Auditor’s Report is the finale of the professional work of an auditor. It also acts as a means of communication with various stakeholders of the company. After the year 2008, commonly remembered as the year of financial crisis, superior clarity in the auditor’s report was the need of the hour in so far as the stakeholder’s interest was concerned. It was felt that the auditors be given more independence to strengthen the auditor’s report by use of different types of audit opinion. Standards on Auditing (hereinafter referred to as “SA”) promote consistency in the auditor’s report. An audit conducted in accordance with the globally recognised standards endorses the creditability in the global marketplace as they help in promoting user understanding and in identifying unusual circumstances as and when they occur.
The Council of the Institute of Chartered Accountants of India in its meeting held December, 2009 postponed the effective date / applicability of the SA 700 (Revised) - Forming an Opinion and Reporting on Financial Statement, SA 705 - Modifications to the Opinion in the Independent Auditor’s Report and SA 706 - Emphasis of Matter Paragraphs in the Independent Auditor's Report, by another year and now these standards are applicable for audit of financial statements for periods beginning on or after 1st day of April, 2012. SA 700 (Revised) deals with the auditor’s responsibility to form an opinion on the financial statements. It also deals with the form and content of the auditor’s report issued as a result of an audit of financial statements.
SA 705 deals with the auditor’s responsibility to issue an appropriate report in circumstances when, in forming an opinion in accordance with SA 700 (Revised), the auditor concludes that a modification to the auditor’s opinion on the financial statements is necessary. SA 706 deals with additional communication in the auditor’s report when the auditor considers it necessary to draw users’ attention to a matter or matters presented or disclosed in the financial statements that are of such importance that they are fundamental to users’ understanding of the financial statements; or draw users’ attention to any matter or matters other than those presented or disclosed in the financial statements that are relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.
ILLUSTRATIVE FORMAT OF AUDITOR’S REPORTS ON FINANCIAL STATEMENTS:
Independent Auditor’s Report
To the Members of ABC Company Limited
Report on the Financial Statements
We have audited the accompanying financial statements of M/s ABC Company Limited (‘the Company’) which comprise the Balance Sheet as at 31st March 20XX, the Statement of Profit and Loss and Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation of these financial statements that give a true and fair view of the financial position, financial performance and cash flows of the Company in accordance with the Accounting Standards referred to in sub-section (3C) of section 211 of the Companies Act, 1956 (“the Act”). This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion and to the best of our information and according to the explanations given to us, the financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India:
(i) in the case of the Balance Sheet, of the state of affairs of the Company as at 31st March, 20XX;
(ii) in the case of the Statement of Profit and Loss, of the profit / loss for the year ended on that date; AND
(iii) in the case of Cash Flow Statement, of the cash flows for the year ended on that date.
Report on Other Legal and Regulatory Requirements
1. As required by the Companies (Auditor’s Report) Order, 2003 (“the Order”), as amended, issued by the Central Government of India in terms of sub-section (4A) of section 227 of the Act, we give in the Annexure a statement on the matters specified in paragraphs 4 and 5 of the Order.
2. As required by section 227(3) of the Act, we report that:
a. we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit;
b. in our opinion proper books of account as required by law have been kept by the Company so far as appears from our examination of those books [and proper returns adequate for the purpose of our audit have been received from branches not audited by us](1);
c. the Balance Sheet, the Statement of Profit and Loss and Cash Flow Statement dealt with by this Report are in agreement with the books of account [and with the returns received from branches not visited by us](2);
d. in our opinion, the Balance Sheet the Statement of Profit and Loss and Cash Flow Statement comply with the Accounting Standards referred to in subsection (3C) of section 211 of the Companies Act, 1956;
e. on the basis of written representations received from the directors as on 31st March, 20XX, and taken on record by the Board of Directors, none of the directors is disqualified as on 31st March, 20XX, from being appointed as a director in terms of clause (g) of sub-section (1) of section 274 of the Companies Act, 1956;
f. Since the Central Government has not issued any notification as to the rate at which the cess is to be paid under section 441A of the Companies Act, 1956 nor has it issued any Rules under the said section, prescribing the manner in which such cess is to be paid, no cess is due and payable by the Company.(3)
For XYZ and Co.
Firm’s Registration Number
(Name of the Member Signing the Audit Report)
Place of Signature:
Basis for Modification Paragraph in the Auditor’s Report
When the auditor modifies the opinion on the financial statements, the auditor shall, in addition to the specific elements required by the SA 700 (Revised), include a paragraph in the auditor’s report that provides a description of the matter giving rise to the modification. The auditor shall place this paragraph immediately before the opinion paragraph in the auditor’s report and use the heading “Basis for Qualified Opinion”, “Basis for Adverse Opinion”, or “Basis for Disclaimer of Opinion”, as appropriate.
Emphasis of Matter Paragraph in the Auditor’s Report
When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the auditor shall:
(a) Include it immediately after the Opinion paragraph in the auditor’s report;
(b) Use the heading “Emphasis of Matter”, or other appropriate heading;
(c) Include in the paragraph a clear reference to the matter being emphasised and to where relevant disclosures that fully describe the matter can be found in the financial statements; and
(d) Indicate that the auditor’s opinion is not modified in respect of the matter emphasised.
Other Matter Paragraph in the Auditor’s Report
If the auditor considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report and this is not prohibited by law or regulation, the auditor shall do so in a paragraph in the auditor’s report, with the heading “Other Matter”, or other appropriate heading. The auditor shall include this paragraph immediately after the Opinion paragraph and any Emphasis of Matter paragraph, or elsewhere in the auditor’s report if the content of the Other Matter paragraph is relevant to the Other Reporting Responsibilities section.
By CA Rahul Sethia
(1) To be included if relevant.
(2) To be included if relevant.
(3) Attention of the readers is invited to the Announcement issued by the Council of the ICAI regarding the auditor’s reporting responsibilities pursuant to clause 4(ix)(a) of the Companies (Auditor’s Report) Order, 2003 and section 227(3)(g) of the Companies Act, 1956 w.r.t the cess payable under Section 441A of the Companies Act, 1956.