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A Hand Book on Companies Auditor's Report Order 2003 by Rajkumar S Adukia

Auditing Standard on Auditor’s Report on Financial Statements

Introduction

The purpose of this Auditing and Assurance Standard (AAS) is to

Ų Establish standards on the form and content of the auditor’s report on an audit performed on the financial statements of an entity.

Ų Some of the standards laid down by this AAS can also be adapted to auditor’s reports on financial information other than financial statements.

Effective date:

This Auditing and Assurance Standard becomes operative for all audits relating to accounting periods beginning on or after 1^st April 2003.

Financial statements are a source of information for a wide range of users. This is because all users do not have the power to obtain additional information to meet their specific information needs. Hence, financial statements need to be prepared in accordance with one, or a combination of:

(a) Relevant statutory requirements, e.g., the Companies Act, 1956, in the case of companies;

(b) Accounting standards issued by the Institute of Chartered Accountants of India; and

(c) Other recognized accounting principles and practices including those recommended in the Guidance Notes issued by the Institute of Chartered Accountants of India.”

The auditor’s report should contain

Ų A clear written expression of opinion on the financial statements taken as a whole.

Ų An opinion that the financial statements have been prepared in accordance with an acceptable financial reporting framework applicable to the entity under audit.

Ų An opinion that the financial statements comply with the relevant statutory requirements.

Ų An unqualified opinion if he is of the opinion that the financial statements present a true and fair view.

Basic Elements of the Auditor’s Report

A level of uniformity in the form and content of the auditor’s report if followed helps to promote the reader’s understanding of the auditor’s report and to identify any unusual circumstances as and when they occur. Besides , if a statute governing the entity requires the auditor to either include certain matters in the audit report or prescribes the form in which he should issue the report, then the auditor should do accordingly and also in addition include the requirements of AAS28.

The auditor's report should include the following basic elements, ordinarily as per AAS 28:

a) Title;

b) Addressee;

c) Opening or introductory paragraph

d) Scope paragraph (describing the nature of audit)

e) Opinion paragraph containing

f) Date of the report;

g) Place of signature; and

h) Auditor's signature.

a) Title

The term “Auditors Report” should be used so as to distinguish the report from various other types of reports

b) Addressee;

The report should be addressed to the relevant authorities based on the terms of engagement.

c) Opening or introductory paragraph

The opening paragraph should clearly identify the financial statement audited and include the period covered under audit. It should also include a statement that the auditor has only expressed an opinion on the financial statement and the responsibility to prepare the financial statement vests with the management.

d) Scope

Ų The report should give the reader an assurance that the audit was carried out in conformance with established standards

Ų The scope of the audit would be based on the terms of engagement and relevant legislations

Ų The report should give an assurance that the audit was planned and performed to obtain reasonable assurance that the financial statements are free of material misstatement.

Ų report should describe the audit as including:

(a) Test check on the available evidence to support the amounts and disclosures in financial statements;

(b) Assessment of the accounting principles applied in the preparation of the financial statements;

(c) Assessment of the significant estimates made by management in the preparation of the financial statements; and

(d) Evaluation of the overall financial statement presentation.

Ų The report should include a statement by the auditor that the audit provides a reasonable basis for his opinion.

e) Opinion

The opinion paragraph should contain

(i) A reference to the financial reporting framework used to prepare the financial statements; and

(ii) An opinion that the financial statements give a true and fair view in accordance to the framework.

(iii) An opinion that statutory requirements have been complied with

f) Date of the report

The date of the report should be

Ų The date when the auditor signs the report. This gives an indication that all events up to that date that could have an impact on the financial statements have been considered.

Ų The date should not be earlier than the date on which the financial statements are signed or approved by management.

g) Place of signature

The report should specify the city where the report is signed.

This is in contrast to ISA 700 (International Standard on Auditing) which states that the expression “Auditor’s Address” means the name of a specific location, which is ordinarily the city where the auditor maintains the office that has the responsibility for the audit.

h) Signature

Ų The report should be signed by the auditor in his personal name.

Ų In case of a firm, the report should be signed in the personal name of the auditor and in the name of the audit firm.

Ų The partner/proprietor signing the audit report should mention his membership number assigned by the Institute of Chartered Accountants of India. ISA 700, however, does not contain any corresponding requirement.

Modified report

a) Matters That Do Not Affect the Auditor’s Opinion

Ų There may be circumstances wherein an auditor’s report may be modified by adding an emphasis of matter paragraph (preferably preceding the opinion paragraph) in order to highlight a matter which is included in a note to the financial statements and affecting the financial statements but does not affect the auditor’s opinion.

Ų Where the going concern question is not resolved and adequate disclosures have been made in the financial statements, the auditor should suitably modify the report by adding a paragraph to highlight a material matter regarding a going concern problem.

Ų If there is any significant uncertainty other than going concern problem and is a matter whose outcome depends on future actions or events not under the direct control of the entity but may affect the financial statements, the auditor should consider modifying the auditor’s report by adding a paragraph.

b) Matters That Do Affect the Auditor’s Opinion

The auditor may express a qualified opinion or disclaimer of opinion if he feels that there is a limitation on the scope of audit which may be either imposed by the entity or by circumstances.

The auditor may express a qualified opinion or an adverse opinion in circumstances there is a disagreement with management regarding the acceptability of the accounting policies selected, the method of their application or the adequacy of financial statement disclosures.

Whenever the auditor expresses an opinion that is other than unqualified, a clear description of all the substantive reasons should be included in the report. Where it is practicable, a quantification of the possible effect(s), individually and in aggregate, on the financial statements should be mentioned in the auditor’s report. In contrast, ISA 700 does not require the auditor to quantify the possible effect(s) in aggregate on the financial statements.

Where it is not practicable to quantify the effect of modifications made in the audit report accurately, the auditor may quantify on the basis of estimates made by the management after carrying out such audit tests as are possible and clearly indicate the fact that the figures are based on management estimates in a separate paragraph preceding the opinion or disclaimer of opinion. This information may include a reference to a more extensive discussion, if any, in a note to the financial statements.

OPINIONS OTHER THAN UNQUALIFIED

Qualified opinions

The auditor may give a qualified opinion

1. when there is limitation of scope of the audit or

2. When there is disagreement with management with respect to the fairness of presentation in accordance with generally accepted accounting principles consistently applied.

A qualified report states that except for the effects of some deficiency in the financial statements, or some limitation in the scope of the auditors' examination, the financial statements are presented fairly.

The auditor should then include a separate explanatory paragraph before the opinion paragraph clearly describing the reasons for the qualification.

Adverse opinion

This is the opposite of an unqualified opinion. It is an opinion that the financial statements do not present a true and fair. When such an opinion is expressed the auditors should disclose in a separate paragraph the reasons for the adverse opinion and the impact on the financial statements.

Disclaimer of opinion

A disclaimer of opinion is given when the scope of the engagement or other conditions preclude the auditor’s compliance with accounting and auditing standards.

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