Akshat HariyaAkshat HariyaArticle AssistantArticle Assistant

M. V. Damania & Co.M. V. Damania & Co.

Earlier known as “Auditing and Assurance Earlier known as “Auditing and Assurance Standards” (AAS)Standards” (AAS)

Now referred to as “Standards on Auditing” Now referred to as “Standards on Auditing” (SA) – effective from 1st April 2008(SA) – effective from 1st April 2008

New/Revised Standards on Audit (“SAs”):-(Relevant for today’s discussion)

SA NumberSA Number Title of SATitle of SA

SA 700(R)SA 700(R) Opinion & Reporting on Opinion & Reporting on Financial Statements Financial Statements

SA 705SA 705 Modifications to the opinion of Modifications to the opinion of AuditorAuditor

SA 706SA 706 Emphasis of Matter & Other Emphasis of Matter & Other Para.Para.

Fair Presentation Framework Fair Presentation Framework ::Auditor gives True & Fair Report under this Auditor gives True & Fair Report under this Framework Framework

Compliance Framework Compliance Framework ::Auditor reports on compliance with specific Auditor reports on compliance with specific applicable laws or rules and regulations.applicable laws or rules and regulations.

OLDOLD NEWNEW

Auditor’s ReportAuditor’s Report Independent Independent Auditor’s ReportAuditor’s Report

Statutory AuditStatutory Audit Consolidated Financial Consolidated Financial StatementsStatements

To, Shareholders To, Shareholders or Membersor Members

XYZ Company XYZ Company Ltd.Ltd.

To,To,

Board Of DirectorsBoard Of Directors

XYZ Company Ltd.XYZ Company Ltd.

Audit Entity’s identityAudit Entity’s identity

Financial Year (Period)Financial Year (Period)

Title of Financial StatementsTitle of Financial Statements(Balance Sheet, Statement of Profit & (Balance Sheet, Statement of Profit &

Loss Loss and Cash flow statement)and Cash flow statement)

Summary of Significant Accounting Policies &Summary of Significant Accounting Policies &

Other explanatory informationOther explanatory information

Auditor to describe Management’s Auditor to describe Management’s Responsibility under separate paragraph:Responsibility under separate paragraph:

- for preparation of Financial - for preparation of Financial Statement Statement andand

- existence of relevant Internal - existence of relevant Internal ControlControl

Auditor’s Responsibility is to express Auditor’s Responsibility is to express opinion on Financial Statementopinion on Financial Statement

Auditor to follow Standards on Auditor to follow Standards on

Auditing issued by I.C.A.IAuditing issued by I.C.A.I.

Reporting on matters that are Reporting on matters that are supplementary to auditor’s responsibilitysupplementary to auditor’s responsibility

For e.g., reporting under CARO or for For e.g., reporting under CARO or for NBFCs as required by R.B.I., etc.NBFCs as required by R.B.I., etc.

Reporting as per Sec. 227(3) of Companies Reporting as per Sec. 227(3) of Companies Act - 1956 Act - 1956

Overall presentation of Financial Statement Overall presentation of Financial Statement to show whether it gives True & Fair viewto show whether it gives True & Fair view

Specific requirements of applicable law to Specific requirements of applicable law to be followed, such as Form 3CB, Sec. 44AB be followed, such as Form 3CB, Sec. 44AB of I.T. Act - 1961of I.T. Act - 1961

Sufficient Appropriate Audit Evidence Sufficient Appropriate Audit Evidence (SA – 450 & SA – 500 to 599)(SA – 450 & SA – 500 to 599)

Whether Misstatements are MaterialWhether Misstatements are Material (SA -450)(SA -450)

Evaluation of Accounting Polices and Evaluation of Accounting Polices and EstimatesEstimatesWhether Statements give Fair PresentationWhether Statements give Fair Presentation

Unmodified Opinion :Unmodified Opinion :

- If Auditor concludes that Financial If Auditor concludes that Financial Statements Statements areare in conformity with the in conformity with the factors referred to in earlier slide.factors referred to in earlier slide.

Modified Opinion :Modified Opinion :(in following two situations)(in following two situations)

If statements as a whole are If statements as a whole are notnot free from free from material misstatementsmaterial misstatements

When auditor is When auditor is notnot able to obtain required able to obtain required audit evidenceaudit evidence

Type of Audit Opinion in Type of Audit Opinion in Audit ReportAudit Report

Qualified OpinionQualified Opinion

Adverse OpinionAdverse Opinion

Disclaimer of OpinionDisclaimer of Opinion

Inappropriate selection of Accounting Inappropriate selection of Accounting PoliciesPolicies

Absence of Fair Presentation of Financial Absence of Fair Presentation of Financial transaction in Financial Statementstransaction in Financial Statements

Absence of Appropriate DisclosuresAbsence of Appropriate Disclosures

Due to circumstances records not available Due to circumstances records not available (destroyed, seized etc.)(destroyed, seized etc.)

