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AUDIT REPORTS

By: CA. Pankaj Garg

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Elements of Auditor’s Report

Title Addressee Opening or Introductory Paragraph Scope Paragraph Opinion Paragraph Date of the Report Place of signature Auditor’s signature.

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Opening or Introductory Paragraph

It covers the followings aspects: Identification of financial statements that

have been audited; Date and period covered by the financial

statements; Management responsibility for preparation of

financial statements; Auditor’s responsibility for expression of

opinion.

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Opening paragraph - Illustration

“We have audited the attached Balance Sheet of M/s______ as at 31st March ____ and also the Profit and Loss account for the year ended on that date annexed thereto. These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these financial statements based on out audit”.

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Scope Paragraph

It covers the followings: Describing the scope of audit by standing that

audit was conducted in accordance with AAS.Requirement of AAS that auditor should

obtain reasonable assurance that the financial statements are free of material misstatement.

Auditors believing that their audit provides a reasonable basis for their opinion.

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Scope Paragraph - Illustration

“We conducted out audit in accordance with the AAS generally accepted in India. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion”.

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Opinion Paragraph

It covers the followings aspects: Auditor’s opinion about true and fair

view of financial statements. Reporting on various matters required

by law.

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Opinion Paragraph – Illustration

In our opinion and to the best of our information and according to the explanations given to us, the financial statement gives a true and fair view in conformity with the accounting principles generally accepted in India.

In the case of Balance Sheet, of the state of affairs of the M/s____ as at 31st March _____.

In the case of Profit and Loss Account of the profit/loss for the year ended on that date.

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Types of Audit Reports

Types of Reports

Unqualified Modified Disclaimer of Opinion

Do not affect Opinion Affect Opinion

Qualified Adverse

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Unqualified Reports

An opinion is said to be unqualified when the auditor concludes that the financial statements give a true and fair view in accordance with the financial reporting framework used for the preparation and presentation of the financial statements.

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Unqualified Report

An Unqualified Report indicates the followings: Financial Statements have been prepared using the

generally accepted accounting principles. Financial Statements comply with relevant statutory

requirements and regulations. All material matters have been adequately disclosed. Effect of any change in the accounting policies have

been properly determined and disclosed in the financial statements.

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Modified Reports

An Report other than unqualified is said to be MODIFIED. As per AAS – 28, an auditor’s report is considered to be modified when it includes:

(a) Matters that do not affect the auditor’s opinion – with emphasis of matter

(b)Matters that do affect the auditor’s opinion – Qualified Reports and adverse Reports

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MODIFIED REPORT - WITH EMPHASIS OF MATTER

The circumstances in which the modified report may be issued are: Where the going concern question is not resolved & adequate disclosures have been made in the financial statements. There is a significant uncertainty (other than

going concern) the resolution of which depends upon future events & which may affect the financial statements.

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Emphasis of Matter - Example

“Without qualifying our opinion, we draw attention to Note __ of Schedule __ to the financial statements. The entity is the defendant in a lawsuit alleging infringement of certain patent rights and claiming royalties and punitive damages. The entity has filed a counter action, and preliminary hearings and discovery proceedings on both actions are in progress. The ultimate outcome of the matter cannot presently be determined, and no provision for any liability that may result has been made in the financial statements”.

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Qualified Audit Reports

A qualified audit report is one where an auditor gives an opinion on the truth and fairness of financial statements, subject to certain reservations.

A qualified opinion should be expressed when the auditor concludes that –

(a) An unqualified opinion cannot be expressed; or

(b) The effect of any disagreement with management is not so material as to require an adverse opinion;

(c) The limitation on scope is not so material as to require a disclaimer of opinion.

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Circumstances which demand qualified report

Auditor is unable to obtain necessary information & explanations.

Proper books of account have not been kept by the company.

Balance Sheet and Profit and Loss Account are not in agreement with the books of account and returns.

Profit and Loss account & the balance sheet do not comply with the Accounting Standards.

If there is contravention of the provisions of Companies Act having a bearing on the accounts and transactions of the company.

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Disclaimer of Opinion

The auditor while performing his work may come across several instances where he fails to obtain sufficient information to warrant an expression of opinion, and thus, is unable to form an opinion, he issues a disclaimer of opinion. Accordingly, the auditor may state that he is unable to express an opinion because he has not been able to obtain sufficient and appropriate audit evidence to form an opinion”.

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CARO, 2004

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Applicability of CARO 2004

CARO, 2004 is applicable to all types of companies including a foreign company, but shall not apply to:

1. A banking company;

2. An insurance company;

3. Sec. 25 Company; and

4. A private limited company:

- paid up capital & reserves does not exceeds Rs. 50 lakh;

- outstanding loan does not exceeds Rs. 25 Lakhs,

- turnover does not exceed Rs. 5 crore.

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CARO 2004 – Fixed Assets

whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets;

whether these fixed assets have been physically verified by the management at reasonable intervals; whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the books of account; and

if a substantial part of fixed assets have been disposed off during the year, whether it has affected the going concern.

