Independent audit report is given to the shareholders of the company which is independent of the management. Audit Report is the communication to the shareholders by which an auditor expresses his opinion about the financial statement of the company audited by him. Audit report is an important aspect in the audit process. Auditor collects evidence about financial statement for the audit by different method. Audit evidence and materiality of statement are the core concepts in audit report. The Companies Act 1956 lays down the requirement of audit report.
A shareholder who has received the Annual Report for the financial year 2012-13 may notice the changes in the auditors report in general and in its title in particular. The new auditors’ report is now titled as “Independent Auditors’ Report”. The new Auditors’ Report among other things , has several paragraph headings now viz., Reprt on the financial statements, Management’s Responsibility for the financial statements , Auditors’ Responsibility , opinion and Report on other Legal and Regulatory requirement .
The auditors’ report along with Annexure to the Auditors’ report for audits of financial statements for periods beginning on or after 1st April 2012 have to be issued in the revised auditors’ report format, as prescribed in the Revised Standard on Auditing (SA) 700, forming an opinion and reporting on financial statements.
.Companies (Audit Report) Order 2003 (CARO) applies to all Companies, including foreign company’s defined u/s.591 of the Companies Act. However, the order is not applicable the to following companies:
(i) A banking company
(ii) An insurance company
(iii) A company registered u/s.25 of the Act
(iv) A private limited company which satisfies the following conditions:
(a) Its paid up capital and reserves do not exceed Rs.50 lacs;
(b) It has not accepted any public deposits;
(c) Its turnover does not exceed Rs.5 crores; and
(d) Its outstanding loan from any bank or financial institution does not exceed Rs.10 lacs.
If any of the above conditions are not satisfied, the above order will apply to the private limited company.
Provisions of Companies Act 1956 regarding the contents of Audit Report:
As per section 227(2) of the Companies Act, 1956 the auditor is required to make a report to the shareholders of the company.
1. On the account examined by him
2. On every balance sheet and profit and loss account and
3. On every document by law to be annexed to the balance sheet and profit and loss account which before the company in general meeting
Sec. 227(3) The auditors’ report shall also state-
(a) whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purposes of his audit;
(b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books, and proper returns adequate for the purposes of his audit have been received from branches not visited by him;
(bb) whether the report on the accounts of any branch office audited under section 228 by a person other than the company’ s auditor has been forwarded to him as required by clause (c) of sub- section (3) of that section and how he has dealt with the same in preparing the auditor’ s report;
(c) whether the company’s balance sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns.
Further any observations or comments of the auditors which have any adverse effect on the functioning of the company need to be in thick type or in italics and if any point in the report is answered in the negative or with a qualification, the auditors’ report shall also state the reason for the answer.
Qualified Audit Report:
A qualified report means an audit report which is not clean. In case auditor has any reservation in respect of certain methods mentioned in the financial statements he may qualify his report. A qualified opinion shall be expressed as being subject of or except for the effects of the matter to which the qualification matters. If the accounting standards issued by Institute of Chartered Accounts of India is not followed by the company the auditor may qualify his report.
In addition as per CARO the auditor may qualify in his report in respect of inventories, Fixed Assets, loan given or taken by the company, internal control procedures, internal audit system, acceptance of public deposits, maintenance of cost records, payment of statutory dues, transaction prejudicial to the interests of the company, etc.
Whenever the auditor expresses an opinion that is other than unqualified, a clear description of all the substantive reasons should be included in the report and, unless impracticable, a quantification of the possible effect(s), individually and in aggregate, on the financial statements should be mentioned in the auditors’ report. In circumstances where it is not practicable to quantify the effect of modifications made in the audit report accurately, the auditor may do so on the basis of estimates made by the management after carrying out such audit tests as are possible and clearly indicate the fact that the figures are based on management estimates. Ordinarily, this information would be set out in a separate paragraph preceding the opinion or disclaimer of opinion and may include a reference to a more extensive discussion, if any, in a note to the financial statements.
Few Examples of qualification in Auditors’ report and the director’s reply:
1. Auditors’ Report regarding arrears of statutory dues:
According to the information and explanations given to us, there are no undisputed amounts payable in respect of Provident Fund, Employees’ State Insurance, Income tax, Sales tax, Service tax, Customs duty, Excise duty and other material statutory dues that were in arrears as at 30th June 2012 for a period of more than six months from the date they become payable except for income tax amounting to Rs. 100000 which is outstanding for more than six months as at 30th June 2011.