Due to timing of audit ( such as audit Due to timing of audit ( such as audit carried out after stock taking is over) carried out after stock taking is over)

Auditor prevented by managementAuditor prevented by management

Absence of explanations by managementAbsence of explanations by management

Matters in audit are Matters in audit are Material but not Material but not PervasivePervasive

PervasivePervasive effects are such in judgment of effects are such in judgment of auditor that affect not a specific element auditor that affect not a specific element but affect substantial portion of Financial but affect substantial portion of Financial Statements and are fundamental to Statements and are fundamental to disclosure in or understanding of disclosure in or understanding of statements statements

Except for the effects of the matter(s) Except for the effects of the matter(s) described above in the basis for opinion described above in the basis for opinion para, the financial statements give a true para, the financial statements give a true and fair view…….and fair view…….

Financial Statements are Financial Statements are materially materially misstated with pervasive effectsmisstated with pervasive effects..

Manner of giving Adverse OpinionManner of giving Adverse Opinion::In the auditor’s opinion, because of the In the auditor’s opinion, because of the significance of the matters described in the significance of the matters described in the basis for opinion para above, the financial basis for opinion para above, the financial statements do not give a true and fair statements do not give a true and fair view……view……

There is material as well as pervasive There is material as well as pervasive inability to obtain required audit evidenceinability to obtain required audit evidence

Manner of giving Disclaimer Opinion:Manner of giving Disclaimer Opinion:““Because of the significance of the Because of the significance of the matter(s) described in the ‘Basis for matter(s) described in the ‘Basis for Disclaimer of Opinion para’, the auditor Disclaimer of Opinion para’, the auditor has not been able to obtain sufficient & has not been able to obtain sufficient & appropriate audit evidence to provide a appropriate audit evidence to provide a basis for an audit opinion and accordingly, basis for an audit opinion and accordingly, the auditor does not express an opinion on the auditor does not express an opinion on Financial Statements”.Financial Statements”.

Standard on Auditing (SA) 706Standard on Auditing (SA) 706

Emphasis of Matter Emphasis of Matter Paragraphs and Other Matter Paragraphs and Other Matter

Paragraphs in the Paragraphs in the Independent Auditor’s Independent Auditor’s

ReportReport

An emphasis of matter paragraph is useful when An emphasis of matter paragraph is useful when the auditor, having formed an opinion, intends to the auditor, having formed an opinion, intends to draw the attention of the users to:draw the attention of the users to: A matter, though appropriately presented and A matter, though appropriately presented and

disclosed, is of fundamental importance to the disclosed, is of fundamental importance to the users to understand the financial statements;users to understand the financial statements;

Any other matter relevant to the users’ Any other matter relevant to the users’ understanding of the audit, auditor’s understanding of the audit, auditor’s responsibility or auditors’ report.responsibility or auditors’ report.

Where an emphasis of matter paragraph is Where an emphasis of matter paragraph is required by any other auditing standard, the required by any other auditing standard, the disclosure shall be as per this SA.disclosure shall be as per this SA.

The auditor should have obtained sufficient The auditor should have obtained sufficient appropriate audit evidence that the matter is not appropriate audit evidence that the matter is not materially misstated.materially misstated.

The emphasis of matter paragraph shall be placed The emphasis of matter paragraph shall be placed immediately after the Opinion paragraph in the immediately after the Opinion paragraph in the Auditors’ Report under the heading “Emphasis of Auditors’ Report under the heading “Emphasis of Matter Paragraph”Matter Paragraph”

Include a clear reference to the matter being Include a clear reference to the matter being emphasized and to the relevant disclosures.emphasized and to the relevant disclosures.

Indicate that the auditors’ opinion is Indicate that the auditors’ opinion is NOTNOT modified by modified by using words like using words like “Without qualifying our opinion.”“Without qualifying our opinion.”

If auditor wants to communicate any other matter not If auditor wants to communicate any other matter not prohibited by law, he may do so using an prohibited by law, he may do so using an “Other “Other Matter” Matter” paragraph immediately after the Emphasis of paragraph immediately after the Emphasis of matter paragraph.matter paragraph.

1.1. Inventories are misstated.Inventories are misstated. The The misstatement is deemed to be material misstatement is deemed to be material but not pervasive to the financial but not pervasive to the financial statements. The audit opinion is qualified statements. The audit opinion is qualified for the misstatementfor the misstatement..

