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Audit Report - What is'true and fair view?'

P.R. Sethuraman 
on 11 March 2019

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Present formats of Audit Report:

The present formats of the audit reports are primarily guided by the relevant SAs:

  • SA 700 (Revised), 'Forming an Opinion and Reporting on Financial Statements'
  • SA 701, 'Communicating Key Audit Matters in the Independent Auditor's Report'
  • SA 705 (Revised), 'Modifications to the Opinion in the Independent Auditor's Report'
  • SA 706 (Revised), 'Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report'

Report on Other Legal and Regulatory Requirements.

Regarding Other Legal and Regulatory Requirements mentioned in the SA format it inter-alia covers:

Requirements of Section 143 of the Companies Act 2013- the new Act has added among other things 143 (3) (i) on IFC and 143 (12) on fraud. In respect of IFC, the ICICI Guidance Note on IFC even suggests for a separate addendum, if required. Fraud that is noticed during audit is handled in CARO. But, now, even if it is sense, it is coming under the notch of main report.

The Requirements of the other Acts like Banking Act, Insurance Act etc.,

Besides, Companies (Auditor's Report) Order, 2016 is part and parcel of companies as applicable.

Purpose of the Article:

The above standards inter-alia give the formats covering Report on the Financial Statements, Responsibility for the Financial Statements, Auditor's Responsibility, Opinion ,Basis of opinion for Qualification(if applicable )and Report on Other Legal and Regulatory Requirements. Besides, Report on Other Legal and Regulatory Requirements are dealt with in the above Section copiously. Further, they are dealt with copiously by a number of write ups. There is no need to go through again in this article since the 'sole' purpose of this article is to understand in depth the 'Soul', that is the inspiration, the spirit and commitment of the Audit Report. Let us now deal with life-force of an audit report.

What's audit? Audit is to give a report giving an opinion on the financial statements on 'the 'true and fair view' for a specified a period to the members of an entity.

Then, what is 'true and fair view'? 'True' is factually correct while 'fair' is based on reasonable estimates built on proper appraisals and assessments on given circumstances? To understand, it is better to compare with living figures that essentially depend on book figures. Mother is 'true' since the child is born out of her womb that is visually 'seen'. But, what about 'father' that's tested by environments? – It is a 'fair' call. Today, when there is surrogate mother, how far is it true even for a mother - a call may be required! Coming to the book figures, most of the items are contractual payments based on agreed contacts that are by and large nothing but true. But, what about estimates based on judgments? –the possible out outcome of disputed cases, provisions for income tax, cases pending in appeals at different levels etc. Are they not fair view taken? That is all about 'true and fair' view.

But, what about Judgements?

'To Judge', it means forming an opinion or taking a view about something or someone after a careful thought, study and examination. Everybody has to take a judgment on every issue one confronts at various points of time. A person makes a judgment as to the line or course of education he/she has to pursue; has to make a judgment as to whom he/she is to marry; so on and so forth. Therefore, making a judgment is part and parcel of one's life--quality life to proceed further.

Taking a judgment on each issue one comes across is sine quo non without which human life guided by the Sixth sense would be loitering without any direction. The point at issue is how for the judgment is just, meaningful and real to a situation?

But, in this article, an attempt is made to grasp, comprehend, compare and draw a line of distinction between the judgment normally 'given' in a Court of Law and a judgment, more often than not, 'taken' by auditors in making their observations in their reports.

To judge any issue, a thorough and detailed study so as to examine its background, its impacts with all its manifestation and results, prima-facie and hidden that trigger the issues are ab- initio necessary.

The judge involved has all the time at his disposal- many a times involving different judges for sheer time taken by the process of judicial examination by regular postponement of hearings for one reason or the other before delivering judgment, primarily caused by the absence of a legally binding time frame for the delivery of judgment. As a result, cases are piling up not seeing the light of the cases bundled in the case- files- giving birth aptly to a slogan 'Delayed justice is no justice'. Perhaps, they are called 'cases' since bundled in 'cases' gaining 'dust to rest' until see the light of the day!

But, alas! What is the position of auditors? They examine the 'figures' in the books of accounts on which living figures heavily depend on. Auditors, to give a 'true and fair-view' of accounts has to study, examine and take a call on judgments on various and diverse issues that have a bearing on accounts like,

  • Where estimates/judgmental calls are involved like
    • Provision for depreciation/amortization
    • Provision for doubtful debts/advances
    • Provision for impairment
    • Provision for taxation etc
  • Where judgmental calls/estimates to be taken on
  • Pending disputed cases in revenue departments
  • Pending Court Cases at different levels

On the top of this, there is a rigid time frame for audit opinion/ report since prescribed in the respective Acts/ by Regulatory Authorities.

