0. Audit Report & Relevant Standard on Auditing
C.A. Milan Mody
Pune Branch of WIRC of ICAI jointly with WICASA
Presented on 18th December 2016

1. What are we covering today?
Independent Auditor’s Report
Relevant Standards on Auditing
Common mistakes while drafting audit report
Other key points and practical tips

2. Reporting requirements under the Companies Act, 2013

3. Reporting requirement u/s 143
143(1)
Exceptional Reporting
Reporting requirement
143(3) Main report
143(11) CARO
143(3)(i) IFC Report
143(12) Fraud reporting
143 (9) &
143 (10)
Compliance with SA

4. Exceptional reporting based on inquiry 143 (1)
Loans & advances given whether prejudicial to Co.
Merely book entries which are prejudicial to Co.
Investments sold less than cost price
Whether loans & advances shown as deposits
Whether personal expenses shown as revenue
Whether cash received for shares allotted

5. Reporting under section 143 (3) Auditor’s Report
Whether auditor has sought and obtained all information & explanation and if not, details with the effect of such information on the financial statements is required to be given
Whether proper books of account have been kept by the company / branch (as per Rule 3(5) of Companies (Accounts) Rules, 2014 backup should be maintained in India)
Whether branch audit report received and how it has been dealt with
Whether balance sheet and profit and loss account dealt with in the report are in agreement with books of account and returns
Text marked in red is newly inserted in the Companies Act, 2013 as compared to the Companies Act, 1956.

6. Reporting under section 143 (3) Auditor’s Report
Whether financial statements comply with the accounting standards
The observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company
GN issued by ICAI
Whether directors is disqualified from being appointed as director u/s 164(2)

7. Reporting under section 143 (3) Auditor’s Report
Any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith
GN issued by ICAI
Whether company has adequate internal financial controls in place and operating effectiveness of such controls
As per GN separate report to be issued for IFC and reporting is only over financial reporting.
Implementation guide on audit of IFCOFR with specific reference to small, less complex companies

8. Reporting under section 143 (3) Auditor’s Report
Others matters prescribed
Whether company has disclosed effect of pending litigation on financial position
Whether company has made provision for foreseeable losses on long term contract, including derivative contracts
Whether any delay in depositing money in IEPF

9. Impact of qualification in Main report & IFC report
Qualify IFC report
No impact of IFC
Qualification in IFC report
Not affecting opinion on FS
Affecting opinion on FS

10. Standards on Auditing … Guides the Auditor
Report

11. Reporting standards Standards on Auditing Reporting Standards SA 700
Forming an Opinion and Reporting on Financial Statements
SA 705
Modification to the Opinion in the Independent Auditor’s Report
SA 706
Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
SA 701
Communicating Key Audit Matters in the Independent Auditors Report
[w.e.f. April 2017 to audit of listed entities]

12. Key points on Reporting Standards
Mandatory
Compliance with SA is mandatory u/s 143(9) and (10)
Applicability
General purpose FS
Not to reviews, compilation etc.
Consistency
Standard format with clear headings (as given in next slide)
Management vs Auditors responsibility
Reduces the ‘expectation gap’ in regard to scope of auditor
Guidance
EOM, Qualification or Adverse opinion

13. Contents (headings) of an audit report
Introductory paragraph
Management’s responsibility for the financial statements
Auditor’s Responsibility
Basis of Modification (if any)
Opinion / Modified opinion
Emphasis of Matter (if any)
Other Matter (if any)
Report on Other Legal and Regulatory requirements
Also refer next slide

14. Contents (headings) of an audit report to change w.e.f 1st April 2017
Opinion / Modified opinion
Basis of Modification (if any)
Emphasis of Matter (if any)
Responsibilities of management and those charged with governance for the financial statements
Auditor’s Responsibilities for the audit of the financial statements
Report on Other Legal and Regulatory requirements

15. SA 705
Modification to the Opinion in the Independent Auditor’s Report
SA 706
Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

16. Types of modified opinion
Modified Opinion [SA 705]
Qualified Opinion
E.g. AS not complied
Adverse Opinion
E.g. Subsidiary not consolidated
Disclaimer of Opinion
E.g. Insufficient audit evidence

17. Types of Modified Opinion
Nature of Matter Giving Rise to the Modification
Auditor’s 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
Disclaimer of opinion
FS having EOM / Modification are closely looked by stakeholders

18. Guidance for modified opinion in audit report
Particulars
Whether Use of
Qualified Expression
Limitations on scope of audit
Material but not fundamental
Fundamental
Yes ‘Except for’
Yes Disclaimer
of Opinion
Disagreements:
Yes Adverse
Opinion

19. Impact of qualification in audit report
As per para A18 of SA 705, if financial statements are subject matter of qualification, the effect of the qualification on the financial Statements (unless impracticable) individually and also in aggregate.
Example : - If inventory is overstated- effects on inventory, PAT and reserves to be given
Individual
Aggregate

20. Consistency in reporting
Opinion paragraph should give reference of modification para i.e. “except for the possible effects of the matter(s) ...” Similarly multiple reference to one comment in the report may be necessary e.g. AS compliance and books, Directors declaration and information and explanation received

21. EOM and Other Matters [SA 706]
Going concern assumption
Change in significant accounting policy
Revenue recognition (measurement)
Future outcome of exceptional litigation
Impairment test / long term strategic investments
CFS excludes entities which are fully impaired
Other Matters
Change in auditor - previous year’s figures
Unaudited accounts of group entities in CFS
Appointment of auditor post year end
Implementation Guide on Reporting Standards issued by ICAI includes 55 FAQ’s & 26 illustrative formats of audit report

