lone na ag ee Audit Report Introduction ‘The audit Reporting is the communication of audit conclusions after hay utied out the submit his report specifying matters to be included therein. The audit report is the summarised expression of certain facts and opinions regarding the conduct of the audit and conclusions with reference to it. The AAS 28 lays-down the standards to be complied with in connection with the audit reports. The endctments governing the preparation and presentation of financial statements of the entity also lays down the requirement of an audit report. For e.g., Section 227 of the Companies Act specifies the matters to be included in audit report of a company. Similarly section 233B deals with matters of report of a cost auditor. Basic Elements of an Audit Report. a The audit report strould, generally, be in the following lay out- (a) Title (6) Addressee (©) Opening or introductory paragraph- (i) identification of financial statements audited gpd Gi) a statement on the responsibility of the entity’s management and that of auditor, (d) Scope paragraph - (#) a reference to the auditing standards generally accepted in India and (ii) a description of work performed by the auditor. (©) Opinion paragraph - (i) a reference to the financial reporting framework used to prepare the financial statements and (if) expression of opinion on the financial statements (A) Date of the report s. (g) Place of signature (A) Auditor’s signature. ‘Sometimes, the governing enactments may require inclusion of certain statements or matters in or with the auditor's report. In such cases, the auditor’s report should include all those matters in addition to the matters as specified in AAS above. 1. Title - . The title indicates the nature of report. The title should be like- “Auditor's Report” or Branch Auditor's Report”. The title distinguishes this report from other reports like Director's report oF an Accountant report on compilation of the accounts ete. : 106Audit Report : 107 2. Addressee The auditor's report should address the person to whom it is meant to be forwarded. The Tequirements of the engagement or the relevant statute may determine the person to whom report should be submitted. Generally the report is submitted to the person who appoints the auditor. 3. Opening or Introductory paragraph The introductory paragraph should identify - 1. the financial statements with respect to which audit opinion is given- Financial statements are identified by title, period covered, the entity to which it relates etc. 2. the clear marking of the responsibility between management and auditor- The report should state that the financial statements are the responsibility of the management; the auditor’s responsibility is limited to expression of opinion thereon. The preparation of the financial statements involves making of significant accounting estimates, determination of appropriate accounting principles and methods used in preparation of financial statements. These determination will have to be made appropriately by the management having regard to the reporting frame work of financial statements, as chosen by or is required to be complied with, by the management. 4, Scope paragraph iN The scope paragraph specifies the work performed by auditor. The scope of audit work is governed by the terms of engagement, statutory provisions and the pronouncements of the institute. The scope of the audit as affected by the statute or the pronouncements of the ICAI, cannot be modified or whittled down by the terms of engagement, agreement or any arrangement between auditor and auditee. The auditor should specify in the scope paragraph that auditing has been conducted in accordance with the established auditing standards. This is both an expression of auditing procedures carried out as well as an expression of assurance to the readers that the auditing conducted could be taken to be one in accordance with what AAS have mandated auditors to do in audit situations, The scope paragraph should indicate that auditor had planned and performed the audit to obtain reasonable assurance whether financial statements are free from material misstatement. Specifically the scope paragraph describes the audit as including- (a) examining on a test basis, evidence to support the accounts, disclosures in financial statements. (6) assessing accounting principles used in the preparation of financial statements. (c) assessing the significant “estimates made by management in preparation of financial statements. tt. (d) evaluating the overall financial statement presentation, The report, besides describing what an audit is, should mention that the audit has provided reasonable basis for expression of opinion. 5. Opinion Paragraph The opinion paragraph of the report should indicate the financial reporting framework used to prepare the financial statements and state the auditor inion as to whether the financial statements give 4 true and fair view in accordance with that financial reporting framework and comply with the statutory disclosure requirements. In addition to the opinion on true and fait view of the financial statements, the auditor may be required _to_express-epinion on specific_matters required by statute. In such cases, besides, expressing opinion on the truth and fairness of financial statements, the auditor should specify his opinion on such additional matters as well. For e.g. the108 “A Hand Book of Practical Auditing Companies Act, 1956 requires auditor in terms of section 227(2) to express whether in his opinion, the said accounts give information as required by the Act. 6. Date of the report = The date of report indicates the date on which the auditor signs his report. It indicates that the auditor has considered the effect on the financial statements and also on his reports of events occurred upto that date. Again this date should not precede the date on which the financial statements were approved by the management. Because, the auditor’s responsibility is to express opinion on the financial statements as prepared by the management. 7. Place of report The town in which the audit report is signed should be indicated. 8. Auditors signature The report should be signed by the auditor in his personal name. Where the firm is auditors of the entity, the signature should be in the personal nam« we of the part Partner signing as well as in the firm name. The membership number of the individual signing the report should invariably be mentioned. +a sr adintabre tolramoed cleats, Specimen of a clean auditor’s report We have audited the attached Balance Sheet of ABC as at 31st March 2005 and also the Profit and Loss Account for the year ended on that date. The financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these financial statements based on our audit. 1Sf off pF TiWOly Deni a ESR We conducted our audit in accordance with auditing standards generally accepted in India. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are from material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management as well as evaliiating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion and to the best of information and according to the explanations given to us, the financial statements give a true and fair view in conformity with the accounting principles generally accepted in India (@ in case of the Balance sheet, of the state of affairs of ABC as at 31st March 2005 and Gi) in case of Profit and Loss Accounts of the profit / loss for the year ended 31st March 2005/ For A. SRINIVASAN and Co., Chartered Accountants A. Srinivasan (name of the auditor with membership number) Place - Chennai Date - 25.04.2005 bog. Kinds of Audit Report Clean or unqualified report An auditor issues ah unqualified report when he concludes that the financial statements give a true and fair view in accordance with the financial reporting framework used for the preparation and presentation of financial statements. An unqualified opinion or clear report indicates that entation of financial statementsAudit Report 109 Se te 1. the financial statements have been prepared using the generally accepted accounting rinciple. These have been consistently applied from time to time. 2. the financial statements comply With the relevant statutory requirements and regulations. 3, there is adequate disclosure of all material matters relevant to the proper presentation of the financial information, subject to statutory requirement if any, ~~ a= + 4, changes in accounting method if any, is in accordance with what is permissible and the same have been properly determined, the effect measured and disclosed fairlyin financial statements. Modified report- qualified, disclaimer or adverse report An auditor’s report is considered to be modified when it includes (a) matters that do not affect the auditor's opinion © emphasis of matter (b) matters that do affect the auditor’s opinion © Qualified op’ * @ Disclaimer of opinion © Adverse opinion Modified opinion for emphasis and not affecting auditor’s opinion Sometimes, the auditor may find it useful to incorporate reference to certain matters which have been properly disclosed in the financial statements for the benefit of the readers. Such reference is indicated before opinion paragraph. The mentioning of such matters in auditor’s report is to highlight the importance of such facts the conjoint reading of which will be beneficial for the better understanding of the report. It is not to be taken as any reservation on the part of auditor in relation to the opinion he expresses beneath. AAS requires two items to be highlighted as modified opinion for emphasis. When there is “going concern problem’ (*i.e. generally accounts are prepared based on the concept of going concern. That is, the entity will be carried out in future. This implies current assets are held for realisation and hence are to be valued at lower of cost or market price; fixed assets are held for carrying operations on them and hence they are to be valued at cost less depreciation. But when the going concern concept is impaired due to imminent threat to continuity of the entity, the accounting of transactions and balances would require consequent changes. For e.g. all asset are to be valued at realisable values.) and it is not resolved as to the appropriateness or otherwise of the going concen, the fact should be indicated in the report about the doubt. Again, when there is an uncertainty about a matter, which has been disclosed in the financial statements and about the effect of which, it is not possible to determine and which is beyond the controi of the management, the same should be emphasied in the audit report. But if the effects of uncertainties are of multiple nature and the magnitude may be such (of course uncertain) as to vitiate the opinion, the auditor may choose, instead of reporting it as a matter of emphasis, to mention it by way of disclaimer. Modified opinion-disclaimer, qualified and adverse opinion An auditor expresses “other than unquylified” opinion - which may be “disclaimer, qualified or adverse” opinions when either of the following circumstances exist and in the auditor’s judgement, the effect of the matter is or may be material to the financial statements- (a) there is a limitation on the scope of the auditor’s work (b) there is disagreement with management regarding the (A) acceptability of the accounting policies selected (B) the method d of their application or (C) the adeqi 1 statement disclosures, 3110 “A Hand Book of Practical Auditing The limitation on the scope of work may necessitate auditor to issue a qualified or disclaimer of opinion. bi ‘The disagreement as specified in (b) may necessitate auditor to issue a qualified or adverse opinion. (A) A qualified opinion should be expressed when the auditor concludes that an unqualified cannot be expressed but that the effect of disagreement with management is not so material and pervasive as to require an averse opinion or the Tinitation on The scope isnot so material and pervasive as to require a disclaimer of opinion. A qualified opinion is expressed as being “subject t or “except for” the effects of the matter to which the qualification relates. The qualification should clearly indicate the reasons for the qualification and the impact of the qualification in profits/losses and also on the financial position of the entity. Note that the qualified opinion is given in cases of disagreement with management regarding the (a) acceptability of the accounting policies selected, (b) the application of such policies, or (c) the adequacy of disclosure. The wrong policy chosen or applied cannot escape from the auditor’s qualified report on the pretext that such wrong policy is adequately disclosed as a note to the financial statements. The (a), (b) or (c) warranting issue of qualified report operates in a mutually ‘exclusive plane. Examples 1 Limitation on scope of audit- Non availability of confirmation of balances of major debtors, non-verification of stocks at the year end etc. 2. Disagreement with management. Accounting policy- e.g. Providing of retirement benefits on cash basis without accrual accounting; non - provision of depreciation Wrong application of accounting e.g. Capitalising interest expenditure on loan for erection of machinery after installation. Inadequate disclosure- omitting to furnish quantitative details of purchases, sales, stock as per schedule VI requirements, omission to separately show the managerial remuneration etc. (B) A Disclaimer of opinion should be expressed when the possible effect of limitation on the scope js so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and is accordingly unable to express an opinion on the financial statement ‘The disclaimer is expressed when forming of an overall opinion about the financial statements. The opinion-forming process is inhibited by non-availability of material supporting for an assertion. If the non-availability of evidences relates to only partial segment of audit matters which is considered to be not material, the auditor would limit his “other than unqualified opinion” to “qualified opinion” For example, when he is not able to observe the stock taking of the entity, he may opine the truth and fairness of financial results and position adding a term “ subject to the non-observance of the stock taking by us due to the reason......” On the other hand, if the financial records are not at all produced to him in view of the seizure of the same by Income tax authority, the limitation is so pervasive and grave that the auditor will disclaim to give opinion as to the truth and fairness of the financial results and position. Again, when the limitation imposed on auditor is designed to curtail or take away the rights and duties of auditor as enshrined in enactments, or pronouncements of ICAI, the auditor will refrain from taking up such audit, instead of accepting the assignment and expressing disclaimer. (C) An Adverse opinion is expressed when the effect of disagreement is so material and Pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements.