Circumstances beyond the control of the entity; eg. Where records have been destroyed by
fire, or seizure by government authority, etc.
Circumstances relating to nature or timing of the Auditors work eg. When auditor is
appointed on such date that he cannot observe the physical count
Limitation imposed by the management Eg: Management prevents auditors from inventory
counting / obtaining external confirmations.
In case limitation is imposed by the management, the auditor shall request the management
to remove the limitation
If the management still persists, Auditor shall communicate it to those charged with
governance and determine if alternative audit procedures are possible.
If the auditor is unable to obtain sufficient appropriate audit evidence, he shall:
Resign from the engagement, where practicable and not prohibited by law
If resignation is not possible due to stage of the auditor legal or professional restriction, the
auditor shall give a disclaimer of opinion
Where the auditor decides to resign, he shall inform to those charged with the governance
any matters regarding misstatements identified during the audit that would have given rise to
modification in the report

15

Form and Content of Modified Report


In addition to the elements of the auditors report referred
in SA 700 , the following need to be added for modified
reports :
Basis of modification paragraph
Amendments in the opinion paragraph
Amendments in the Auditors responsibility paragraph

Form and Content of Modified Report


Basis of modification paragraph
This is placed immediately before the opinion paragraph and under the heading Basis of
Qualified Opinion, Basis of Adverse Opinion, Basis of Disclaimer of Opinion
Modification may relate to :
Specific amounts in the financial statementsin this case, include the description and
quantification of the financial effects, if practicable . If not practicable , state the fact in
the report
Narrative disclosures in the financial statementsin this case explain how the disclosures
are misstated
Non-disclosure of information required to be disclosedin this case
Discuss the non disclosure with those charged with governance
Describe the nature of omitted information
If practicable, not prohibited by law and if sufficient appropriate audit evidence relating
to that item is obtained, include the omitted disclosure
Even if the auditor has expressed an adverse opinion or disclaimer of opinion, he shall
describe other matters which he is aware that would have required a modification

16

Form and Content of Modified Report


(Contd..)
Amendments in the opinion paragraph
Use the heading Qualified Opinion , Adverse Opinion , or Disclaimer
of Opinion
Must use the phrases- with the foregoing explanation or subject to or
except that
Where a qualified opinion is issued due to material misstatement the auditor
shall state in the opinion paragraph that except for the matters described in
the basis of qualified opinion, the financial statements have been prepared,
in all material respects, in accordance with the applicable financial reporting
framework
When modification arises from inability to obtain sufficient appropriate
audit evidence, the auditor shall use the corresponding phrase except for
the possible effects of the matter(s) or the modified opinion

Form and Content of Modified


Report (Contd..)
When issuing an adverse opinion, the auditor shall state
That the financial statements DO NOT PRESENT a true and fair view; or
The financial statements have NOT been prepared, in all material respects,
in accordance with the applicable financial reporting framework
When the auditor disclaims an opinion due to inability to obtain sufficient
appropriate audit evidence, he shall state:
Because of the significance of the matter (s) described in the Basis for
Disclaimer of opinion paragraph ,the auditor has NOT been able to obtain
sufficient appropriate audit evidence therefore The auditor does NOT
express an opinion on the financial statements

17

Form and Content of Modified Report


(Contd..)
Amendments in the Auditors responsibility paragraph
In case of qualified opinion or adverse opinion, the auditor shall state that he
believes that the audit evidence is sufficient and appropriate to provide a basis for
his MODIFIED audit opinion
In case of disclaimer of opinion due to inability to obtain sufficient appropriate
audit evidence :
The auditor shall amend the introductory paragraph to state that he was engaged
to audit the financial statements;
He shall amend the Auditors responsibility paragraph and scope to include the
following because of the matter(s) described in the Basis for Disclaimer of
Opinion paragraph , we have not been able obtain sufficient appropriate audit
evidence to provide a basis for our audit opinion.

