Guidance Note on Revision of the Audit Report

The following is the text of the Guidance Note on Revision of the Audit Report issued by the Council of the Institute of Chartered Accountants of India

This Guidance Note aims to provide guidance to members regarding revision of the audit report after the same has been issued, in case the auditor considers necessary to do so. It lays down the procedures to be followed by the auditor who, subsequent to the date of his report, becomes aware that facts may have existed at that date which might have afftected his report had he been aware of such facts at the time of inssuance of the audit report. Accordingly, the Guidance Note does not apply to situations arising from developments occuring after the date of the audit report; neither does it apply to situations where, after issuance of the audit report, final determinations or resolutions are made of contingencies or other matters which had been disclosed in the financial statements or which had resulted in qualification / disclaimer / adverse opinion in the original audit report.

A revision of the audit report may be warranted in several instances involving reasons such as apparent mistakes, wrong information about facts, subsequent discovery of facts existing at the date of the audit report, etc. The nature and range of instances may vary from one enterprise to another depending upon facts and circumstances. As it encompasses variety of conditions which might be encountered, these procedures are set out only in general terms for guidance of members and for having uniform approach in such cases. Members are advised to exercise professional judgement depending upon the actual facts and circumstances of the case.

The revision of the audit report would mean issuing a revised audit report as per procedure hereafter provided. The auditor under no circumstances is permitted to withdraw in any manner whatsoever the audit report once issued. However, the auditor may take steps to prevent reliance on the audit report issued by him in the manner hereafter provided.

It must be appreciated that the revision of the audit report is a matter of great significance since confidence of the stakeholders rests on the opinion expressed by the auditor in the audit report. The Guidance Note recognises that though the instances of revision of the audit report may be rare in actual practice, members are expected to exercise care and caution in view of the significance of the matter. Such a step on the part of the auditor not only demonstrates the independence of auditor to act in a free and fair manner but would also enhance confidence of the public at large in the profession.

It is clarified that revision of audit report does not absolve the member from the professional misconduct, if any, committed by him.

The Framework for SAPs and Guidance Notes on Related Services issued by the Institute of Chartered Accountants of India distinguishes between audit and related services. As per the Framework, related services comprise of reviews, agreed-upon procedures and compiliation. The Guidance Note is applicable whenever an audit or related services is carried out. Therefore, the reference to the "audit report" includes any report that may be issued pursuant to audit or related services rendered to the entity. It may be noted that reference to financial statements in the Guidance Note may be construed as reference to financial or other such statements which may be the subject matter of report.

It may be clarified that the auditor has no obligations to perform auditing procedures or make any enquiry regarding the audited financial statements after the auditor has signed the report. The responsibility to inform the auditor, of such facts which existed on the date of the report, primarily rests with management. However, the auditor may come to know of such facts through other sources also.

As stated above, the management is expected to inform the auditor of any facts which existed on the date of the audit report which may affect the financial statements. When auditor becomes aware of such facts which may affect the financial statements, the auditor may consider whether the financial statements need amendment and discuss the matter with the management and may advise the management to revise the financial statements. When management agrees with the auditor's suggestion and decides to revise the financial statements then while reporting on such revised financial statments, members are expected to follow the Guidance Note on Audit Report on Revised Accounts of Companies Before Circulation of Shareholders. Members may not that the said Guidance Note also deals with the manner of revisinig the audit report under circumstances mentioned therein. Further, members' attention is also invited to the Guidance Note on Revision / Rectification of Financial Statments dealing with auditor's responsibility in case of revision / rectification of balance sheet and profit and loss account of a company already adopted by the company at its annual general meeting.

When an auditor considers that :

• amendment in financial statements is not warranted, or
  
   

• when he adivises amendment to financial statements as above but the management does not intend to revise the same, or
  
   

• when management agrees for revision in financial statements but is unable to do so despite its bonafide intentions but management extends its cooperation to the auditor and agrees to ensure that anyone in receipt of the previously issued financial statements together with the audit report thereon is informed of the situation and would be issued the revised audit report, the auditor may then consider issuing the revised report as under:
  
   

• Refer to the earlier report issued by the auditor on the financial statements; and
  
  State the reasons for revising the report.

In case of corporate entities, the auditor may consider revising the report till the accounts are adopted at annual general meeting. But in case of entities which are not required to adopt accounts by any such body, the auditor may consider revision of the audit report within a reasonable time having regard to prevailing circumstances but not later than issuance of the audit report for the accounts of immediately next accounting period.

A situation may also arise where the auditor is a continuing one, the auditor may consider that it may not be necessary to revise the financial statements and issue a revised report in view of the fact that appropriate disclosures are made in the financial statements to be released pertaining to the immediate following period when such situation is imminent.

When management neither agrees for revision of financial statements as laid down in para 8 nor takes steps as narrated in paara 9 above, the auditor wold notify those persons ultimately responsible for the overall direction of the entity that action will be taken by the auditor to prevent future reliance on the audit report. The steps that can appropriately be taken will depend upon the degree of certainity to the auditor's knowledge that there are persons who are currently relying or who will rely on the financial statements and the audit report, and who would attach importance to the information and the auditor's ability as a practical matter to communicate with them. The action taken will depend on the auditor's legal rights and obligations and the recommendations. In appropriate circumstances the auditor may consider seeking legal advice. The auditor may take the following steps to the extent applicable:

1. Notify the client that the audit report must no longer be associated with the financial statements.
   
    

2. Notify Regulatory Agencies having jurisdiction over the client that the audit report should not longer be relied upon. The Registrar of Companies, the Securities and Exchange Board of India, Reserve Bank of India, Income-tax Department, Insurance Regulatory and Development Authority or any other Governmental Regulatory body are appropriate agencies for this purpose as to entitites within their jurisdiction.
   
    

3. Making an appropriate statement at the annual general meeting, if requested by the Chairman.

When management neither agrees to revise the financial statements nor agrees to ensure that anyone in receipt of the proviously issued financial statements and audit report thereon will be informed of the situation and would be issued revised audit report, the auditor may also conclude that withdrawal from the further engagement with the entity is necessary. Factors that would affect the auditor's conclusion include the implications of the involvement of the highest authority within the entity which may affect the reliability of management representations, and the effects on the auditor of continuing association with the entity. In appropriate circumstances, the auditor may consider seeking legal advice.

In case of an auditor being a partnership firm, it is recommended that the partner who signed the original audit report, should also sign the revised report or the letter indicating preventing reliance on the audit report, as the case may be. In case of signing by any other partner the reasons thereof should be stated.