Board’s Reply:
The amount of Rs. 100000 is related to Minimum Alternate Tax provision for the earlier years. The Company is under BIFR. The payment is being taken up for waiver under the Rehabilitation Scheme.
2. Auditors’ Report on accumulated losses:
The Company has accumulated losses amounting to Rs. 10000000 at the end of the financial year which exceeds its net worth of Rs. 6000000
Board’s Reply:
In view of the accumulated loss exceeding the net worth, the company was referred to the BIFR and has been declared sick by the BIFR.
3. Auditors’ Report on Short Term Funds:
According to the information and explanations given to us and on an overall examination of the balance sheet of the company, we report that short term funds amounting to Rs. 1000000 have been used for long term purposes.
Board’s Reply:
The said amount represents excess of current liabilities over the current assets. This is caused due to current financial situations of the Company, wherein it has carried forward accumulated losses of Rs. 19700000 in its balance sheet.
In addition as per CARO the auditor may qualify in his report in respect of inventories, Fixed Assets, loan given or taken by the company, internal control procedures, internal audit system, acceptance of public deposits, maintenance of cost records, payment of statutory dues, transaction prejudicial to the interests of the company, etc.
New Auditors’ Report and Qualified Opinion
In the new Auditors’ report whenever the auditor is required to qualify he has to give qualified opinion. Standards on Auditing (SA) are issued by Auditing and Assurance Standards Board (AASB) under the authority of the Council of ICAI. The following standards are applicable in connection with qualified opinion in audit report.
SA700 Forming and Opinion and Reporting on Financial Statements:
The auditor shall form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. In order to form that opinion, the auditor shall conclude as to whether the auditor has obtained reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. The auditor shall express an unmodified opinion when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
SA705 Modifications to the Opinion in Independent Auditors’ Report:
If the auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement or is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement, the auditor shall modify the opinion in the auditors’ report in accordance with the financial statements prepared in accordance with the requirements of a fair presentation framework. If the financial statements do not achieve fair presentation, the auditor shall discuss the matter with management and, depending on the requirements of the applicable financial reporting framework. And how the matter is resolved shall determine whether it is necessary to modify the opinion in the auditors’ report in accordance with SA 705.
Types of Modifications in the opinion:
Clean Opinion means when there is no qualification or reservation in the Audiors’ Report. The auditor may modify his opinion as given below:
1. Qualified Opinion: This type of opinion occurs where the auditor either on the basis of evidence obtained or otherwise, concludes that misstatements are material but not pervasive to the financial statements.
2. Adverse Opinion: An adverse opinion is issued when the effect of a disagreement is so material and pervasive to the financial statements with appropriate audit evidence that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements.
3. Disclaimer Opinion: A disclaimer opinion is expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and is, accordingly, unable to express an opinion on the financial statements. For example if the accounts are signed by the central excise department, the company will not furnish any record. In such case disclaimer opinion will be expressed by the auditor.
In accordance with Section 227 the modified opinion (qualification ) should be mentioned in bold and italics.
SA706 Emphasis of Matter Paragraph and Other Matter Paragraph in the Independent Auditors’ Report
A paragraph included in the auditors’ report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditors’ judgment, is of such importance that it is fundamental to users’ understanding of the financial statements. An Emphasis of Matter paragraph is not a substitute for either the auditor expressing a qualified opinion or an adverse opinion, or disclaiming an opinion, when required by the circumstances of a specific audit engagement.
Whenever there is a modified opinion, emphasis of matters relating to the financial statements may be disclosed for the understanding of the members if the auditor thinks necessary.
Director’s Reply in Board Report on Qualification by the Auditor.
According to Section 215 the annual accounts must be first signed by the Directors and then by the Auditors. As per Section 217 of the Companies Act, 1956 the Board’s Report should contain necessary clause giving explanations to the qualifications in the Audit Report. In lieu of this the board’s report can be signed after the audit report is signed.
Pursuant of section 217 of the Companies Act, the directors of the company have to give reply for the qualifications mentioned in the audit report as per section 227 of the companies act by the statutory auditors.
In accordance with Section 217(3) of the Companies Act, the Board of Directors shall bond to give fullest information and explanations in its report in an addendum to that report on every reservation, qualification or adverse remark contained in the auditors’ report.
As per Secretarial Standard 10 issued by the Institute of Company Secretaries of India, New Delhi, the board’s report should contain the information and explanations on every reservation, qualification or adverse remarks contained in the auditors’ report. The report should also specify any point in auditors’ report on the annual financial statements on which a difference of opinion has arisen.