Examples of Qualified Opinion


Basis of Qualified Opinion
The Companys inventories are carried in the Balance Sheet at Rs. XXX.
Management has not stated the inventories at the lower of cost and net realisable
value but has stated them solely at cost, which constitutes a departure from the
Accounting Standards referred to in sub-section (3C) of section 211 of the Act. The
Companys records indicate that had management stated the inventories at the
lower of cost and net realisable value, an amount of Rs. XXX would have been
required to write the inventories down to their net realisable value. Accordingly,
cost of sales would have been increased by Rs. XXX, and income tax, net profit and
shareholders funds would have been reduced by Rs. XXX, Rs. XXX and Rs. XXX ,
respectively.
Qualified Opinion
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 paragraph, the 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

18

Examples of Adverse Opinion


Basis of Adverse Opinion
As explained in Note X, the Company has not consolidated the financial
statements of subsidiary XYZ Company it acquired during 20XX because it has not
yet been able to ascertain the fair values of certain of the subsidiarys material
assets and liabilities at the acquisition date. This acquisition is therefore accounted
for as an investment. Under the accounting principles generally accepted in India,
the subsidiary should have been consolidated because it is controlled by the
Company. Had XYZ been consolidated, many elements in the accompanying
financial statements would have been materially affected. The effects on the
financial statements of the failure to consolidate have not been determined.
Adverse Opinion
In our opinion, because of the significance of the matter discussed in the Basis for
Adverse Opinion paragraph, the consolidated financial statements do not give a
true and fair view in conformity with the accounting principles generally accepted
in India

Examples of Disclaimer of Opinion


Basis of Disclaimer of Opinion
The Companys investment in its joint venture XYZ Company is carried at Rs. XXX in
the Companys Balance Sheet, which represents over 90% of the Companys net
assets as at March 31, 20XX. We were not allowed access to the management and
the auditors of XYZ Company. As a result, we were unable to determine whether any
adjustments were necessary in respect of the Companys proportional share of XYZ
Companys assets that it controls jointly, its proportional share of XYZ Companys
liabilities for which it is jointly responsible, its proportional share of XYZ Companys
income and expenses for the year, and the elements making up the Cash Flow
Statement.
Disclaimer of Opinion
Because of the significance of the matter described in the Basis for Disclaimer of
Opinion paragraph, we have not been able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion. Accordingly, we do not express an
opinion on the financial statements.

19

Standard on Auditing (SA) 706

Emphasis of Matter
Paragraphs and Other
Matter Paragraphs in the
Independent Auditors
Report

Form of Audit Report


Types of paragraph
Emphasis of Matter
Paragraph in the Audit Report
On a matter that is appropriately presented or disclosed in Financial Statements.
Insertion of an emphasis of matter paragraph in the Auditors Report does not
make the opinion modified
An Emphasis of Matter paragraph is not a substitute for either the auditor
expressing a qualified opinion or an adverse opinion, or disclaiming an opinion
An emphasis of matter is not a part of the audit opinion at all. It is a separate,
independent paragraph designed to provide additional communication to the
users
Other paragraphs
Paragraph in the Audit Report that refers to a matter other than those presented or
disclosed in Financial Statements.

20

Emphasis of Matter Paragraph


An emphasis of matter paragraph is useful when the auditor, having formed an
opinion, intends to draw the attention of the users to :
A matter, though appropriately presented and disclosed, is of fundamental
importance to the users to understand the financial statements;

Any other matter relevant to the users understanding of the audit, auditors
responsibility or Auditors Report.
Where an emphasis of matter paragraph is required by any other auditing standard,
the disclosure shall be as per this SA.
Such a paragraph shall refer to information presented and disclosed in financial
statements.
The auditor should have obtained sufficient appropriate audit evidence that the
matter is not materially misstated.

Emphasis of Matter Paragraph (Contd..)

