Disclaimer in auditors' report

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Querist : Anonymous

Querist : Anonymous (Querist)

15 February 2010 Due to some different procedures followed by the foreign parent company, the indian company is asked to reverse the revenue of previous year in current year. Due to this reversal, the net profit is getting turned into Net losses. The question is:

1) What type of report (i.e Qualified, discliamer or adverse)to be issued in such scenario where the profit is getting converted into losses of current year?

2) Why with reason

3) Please give some real examples to set the past precedents.

4) How this reversal shall be disclosed in the financial statements i.e extra ordinary item or something else?

Thanks

Querist : Anonymous

Querist : Anonymous (Querist)

28 February 2010 Is any one who can answer the question? please.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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21 July 2024 In the scenario where the Indian company is required to reverse revenue from a previous year, resulting in a current year net loss, the auditors would typically issue a Qualified Opinion in their audit report. Here’s an explanation and further details:

1. **Type of Audit Report: Qualified Opinion**
- A Qualified Opinion is issued when the financial statements of a company are fairly presented except for a specific issue that the auditors believe is not pervasive enough to warrant an Adverse Opinion but is significant enough to require mention.
- In this case, the reversal of revenue from a previous year leading to a current year net loss is a significant issue that affects the comparability and accuracy of the financial statements.

2. **Reason for Qualified Opinion:**
- The reversal of revenue from a previous year is a material adjustment that impacts the current year financial statements.
- Auditors are unable to confirm the accuracy of the adjustments made, as they are based on procedures and requirements from the foreign parent company.
- Therefore, the auditors cannot express an unqualified opinion on the financial statements due to the material impact of this adjustment.

3. **Real Examples/Precedents:**
- **Satyam Computers Case (2009):** The auditors gave a Qualified Opinion due to material misstatements in financial statements.
- **Kingfisher Airlines Case:** Auditors issued a Qualified Opinion due to uncertainties about the company's ability to continue as a going concern.
- **IL&FS Case:** Auditors issued a Qualified Opinion due to concerns over significant financial irregularities and defaults.

4. **Disclosure in Financial Statements:**
- The reversal of revenue should be disclosed as a material adjustment in the financial statements.
- Depending on the materiality and nature of the adjustment, it may be disclosed separately as an extraordinary item or within the notes to the financial statements explaining the impact on the current year's results.

**Additional Considerations:**
- The auditors should provide clear explanations in the audit report regarding the nature, timing, and extent of the adjustment made to the financial statements.
- Management's responsibility is to ensure that the financial statements comply with accounting standards and present a true and fair view of the company's financial position.

In summary, the issuance of a Qualified Opinion in such scenarios reflects the auditors' concern over the material impact of the revenue reversal on the financial statements. It ensures transparency and clarity for stakeholders regarding the accuracy and reliability of the financial information presented.

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