22. Impact of going concern assumption (SA 570)
Impact of Going Concern [SA 570] in Audit Report
Component
Disclosure in
Auditor’s Report
Existence of material uncertainity and disclosure made in financials
Emphasis of Matter [para 19]
Existence of material uncertainity and disclosure not made in financials
Qualified or Adverse Opinion [para 20]
Use of going concern assumption inappropriate
Adverse opinion [para 21 and A25]
Management unwilling to make or extend its assessment
Qualified or disclaimer of opinion [para A27]

23. Consolidated audit report
The component auditor's observations, if any, on the component’s financial statements are required to be included in the parent auditor's report on the CFS, regardless of materiality”
Diminution in the value of investment in subsidiary is subject matter of qualification in standalone FS, the same would not be subject matter of qualification in audit report of CFS
In the case of components included in the consolidated financial statements of the parent company, reporting on the adequacy and operating effectiveness of internal financial controls would apply only if it is an Indian company under Companies Act, 2013

24. Consolidated audit report
CARO 2016 is not applicable for Consolidated financial statements.
Reference is given to the audit evidence obtained by the other auditors and certification of management for the unaudited financial statements / information to form an opinion on the consolidated financial statements.

25. Component is Material to financial statement (Yes / No)
ICAI announcement on Reporting on Components [CFS]
Component
Component is Material to financial statement (Yes / No)
Disclosure in Principal Auditor’s Report
Unaudited No
Optional disclosure
[if reported, ‘Other Matters’]
Audited by another auditor
[if disclosed, ‘Other Matters’]
Yes
Disclosure to be made in ‘Other Matters’
Report to be modified

26. SA 710
Comparative Information — Corresponding Figures and Comparative Financial Statements

27. Qualification in last year and corresponding consequences in current year [Illustrative 1]
Auditor’s report on the earlier year includes
Qualified opinion or a disclaimer of opinion, or an adverse opinion
Matter which gave rise to the modification is unresolved
Auditor shall modify the opinion on current period’s financial statements

28. Qualification in last year and corresponding consequences in current year [illustrative 2]
In subsequent year, auditor obtain evidence that there was material misstatement in the prior period FS on which unmodified opinion has been issued
Auditor shall verify whether the misstatement has been dealt with as required under applicable financial reporting framework
If the misstatement is not dealt, then the auditor shall express
A qualified opinion or an adverse opinion in the auditor’s report on current period FS.

29. SA 701
Communicating Key Audit Matters (KAM) in the Independent Auditors Report

30. Key points – ‘KAM’ Applicable to audit of listed entities
Effective for audits of financial statements for periods beginning on or after 01st April, 2017
New dimension to audit report
Key matters are discussed with management and those charged with governance
Increase awareness to users

31. (compilation from FRRB)
Common Mistakes in
Audit Report
(compilation from FRRB)

32. Common mistakes Auditor’s Comment
Signature date prior to director’s signature
Auditor has signed the Auditor’s report prior to the date when the financial statements were signed and authenticated by the director of the company.
Fellow member indicated
Auditor has mentioned his membership number “F” (i.e. represent fellow member) is prefixed to Auditor’s Report.
Examined vs Audited
Opening paragraphs of the Auditors Report states to have “examined the attached Balance Sheet…”
Requirements
SA – 700 (Para – 26) Since the Auditor’s responsibility is to report on the Financial Statements as prepared and presented by the management, the auditor should not date the report earlier than that the date on which the Financial Statements are signed or approved by management.
Institute does not give such prefix
Auditor should have used the word ‘audited’ rather than using the word ‘examined’ to reflect his correct responsibility.

33. Common mistakes (contd..)
Auditor’s Comment
Cash flow statement not covered for reporting
In the Auditor’s Reports no reference was made to the Cash Flow Statement in opening paragraph and opinion paragraph
Qualifications are not quantified
Requirements
SA 700 – (Para – 9) The auditor’s report should identify the cash flow statement as a part of financial statements and further, also express an opinion on the cash flow statement audited.
SA 700 – To give reasons for qualification, should also report the quantitative impact of such on the financial statements of each, individually as well as their aggregate. If impracticable – then state it.

34. Common mistakes (Contd..)
Auditors’ comment
Silent about applicability of CARO
Auditor has not mentioned membership number / firm registration number in the audit report
Requirement
If CARO is not applicable it has to be explicitly stated in audit report.
As per para A36 of SA 700, it is mandatory for the auditor to mention the membership number and firm registration number as per ICAI.

35. Other KEY Points

36. Key points Requirement of italic or bold is done away
Provide reasons for qualifications
Auditors to attend AGM unless exempt
Qualification to be read at AGM
QARC will screen the qualifications in FS and refer it to FRRB if company response is unsatisfactory. (Form A to SEBI)

37. Practical Tips

38. Good Practices
The conclusive opinion of the IFC can also be stated in the main audit report along with the reference of IFC Annexure as follows:
“Our report expresses an unmodified opinion on the adequacy and operating effectiveness of the Company’s internal financial controls over financial reporting.”
Reference of EOM paragraph of last year given in the current period’s audit report:
“Further the emphasis of matter mentioned in paras___ were also reported in our earlier audit report dated 30th June 2011“

39. Good Practices
Rotation of engagement partners to be done at periodic intervals before the stipulated time period of 7 years under SQC 1.
Giving cross references of relevant notes forming part of notes to financial statements in case of reporting requirement for the impact of pending litigation on its financial position.
It is preferred to give note reference for matters covered under EOM rather than reproducing the entire note in audit report.

40. Quality check
Use of checklist
Interim audits
Standard paragraphs (uniform drafting)
Staff training
Avoid copy paste
Illustrative audit reports of standalone / CFS under Ind AS

41. 41

42. Thank you
C.A. Milan Mody