The emphasis of matter paragraph shall be placed immediately after the


Opinion paragraph in the Auditors Report under the heading Emphasis of
Matter Paragraph
Include a clear reference to the matter being emphasized and to the
relevant disclosures
Indicate that the Auditors opinion is NOT modified by using words like
Without qualifying our opinion or Our report is not qualified on this
account

21

Emphasis of Matter Paragraph (Contd..)


Examples when an emphasis of matter paragraph is to be included:
An uncertainty relating to the future outcome of an exceptional litigation
or regulatory action
Early application (where permitted) of a new accounting standard that
has a pervasive effect on the financial statements in advance of its
effective date
A major catastrophe that has had, or continues to have, a significant
effect on the entitys financial position

Emphasis of Matter Paragraph (Contd..)


Emphasis of Matter
We draw attention to Note XX of Schedule XX to the financial statements stating
that the Company has paid Rs. xx Crores under protest against claims of Rs. xx
Crores for expenses which the Company has disputed in matters that are in various
stages of litigation. Pending resolution of these disputes by the relevant courts,
these expenses have been accounted for in the May 11, 2013 financial statements
based on the managements expectation of the amounts due. Our opinion is not
qualified in respect of this matter.

22

Other Matter
An Other Matter paragraph may be required to enhance users understanding of an
audit
Examples: Relevant to Users Understanding of the Auditors Responsibilities or the
Auditors Report
Reporting on more than one set of financial statements
Restriction on distribution or use of the Auditors Report
Specimen:We did not audit the financial statements of certain subsidiaries, whose financial
statements reflect total assets (net) of Rs. XXXX as at March 31, 20XX, total
revenues of Rs. XXXX and net cash outflows amounting to Rs. XXXX for the year
then ended. These financial statements have been audited by other auditors whose
reports have been furnished to us by the Management, and our opinion is based
solely on the reports of the other auditors. Our opinion is not qualified in respect of
this matter

Other Matter (Contd..)


Place of Other Matter:Depends on the nature of the information to be communicated

If the other matter pertains to the audit,


the auditors responsibility or the auditors
report insofar as

Where placed in auditors report?

Expressing an opinion on the financial


statements

Placed immediately below the


Emphasis of Matter paragraph

Other reporting responsibilities of the


auditor (eg. Reporting under CARO)

Included in the section titled:


Report on Other Legal and Regulatory
Requirements:

23

How do you exercise judgement


Judgement of appropriate reporting depends on the facts and
circumstances of each case.
e.g There is a pending tax litigation amounting a significant
amount say 200 crores and the amount is disclosed under
contingent liabilities.
Case 1
The company won the case in high court and department is in
appeal
There is no other judgement or amendment to the law contrary
to the High Court decision

How do you exercise judgement


Case 2
The company lost the case in Tribunal/ High Court and is in
appeal in High court/ Supreme Court
The amount is quite significant to the entity
The company and the legal opinion still contends that there is
a strong case
You may not conclude that provision is necessary

24

How do you exercise judgement

Case 3
The company lost the case in High Court and is in appeal
There are many such cases from other High Courts also
There is no favourable case to support
The company and the legal opinion still contends that the
case is different and not comparable to other such cases
Case 4
There is a Supreme Court decision which is clearly against
the matter in appeal and it is more likely than not that the
appear will be decided against the company.

FAQs
Q-: Is it possible for the financial statements to be prepared in
accordance with two financial reporting frameworks and if so,
how is auditors opinion expressed
A: Each framework is considered separately in forming an
auditors opinion. If the financial statements are found to be in
compliance with each of the frameworks, the auditor may issue
two separate opinions, one for compliance with each
framework.
If they are in compliance with one framework but not the other,
an unmodified opinion may be given on the former under this
SA and a modified opinion on the latter under SA 705

