What is Audit?
This is not a model question for a CA IPCC/Intermediate exam!
Perhaps this may not be asked for examinations.
That does not mean that we do not need an answer.
The profession of Auditing has a long history and has different pedigrees which includes Company Audit, Government Audit, Local Authority Audit etc. and there are the recently evolved ones like Tax Audit, VAT Audit and GST Audit.
Chartered Accountants and Cost Accountants only are entitled to conduct Company Audit and Cost Audit respectively and GST Audit is the domain of both.
Now what is ‘Audit’?
Institute of Chartered Accountants of India issues technical standards relating to audit which is mandatorily to be complied by all Chartered Accountants. If one goes through the Standards on Auditing (known as SAs) it can be seen that the term Audit is nowhere defined!
But was it never defined? The answer is no. It was well defined. But ‘once upon a time’.
AAS 1 (Basic principles governing an audit) which was in force till being substituted by SA 200 (Revised) In 2010 defined an audit as follows;
“An audit is the independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon.”
That is to say the output of the process of audit is an opinion.
Section 227(2) of the companies Act 1956 is fully reproduced as Section 143(2) of the Companies Act 2013, but excluding four key words “whether in his opinion”. So, it is alarming to note that the word opinion has been omitted in the revised versions of SA 200 and Sec 227(2) of the Companies Act.
Does this really mean that the ICAI and GOI has come to the stand that Auditor’s report is not an expression of opinion, but a statement of fact?
Not quite so, since Sec 143(9) of Companies Act 2013 states that every auditor shall comply with the auditing standards and as per para 6 of SA 700 the objectives of the auditor are:
(a) To form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained; and
(b) To express clearly that opinion through a written report.
But it is a fact that the idea expression of ‘opinion’ has been filtered out from Sec 227(2) of the 1956 Act, when it took re-incarnation as Sec 143(2) of the 2013 Act.
Now NFRA is a reality. What if in the course of proceedings against a Company auditor a stand is taken by NFRA that auditor’s report is not an opinion citing SA 200 and 143(2) of the 2013 Act, how an auditor will be able to defend himself on the ground that his report is an opinion formed by Professional judgement and two persons can have different opinion?
This is particularly important because the word “opinion” was there earlier, but has been later omitted by the ICAI and Parliament.
Under such a scenario can an auditor take shelter behind SA 700 and put up a defense that what he has given is an opinion. If some authority takes a stand that those paragraphs in the Standards on Audit which are inconsistent with the Companies Act are inoperative.
These may be viewed as slightly paranoid. But is it really? What was the intention in omitting the four words In the Sec 143(2) of Companies Act 2013?
Now when it comes to GST Audit it is altogether different
Section 2(13) CGST Act 2013 defines Audit as “audit means the examination of records, returns and other documents maintained or furnished by the registered person under this Act or the rules made thereunder or under any other law for the time being in force to verify the correctness of turnover declared, taxes paid, refund claimed and input tax credit availed, and to assess his compliance with the provisions of this Act or the rules made there under.”
Here it is clearly defined as the varication of correctness and not any expression of opinion.
Now, advocates are also demanding that they also may be made eligible for issuing compliance certificate under Sec 35(5) of the CGST Act 2017. The reasons include “Audit means verification/examination and depending on purpose are classified as energy audit, environmental audit etc. They had made attempts to be made eligible for tax audits u/s 44AB also on similar grounds.
Section 35(5) of CGST Act is as follows;
“Every registered person whose turnover during a financial year exceeds the prescribed limit shall get his accounts audited by a chartered accountant or a cost accountant and shall submit a copy of the audited annual accounts, the reconciliation statement under sub-section (2) of Section 44 and such other documents in such form and manner as may be prescribed.”
Rule 80(3) of the CGST Rules 2017 is as follows;
“Every registered person whose aggregate turnover during a financial year exceeds two crore rupees shall get his accounts audited as specified under sub-section (5) of section 35 and he shall furnish a copy of audited annual accounts and a reconciliation statement, duly 58 certified, in FORM GSTR-9C, electronically through the common portal either directly or through a Facilitation Centre notified by the Commissioner.”
Here it not ‘fairness’ but ‘correctness’!
Here also there is nothing about opinion.
The declaration to be signed by a CA/CMA in Form No 9 (C) is as follows;
“I hereby solemnly affirm and declare that the information given herein above is true and correct to the best of my knowledge and belief and nothing has been concealed there from.”
Has the word ‘Audit’ lost its meaning?
If what the Legislature wants in GST laws is a certification of facts only then should it be called an audit?
6. The objectives of the auditor are:
(a) To form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained; and (b) To express clearly that opinion through a written report.
Paragraph 13(k) of SA200(R) (Overall objectives of an independent auditor and the conduct of an audit in accordance with the SAs) defines Professional Judgement as follows;
Professional judgement means the application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.
It has been clarified under SA 800 (special considerations—audits of financial statements prepared in accordance with special purpose frameworks) In India, financial statements prepared for filing with income tax authorities are considered to be general purpose financial statements.
The statutory format of 3CB also contains the clauses which requires the auditor to give opinion’ on true and fairness of financial statement and on the correctness of particulars stated in Form 3CD.
(Author is a CA from Kottayam (Kerala) and can be reached at email@example.com)