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CARO 2004 – Inventories

whether physical verification of inventory has been conducted at reasonable intervals by the management;

are the procedures of physical verification of inventory followed by the management reasonable and adequate in relation to the size of the company and the nature of its business. If not, the inadequacies in such procedures should be reported; and

whether the company is maintaining proper records of inventory and whether any material discrepancies were noticed on physical verification and if so, whether the same have been properly dealt with in the books of account.

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CARO 2004 – Loan and Advances

has the company granted any loans, secured or unsecured to companies, firms or other parties covered in the register maintained u/s 301 of the Act. If so, give the number of parties & amount involved in the transactions;

whether the rate of interest & other terms of loans given by the company, are prima facie prejudicial to the interest of the company;  

whether receipt of the principal amount & interest are regular;

if overdue amount is more than Rs. 1,00,000, whether reasonable steps have been taken by the company for recovery of the principal & interest;

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CARO 2004 – Loan and Advances

has the company taken any loans, secured or unsecured from companies, firms or other parties covered in the register maintained u/s 301 of the Act. If so, give the number of parties & amount involved in the transactions;

whether the rate of interest and other terms of loans taken by the company, are prima facie prejudicial to the interest of the company; and

whether payment of the principal amount & interest are also regular.”

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CARO 2004 – Internal Control

Is there an adequate internal control system commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods and services? Whether there is a continuing failure to correct major weaknesses in internal control system.

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CARO 2004 – Contracts in Which Directors Interested

whether the particulars of contracts or arrangements referred to in section 301 of the Act have been entered in the register required to be maintained under that section; and

whether transactions made in pursuance of such contracts or arrangements have been made at prices which are reasonable having regard to the prevailing market prices at the relevant time;”

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CARO 2004 – Internal Audit

In the case of listed companies and/or other companies having a paid up capital and reserves exceeding Rs. 50 lakhs as at the commencement of the financial year concerned, or having an average annual turnover exceeding five crore rupees for a period of three consecutive financial years immediately preceding the financial year concerned, whether the company has an internal audit system commensurate with its size and nature of its business.

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CARO 2004 – Cost Records

Where maintenance of cost records has been prescribed by the Central Government under clause (d) of sub-section (1) of section 209 of the Act, whether such accounts and records have been made and maintained.

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CARO 2004 – Statutory Dues

is the company regular in depositing undisputed statutory dues including PF, Investor Education and Protection Fund, ESI, Income-tax, Sales-tax, Wealth tax, Service tax, Custom Duty, Excise Duty, cess and any other statutory dues with the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than 6 months from the date they became payable.

in case taxes have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending shall be mentioned.

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CARO 2004 – Others

whether the company has given any guarantee for loans taken by others from bank or financial institutions, the terms and conditions whereof are prejudicial to the interest of the company;

whether term loans were applied for the purpose for which the loans were obtained;

whether the funds raised on short-term basis have been used for long term investment; If yes, the nature and amount is to be indicated;

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CARO 2004 – Others

whether security or charge has been created in respect of debentures issued?

whether the management has disclosed on the end use of money raised by public issues and the same has been verified;

whether any fraud on or by the company has been noticed or reported during the year; if yes, the nature and the amount involved is to be indicated.

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Nov. 02 (4 + 4 Marks)

Q. No. 1: State your views on the following: The Auditor does not agree with affirmations made in the financial statements.

Q. No. 2: State your views on the following: The auditor fails to obtain sufficient information to form an overall opinion on the matters contained in the financial statements.

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May & Nov. 03 (3 Marks)

Q. No. 3: Comment: No cost accounting records are maintained though the company is required to maintain the same.

Q. No. 4: Comment on the following: ABC Ltd. has not deposited provident fund contributions of Rs.20 lakhs to the authorities, but accounted in the books.

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Nov. 05 (4 Marks)]

Q. No. 5: As an auditor, comment on the following: SK Ltd. has fully computerised its accounting operations. The stock records are maintained up to date with timely entries passed for all receipts and issues. The company has hired a professional security agency, which monitors and implements a close vigilance over the operations of the company. As such, the company had dispensed with the practice of taking stock of their inventories at the year end as in their opinion the exercise is redundant, time consuming and intrusion to normal functioning of the operations.

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May 06 (5 Marks)

Q. No. 6: As an auditor, comment on the following situations/statements: X Ltd., to whom Companies (Auditor’s Report) Order, 2003 is applicable, has issued 9% Debenture of Rs. 5 crores, redeemable after 5 years and used the proceeds of issue for payment of Sundry Creditors and other Current Liabilities of Rs. 2.80 crores.

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Nov. 06 (4 Marks)

Q. No. 7: As an Auditor, comment on the following situations/statements: JKT Ltd. having Rs. 40 lacs paid up capital, Rs. 9.50 lacs reserves and turnover of last three consecutive financial years, immediately preceding the financial year under audit, being Rs. 4.90 crores, Rs. 4.50 crores and Rs. 6 crores, but does not have any internal audit system. In view of the management, internal audit system is not mandatory.