The auditor while conducting an audit should critically examine' the accounting policies
adopted by the client and test them for conformity with the accounting standards and
recommendations of the Institute. The Companies Act, 1956, as well as many other
statutes require that the financial statements of an enterprise should give a true and fair
view of its financial position and working results. This requirement is implicit even in the
absence of a specific statutory provision to this effect. However, what constitutes a 'true
and fair' view has not been defined either in the Companies Act, 1956 or in any other
statute. The pronouncements of the Institute seek to describe the accounting principles
and the methods of applying these principles in the preparation and presentation of
financial statements so that they give a true and fair view. The 'Preface to the Statements
of Accounting Standards' issued by the Institute in 1979 states as under:
"While discharging their attest function, it will be the duty of the members of the Institute
to ensure that the Accounting Standards are implemented in the presentation of financial
statements covered by their audit reports. In the event of any deviation from the
Standards, it will be also their duty to make adequate disclosures in their reports so that
the users of such statements may be aware of such deviations."
In cases where no pronouncement of the Institute exists, the auditor should examine the
acceptability of the said accounting policy. The view presented in the financial statements
of an enterprise of its state of affairs and of the profit or loss can be significantly affected
by the accounting policies followed in the preparation and presentation of the financial
statements. The accounting policies followed vary from enterprise to enterprise.
Disclosure of significant accounting policies followed is necessary if the view presented is
to be properly appreciated. It is also quite clear that there is no single, list of accounting
policies which are applicable to all circumstances. The differing circumstances in which
enterprises operate in a situation of diverse and complex economic activity make
alternative accounting principles and methods of applying those principles acceptable.
The choice of the appropriate accounting principles and the methods of applying those
principles in the specific circumstances of each enterprise calls for considerable
judgement by the management of the enterprise. SA 200A on "Objective and Scope of
the Audit of Financial Statements", requires auditor to determine whether the relevant
information is properly disclosed in the financial statements by considering the
judgements that management has made in preparing the financial statements;
accordingly, the auditor assesses the selection and consistent application of accounting
policies, the manner in which the information has been classified, and the adequacy of
disclosure.
Thus, the auditor should determine himself as to whether or not the said treatment is
consistent with the basic principles of accounting. Therefore, it would not be correct to
state that the auditor need not review the accounting policies unless there is a change in
the basis of accounting.
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