Basis For Qualified Opinion:Basis For Qualified Opinion:The Company’s inventories are carried in The Company’s inventories are carried in the Balance Sheet at Rs. XXX. the Balance Sheet at Rs. XXX. Management has not stated the Management has not stated the inventories at the lower of cost and net inventories at the lower of cost and net realisable value but has stated them solely realisable value but has stated them solely at cost, which constitutes a departure from at cost, which constitutes a departure from the Accounting Standards referred to in the Accounting Standards referred to in subsection (3C) of section 211 of the Act. subsection (3C) of section 211 of the Act.

The Company’s records indicate that had The Company’s records indicate that had management stated the inventories at the lower management stated the inventories at the lower of cost and net realisable value, an amount of of cost and net realisable value, an amount of Rs. XXX would have been required to write the Rs. XXX would have been required to write the inventories down to their net realisable value. inventories down to their net realisable value. Accordingly, cost of sales would have been Accordingly, cost of sales would have been increased by Rs. XXX, and income tax, net profit increased by Rs. XXX, and income tax, net profit and shareholders’ funds would have been and shareholders’ funds would have been reduced by Rs.reduced by Rs.XXX, Rs. XXX and Rs. XXX , XXX, Rs. XXX and Rs. XXX , respectively.respectively.

Qualified Opinion:Qualified Opinion: In our opinion and to the best of our information In our opinion and to the best of our information

and according to the explanations given to us, and according to the explanations given to us,

except for the effects of the matter except for the effects of the matter described in the Basis fordescribed in the Basis for Qualified Qualified Opinion paragraphOpinion paragraph,, the financial the financial statements give the information required statements give the information required by the Act in the manner so required and by the Act in the manner so required and give a true and fair view in conformity give a true and fair view in conformity with the accounting principles generally with the accounting principles generally accepted in India.accepted in India.

2. The auditor was unable to obtain sufficient 2. The auditor was unable to obtain sufficient appropriate audit evidence regarding an appropriate audit evidence regarding an investment in a foreign affiliate. The possible investment in a foreign affiliate. The possible effects of the inability to obtain sufficient effects of the inability to obtain sufficient appropriate audit evidence are deemed to appropriate audit evidence are deemed to be material but not pervasive to the financial be material but not pervasive to the financial statement. The audit opinion is qualified for statement. The audit opinion is qualified for the misstatements.the misstatements.

Basis For Qualified Opinion:Basis For Qualified Opinion: ABC Company Limited’s investment in XYZ ABC Company Limited’s investment in XYZ

Company, a foreign associate acquired Company, a foreign associate acquired during the year and accounted for by the during the year and accounted for by the equity method, is carried at Rs. XXX in the equity method, is carried at Rs. XXX in the Balance Sheet as at March 31, 20XX, and Balance Sheet as at March 31, 20XX, and ABC’s share of XYZ Company’s net income ABC’s share of XYZ Company’s net income of Rs. XXX is included in ABC Company of Rs. XXX is included in ABC Company Limited’s income for the year then ended.Limited’s income for the year then ended.

We were unable to obtain sufficient We were unable to obtain sufficient appropriate audit evidence about the appropriate audit evidence about the carrying amount of ABC Company Limited’s carrying amount of ABC Company Limited’s investment in XYZ Company as at March 31, investment in XYZ Company as at March 31, 20XX and ABC Company Limited’s share of 20XX and ABC Company Limited’s share of XYZ Company’s net income for the year XYZ Company’s net income for the year because we were denied access to the because we were denied access to the financial information, management, and the financial information, management, and the auditors of XYZ Company. Consequently, we auditors of XYZ Company. Consequently, we were we were unable to determine whether were we were unable to determine whether any adjustments to these amounts were any adjustments to these amounts were necessary.necessary.

Qualified Opinion:Qualified Opinion: In our opinion and to the best of our In our opinion and to the best of our information and according to the information and according to the explanations given to us, except for the explanations given to us, except for the possible effects of the matter described in possible effects of the matter described in the Basis for Qualified Opinion paragraph, the Basis for Qualified Opinion paragraph, the financial statements give the the financial statements give the information required by the Act in the information required by the Act in the manner so required and give true and fair manner so required and give true and fair view in conformity with the accounting view in conformity with the accounting principles generally accepted in India.principles generally accepted in India.