Very often, auditors have to examine and study the possible outcome of various cases- pending, for and against the client at different levels of appeals or languishing in the desks of government agencies gathering dusts or rotting with greedy and stubborn contractors. Since their reports are time bound, they may have to per force take an auditing decision/ judgment call before judicial verdict is out or before any settlement is reached in other disputed cases under negotiations. At times, in critical cases/issues, where it would be very difficult to decipher and hence, to take a call on judgment, they are in a predicament situation of standing between two stools; nonetheless, they have to take an auditing stand on accounting issues emanating from unsettled cases, of course with a proper disclosure. Here, they rely on the details of the cases, past experience within the entity or cases settled on similar though not identical ones, along with expert and legal opinions. It goes without saying, at this point; they are in an unenviable or vulnerable position of taking a judgment call for estimating the likely impact on the accounts even when it is a thousand dollar question as to how the judgments would turn out, in the ultimate outcome at a later date.

Besides, auditors have to take a call on 'estimates' on various undecided and unclear issues, apart from the normal ones as mentioned against a variety of provisions mentioned above. Very often, they have to address the issues that are unpredictable and at times volatile where judgment plays a major part.

To 'estimate' one should be conversant and familiar about the issue about which he has to estimate. In fact, the word 'estimate' is built on the word 'mate' Class mates know each other in his/her class and hence, he/she knows to whom to be referred for any doubt or clarification on various subjects like math, science etc. depending on the ones proficiency on a particular subject. Similarly, Mr. M.S/Dhoni knows, as a captain of the cricket team, who should open the battings, who should be placed at different points in the field and how to rotate the bowlers under him. What it coveys speak for itself-- a person should be acquainted with the subject about which one is to estimate.

But, at times, it so happens that on certain accounting issues, auditors' exposure is not sound or clear enough to take a judgment call. There comes his experience to go for consultation within /outside the organization- independent expert and legal views so as to facilitate a judgment call as to the accounting treatment to be given to the figures in the books, as the doctors go for scans or other advanced tests to diagnose diseases afflicted to living figures.

As compared to the judicial judgment, auditors' judgmental call is onerous and arduous due to the following reasons:

  • Court judgments are orders binding on the parties to the dispute; Audit reports are opinions/ observations.
  • Court judgments are appealable; but, audit reports? Not appealable but may be exposed to disciplinary action in case of dereliction of duty.
  • Courts have their own jurisdiction- High Courts have their own jurisdiction. Supreme Court utmost to the boundaries of Union of India. But, what about audit reports? With globalization and multinationals' stocks quoted across stock exchanges throughout the world, the reach of the audit reports is global/ phenomenal since stakeholders heavily rely on their reports; possible, if at a future date the stakeholders are fortunate enough to settle in outer Planets, the reach of audit reports may go beyond glob
  • Therefore, 'true and fair view' is the kernel of audit opinion
  • Then, what is 'Report' in Audit Report?

With all these and above, auditors have to deliver their reports within the time frame as explained earlier while the courts have more than ample time to deliver judgments

Auditors, therefore, are to be better understood for their reports as to 'true and fair value' since they have to pen their reports even when the out- come of certain issues on which they have to lace their observations are at- times any body's guess and wide open on the date of reports; and hence based on best of judgments.

While Courts could give their verdicts/judgments with an authority of an order since all possible and plausible evidences have been gone through, auditors could give only their observations based on their judgmental calls on pending issues, for reasons copiously dealt with earlier in the article. It is why Courts have to be 'accountable' for their judgments, while audits have to take a call on 'judgment' generally known as 'judgmental call', in certain areas of audit while accounting!

As spelt out earlier, Audit is to give a report giving an opinion on the financial statements on 'the 'true and fair view' for a specified a period to the members of an entity.

What is true and fair view is already dealt with earlier profusely. Now let us see what is 'Report'?

'Report' is built on the word 'port'. In import, the same materials exported from the other end exactly received. In export, the same materials exported from the end exactly received in the other end. If one travels by air from an airport, the same person lands in the destination airport In portrayal, it should be realistic and convincing. In portal, what is fed is shown in the web. Audit Report is no different but to echo the 'true and fair view'

Conclusion:

Formats and contents of the Audit Report are not handled here since available copiously in SAs/ACTs/Regulatory requirements. The Spirit and soul of the article are its essence. The writer has written different articles on audit and the essence of those are culled out to have a better feeling.


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