The report should also provide an explanation for each qualification contained in the auditors’ report along with the circumstances necessitation the qualification, likely impact on the financial statements and the corrective measures that are proposed to be taken.
In case the auditors’ remarks are not available to the board at the time of consideration and authentication of the balance sheet and profit and loss account, the board has to subsequently consider the reservations and qualifications made in auditors’ report and give their explanations to the said remarks as an addendum to the report.
Qualification in Auditors’ Report and Annual Filing in Form 23AC and 23ACA:.
Form 23 AC & 23 ACA
In annual filing of form 23 AC & 23 ACA, the details of qualifications, reservation or adverse remarks made by the auditor along with director’s comments on the qualification of the auditors as per Board Report are to be furnished in the respective boxes.
In Form 23AC the following points in respects of auditors report is to be filled up.
Auditors’ Comment on the items specified under Companies (Audit Report) Order, (CARO) 2003 and it is to be stated whether the auditors’ comments on report in respect of the following points are favorable, unfavorable and disclaimer are not applicable.
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. Particulars:
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Auditor comments on the report and any one of the following which is applicable is to be filled up : Favorable remark, Unfavorable remark or Disclaimer remark clause not applicable. |
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Favorable |
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Favorable |
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Favorable |
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Favorable |
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Favorable |
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Favorable |
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Favorable |
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Favorable |
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Favorable |
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Clause not applicable |
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Favorable |
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Favorable |
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Favorable |
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Clause not applicable |
Qualification in Audit Report and Listed Companies:
SEBI has, vide circular dated August 13, 2012 providing for the “Manner of Dealing with Audit Reports filed by Listed companies”, mandated listed companies to submit either Form A (Unqualified/ Matter of Emphasis Report) or Form B (Qualified/ Subject To/ Except For Audit Report) along with the Annual Report to the Stock Exchanges. It is also envisaged that the qualified audit reports will be scrutinized by Qualified Audit Review Committee (QARC) and if necessary, the company will be required to restate its books of accounts.
As per the SEBI circular dated August 13, 2012 listed entities would be required to file annual audit reports with the stock exchanges along with specified applicable Forms
Form A: ‘Unqualified’ / ‘Matter of Emphasis Report’ or
Form B: ‘Qualified’ / ‘Subject To’ / ‘Except For Audit Report’
These forms shall be signed by the Chief Executive Officer/Managing Director, Chief Financial Officer, Auditor and Chairman of the Audit Committee
SEBI will establish a Qualified Audit Report Review Committee (QARC) comprising representatives from the Institute of Chartered Accountants of India (ICAI), the stock exchanges and other stakeholders, to review the qualified reports. In cases where the QARC determines that the qualifications are significant and explanations given by company are unsatisfactory, the audit report shall be referred to the Financial Reporting Review Board (FRRB) of the ICAI.
If the FRRB opines that the qualification is justified, SEBI may mandate a restatement of accounts of the entity and require the entity to inform its shareholders through an announcement to the respective stock exchanges.
The FRRB reviews general-purpose financial statements of certain enterprises to determine, to the extent possible:
• Compliance with generally accepted accounting principles in the preparation and presentation of financial statements;
• Compliance with disclosure requirements prescribed by regulatory bodies, statutes and rules and regulations relevant to the enterprise; and
• Compliance with reporting obligations of the enterprise as well as the auditor.
The FRRB reviews are designed to improve the overall quality of financial reporting in India. The FRRB can refer its findings to the relevant regulatory authorities like SEBI for further action.
SEBI has clarified vide its circular dated 5-6-2013 that the restatement of books of accounts mentioned in the SEBI Circular dated 13-8-2012 shall mean that the company is required to disclose the effect of revised financial accounts by way of revised pro-forma financial results immediately to the shareholders through Stock Exchange(s). However, the financial effects of the revision may be carried out in the annual accounts of the subsequent financial year as a prior period item so that the tax impacts, if any, can be taken care of.
To conclude the reply by the Board in the Directors’ report given by some companies is vague and general. Management of company has to give proper importance for the qualification made in the auditors’ report. In view of SEBI’s effort to review the qualification in the auditors’ report of listed companies and Ministry of Corporate Affairs is monitoring the balance sheets which has qualified audit reports , it is essential now that all the companies should ensure and keep the accounts in such a way not to have any qualified opinion in the Auditors’ Report from the auditor and even if the qualified opinion is unavoidable, efforts should be taken by the management without delay to rectify the situation at the earliest. Now the shareholders and directors shall give importance to the Independent Audit Report.
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N. SRIDHARAN
Practicing Company Secretary
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