3.The financial statements are materially 3.The financial statements are materially misstated due to the non consolidation of misstated due to the non consolidation of a subsidiary. The material misstatement is a subsidiary. The material misstatement is deemed to be pervasive to the financial deemed to be pervasive to the financial statements. The effects of the statements. The effects of the misstatement on the financial statements misstatement on the financial statements have not been determinedhave not been determined because it because it was not practicable to do so. An adverse was not practicable to do so. An adverse audit opinion is given under the audit opinion is given under the circumstancescircumstances::

Basis For Adverse Opinion:Basis For Adverse Opinion: As explained in Note X, the Company has As explained in Note X, the Company has

not consolidated the financial statements not consolidated the financial statements of subsidiary XYZ Company it acquired of subsidiary XYZ Company it acquired during 20XX because it has not yet been during 20XX because it has not yet been able to ascertain the fair values of certain able to ascertain the fair values of certain of the subsidiary’s material assets and of the subsidiary’s material assets and liabilities at the acquisition date. This liabilities at the acquisition date. This acquisition is therefore accounted for as acquisition is therefore accounted for as an investment. Under the accounting an investment. Under the accounting principles generally accepted in India, the principles generally accepted in India, the subsidiary should have been consolidated subsidiary should have been consolidated because it is controlled by the Company. because it is controlled by the Company.

Had XYZ been consolidated, many Had XYZ been consolidated, many elements in the accompanying financial elements in the accompanying financial statements would have been materially statements would have been materially affected. The effects on the financial affected. The effects on the financial statements of the failure to consolidate statements of the failure to consolidate have not been determined.have not been determined.

Adverse OpinionAdverse Opinion:: In our opinion, because of the significance In our opinion, because of the significance

of the matter discussed in the Basis for of the matter discussed in the Basis for Adverse Opinion paragraph, the Adverse Opinion paragraph, the consolidated financial statements do not consolidated financial statements do not give a true and fair view in conformity with give a true and fair view in conformity with the accounting principles generally the accounting principles generally accepted in India.accepted in India.

4.4. The auditor was unable to obtain The auditor was unable to obtain sufficient appropriate audit evidence sufficient appropriate audit evidence about multiple elements of the financial about multiple elements of the financial statements. That is, the auditor was statements. That is, the auditor was unable to obtain audit evidence about unable to obtain audit evidence about the entity’s inventories and accounts the entity’s inventories and accounts receivable. The possible effects of this receivable. The possible effects of this inability to obtain sufficient appropriate inability to obtain sufficient appropriate audit evidence are deemed to be both audit evidence are deemed to be both material and pervasive to the financial material and pervasive to the financial statements.statements.

Basis For Disclaimer of OpinionBasis For Disclaimer of Opinion:: We were appointed as auditors of the We were appointed as auditors of the

Company after March 31, 20XX and thus Company after March 31, 20XX and thus could not observe the counting of physical could not observe the counting of physical inventories at the beginning and end of the inventories at the beginning and end of the year. Accordingly, we were unable to year. Accordingly, we were unable to satisfy ourselves by alternative means satisfy ourselves by alternative means concerning the inventory quantities held at concerning the inventory quantities held at December 31, 20X0 and March 31, 20X1 December 31, 20X0 and March 31, 20X1 which are stated in the Balance Sheet at which are stated in the Balance Sheet at Rs. XXX and Rs. XXX respectivelyRs. XXX and Rs. XXX respectively.

InIn addition, the introduction of a new addition, the introduction of a new computerized accounts receivable system in computerized accounts receivable system in September 20X1 resulted in numerous errors in September 20X1 resulted in numerous errors in accounts receivable. As of the date of our audit accounts receivable. As of the date of our audit report, management was still in the process of report, management was still in the process of rectifying the system deficiencies and correcting rectifying the system deficiencies and correcting the errors. We were unable to confirm or verify the errors. We were unable to confirm or verify by alternative means accounts receivable by alternative means accounts receivable included in the Balance Sheet at a total amount included in the Balance Sheet at a total amount of Rs. XXX as at March 31, 20X1. As a result of of Rs. XXX as at March 31, 20X1. As a result of these matters, we were unable to determine these matters, we were unable to determine whether any adjustments might have been whether any adjustments might have been found necessary in respect of recorded or found necessary in respect of recorded or unrecorded inventories and accounts receivable, unrecorded inventories and accounts receivable, and the elements making up the Statement of and the elements making up the Statement of Profit & Loss and Cash Flow Statement.Profit & Loss and Cash Flow Statement.

Disclaimer of Opinion:Disclaimer of Opinion: Because of the significance of the matters Because of the significance of the matters

described in the Basis for Disclaimer of described in the Basis for Disclaimer of Opinion paragraph, we have not been able Opinion paragraph, we have not been able to obtain sufficient appropriate audit to obtain sufficient appropriate audit evidence to provide a basis for an audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion. Accordingly, we do not express an opinion on the financial statements.opinion on the financial statements.

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