25

FAQs
Q: How does an auditor deal with a situation where the audited entity
voluntarily provides supplementary information or where a law or
regulation requires additional information that is outside the scope of the
applicable financial reporting framework?
If such information is embedded in the financial statements, the auditor
discusses with the client if such information could be displayed separately
outside the financial statements.
Where such supplementary information (eg., a GAAP reconciliation
between Indian GAAP and IFRSs included in the Notes to the Financial
Statements) cannot be clearly differentiated from the rest of the financial
statements, the auditors opinion shall have to cover that too. This means
that the auditor would need to audit this information and report on it in the
ordinary course
If the management (or law/ regulation) requires such information not to be
subjected to audit, the auditor must ensure that such information is
presented in a way that clearly shows that it is unaudited. However
under SA 720 the auditor still has the responsibility to read that information
to identify if it contains any material inconsistency with the audited
financial statements

FAQs
Q : How does one decide the nature of modification that
should be made?
An auditor has to evaluate the situation carefully before
making his judgment as to the nature of modification. It is
very important that he, in terms of the principles laid down in
SA 230, Audit Documentation, also documents in his work
papers how and why he reached this professional judgment.
Judgement Judgement Judgement
Document Document Document..

26

FAQs (Contd..)
There can be two situations:
(a) There is a matter for which the auditor has sufficient
appropriate audit evidence to determine that due to such
matter the financial statements are materially misstated,
and
(b) There is a matter for which the auditor is unable to
obtain sufficient appropriate audit evidence to determine
whether due to it the financial statements may be
materially misstated.
In either case the report will be modified, but the nature of
modification can be different.

FAQs (Contd..)
Ex: There are certain ongoing income tax matters. There
can be two instances:
- There are similar income tax matters for other assesses
and it was decided against the assess at the High Court,
however the Company is not making provision.
Qualified opinion
- There are similar income tax matters for other assesses
(e.g. denial of benefit of Sec 80IC deduction), however
the matter is yet to be concluded.- a) Qualified opinion if
the impact is material but not pervasive b) If the impact is
pervasive then Disclaimer of opinion.

27

FAQs
Q : What is an auditor obligated to do if he expects to
modify his report
If the auditor expects to issue anything other than a clean
opinion, he has an obligation to communicate this to
those charged with governance (eg, an audit committee
or board of directors or partners/ trustees in case of a
firm/ trust) that he intends to do so, as well as provide
them the proposed wording.

Some Observations out of


Reports

28

Issue 1
Following qualification is given in the basis of qualified opinion
paragraph in Audit Report of a Company:
Attention is drawn to Note No. X1 of Notes on Financial Statements
which is reproduced :
The liabilities to ABC Bank for the various credit facilities granted as
shown in Note No. X2 of Notes on Financial Statements have been
taken over by XYZ Pvt. Ltd. as per the agreement entered into by and
between ABC Bank and XYZ Pvt. Ltd.. XYZ Pvt. Ltd. has served notice
to company for recovery of dues of Rs.XXX Lacs. The Company has
disputed the agreement and has obtained a stay of recovery from DRT.
XYZ Pvt. Ltd. has taken the symbolic possession of mortgaged premises
i.e. 2nd charge on factory and 1st charge on 1000 sq. ft. of office
premise. The matter is pending with DRT for final hearing and disposal.
In view of the above, the impact on the financial statements cannot be
quantified.

Observation
It was noted that the manner of the reporting suggests
that the auditor merely wanted to invite attention to the
subject matter of a particular note without giving any
reason for qualification. If is felt that if the Auditor had
obtained sufficient appropriate audit evidence that the
matter is not materially misstated in the financial
statements, he could have, under Para 6 of SA 706
included an Emphasis of Matter Paragraph instead of a
qualified opinion.

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Issue 2
It was noted from the Auditors Report that the basis for
qualified opinion states as follows:
In our opinion and to the best of our information and
according to the explanations given to us, attention is drawn
to the following, in respect of these financial statements:
A. In respect of non compliances:
1.

Note No. 29 relating to AS 5 Net Profit or Loss for the


period, Prior Period Items and Changes in Accounting
Policies and AS 10 Accounting for Fixed Assets

2.

Note No. 39 relating to AS 29 Provisions, Contingent


Liabilities and Contingent Assets" in respect of nonprovision of interest and penalties on delays in deposit of
statutory dues with Government, Semi-Government and
Local Authorities.

Observation

It was viewed that the qualifications included in the


audit report is not clear and have not been drafted as
per SA 705, which requires a clear description of all
the substantive reasons to be included in the qualified
opinion including mentioning the basis for the
qualified opinion. Further the impacts on the
financials are also not disclosed in the Audit report.

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Issue 3
Following qualification has been given in the Auditors Report of a
company:
Opinion
Attention is required to following notes forming parts of accounts1.
2.

Note no. X1 relating to non provision of interest amounting to Rs. XXXXXX


lacs on secured/unsecured debt.
Note no. X2 relating to preparation of accounts on a going concern basis.

Subject to the foregoing, in our opinion and to the best of our information
and according to the explanations given to us, the 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:

Observations
It is noted that the Auditor has stated his qualification under the heading
Opinion without stating whether it is qualified or not, though he has
indicated that his opinion is subject to but has also not given a proper
description of the matter giving rise to the modification which is not in
accordance with paragraph 16 of SA-705 which states that:
When the auditor modifies the opinion on the financial statements, the
auditor shall, in addition to the specific elements required by the SA 700
(Revised), include a paragraph in the auditors report that provides a
description of the matter giving rise to the modification. The auditor
shall place this paragraph immediately before the opinion paragraph in
the auditors report and use the heading Basis for Qualified Opinion,
Basis for Adverse Opinion, or Basis for Disclaimer of Opinion, as
appropriate.
Hence, the manner of modification of the report is not in accordance
with SA-705.

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Issue 4
Following qualification has been given in the Auditors Report of a Company:
Opinion
In our opinion and to the best of our information and according to the explanations given to us, the financial
statements subject to the observations in Para 2 (b) and 2 (e) below, 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:..
Report on Other Legal and Regulatory Requirements
As required by section 227(3) of the Act, we report that:
b) i. In absence of detailed working papers on physical verification of inventories, discrepancies, if any,
between book and physical inventories could not be ascertained including effect of the same in the
financial statements of the company.
ii. Interest on delayed payment of statutory dues has not been provided for, which has neither been
quantified nor the effect of the same on the financial statements has been ascertained.
iii. No provision has been made against performance Bank Guarantees invoked amounting to Rs. 59.40
Crores against the company and disputed by it.
iv. No provision has been made against sundry debtors amounting to Rs. 442.16 Crores disputed by the
parties and referred for arbitration.

e) in our opinion, the Balance Sheet, Statement of Profit and Loss, and Cash Flow Statement comply with
the Accounting Standards referred to in subsection (3C) of section 211 of the Companies Act, 1956 except
Accounting Standard 2 ( Valuation of Inventories) issued by The Institute of Chartered Accountants of
India as stated in Para .2 (b) (i) above.

Observation
It may be noted that paragraph 38 of SA 700 states as follows:
Other Reporting Responsibilities
38. If the auditor addresses other reporting responsibilities in the auditors
report on the financial statements that are in addition to the auditors
responsibility under the SAs to report on the financial statements, these other
reporting responsibilities shall be addressed in a separate section in the
auditors report that shall be sub-titled Report on Other Legal and
Regulatory Requirements, or otherwise as appropriate to the content of the
section.
It was viewed that reporting qualification under Report on Other Legal and
Regulatory Requirements is not in accordance with paragraph 22 of SA 705
which states that,
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 paragraph.

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Issue 5
Following qualification has been given in the Auditors Report of a Company:
Opinion
a. Attention is invited to the following
The accounts of the Company are drawn up on Going Concern basis even though
the accumulated losses of the Company exceed its paid up capital and reserve. The
Company is Sick Industrial Company under the provisions of Sick Industrial
Companies Act, 1985.
Issue of Takeover Notice by ABC LIMITED due to nonpayment of its dues under
Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002. TheGoing Concern status of the Company is not affected as
physical possession of the assets have not been taken. (Refer Note No 23).
Balances of Secured Loans as at 31.03.2013 are subject to their confirmation and
reconciliation.
Balances of sundry debtors and advances as at 31.03.2013 are subject to their
confirmation and reconciliation.
Subject to the forgoing, in our opinion and to the best of our information and according
to the explanations given to us, the said accounts read with Significant Accounting
Policies and notes thereon give the information required by the Companies Act, 1956, in
the manner so required and give a true and fair view in conformity with the accounting
principles generally accepted in India:

Observation
It may be noted that SA 705 requires that when the Auditor modifies the opinion, he
shall, in addition to the SA 700 (Revised) requirement, include a paragraph that
provides a description of the matter giving rise to the modification. The auditor shall
place this paragraph immediately before the opinion paragraph and use the heading
Basis for Qualified Opinion; Basis for Adverse Opinion; Basis for Disclaimer of
Opinion.
SA 706 requires that vide paragraph 6 if the auditor considers it necessary to draw
users attention to a matter presented or disclosed in the financial statement that, in
the auditors judgment, 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 auditors report. Such a paragraph shall refer only to
information presented or disclosed in the financial statement.
It was viewed that the opinion of the auditor is not a qualified opinion, it is more of a
Matter of Emphasis where auditor is trying to draw attention to certain facts.
Accordingly, the same should have been paragraphed his under Emphasis of
Matter.

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Observation
It may be noted that SA 705 requires that when the Auditor modifies the opinion, he
shall, in addition to the SA 700 (Revised) requirement, include a paragraph that
provides a description of the matter giving rise to the modification. The auditor shall
place this paragraph immediately before the opinion paragraph and use the heading
Basis for Qualified Opinion; Basis for Adverse Opinion; Basis for Disclaimer of
Opinion.
SA 706 requires that vide paragraph 6 if the auditor considers it necessary to draw
users attention to a matter presented or disclosed in the financial statement that, in
the auditors judgment, 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 auditors report. Such a paragraph shall refer only to
information presented or disclosed in the financial statement.
It was viewed that the opinion of the auditor is not a qualified opinion, it is more of a
Matter of Emphasis where auditor is trying to draw attention to certain facts.
Accordingly, the same should have been paragraphed his under Emphasis of
Matter.

Regulatory Focus

.
Regulator is overseeing whether reporting is
appropriate and not excessive
Regulator is following up on auditors qualification

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Regulatory focus
SEBI has now decided to put in place a system to monitor
the audit qualifications contained in the audit report
accompanying the audited annual financial statements
submitted by listed companies.
SEBI has constituted the Qualified Audit Review
Committee (QARC) with representatives from Institute of
Chartered Accountants of India (ICAI), stock exchanges,
etc. The QARC shall review the cases received from the
stock exchanges and guide SEBI in processing the
qualified annual audit reports referred to by the stock
exchanges.

Regulatory focus (Contd..)


After analyzing the qualifications in audit reports, QARC may make
following recommendations:
If, prima facie, QARC is of the view that an audit qualification is not
significant, it may suggest steps for rectification of such qualification;
If, prima facie, QARC is of the view that an audit qualification is significant
and the explanation given by the listed company concerned / its Audit
Committee is unsatisfactory, the case may be referred to the Financial
Reporting Review Board of ICAI (ICAI-FRRB) for their opinion on whether
the qualification is justified or requires restatement of the books of
accounts of the listed company;
If an audit qualification is not quantifiable, QARC may suggest
rectification of the same within a stipulated period.

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