The ICAI had pursuant to the issuance of the Revised SA 700, “Forming an Opinion and Reporting on Financial Statements”, prescribed a revised format of the auditor’s report on financial statements. As per SA 700 an auditor shall modify the opinion in the audit report when:

a) the auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from
material misstatements

b) the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement Considering the materiality and the pervasiveness of the effects or possible effects on the financial statements, the auditor may issue a modified report with a:

a) Qualified opinion

b) Adverse Opinion

c) Disclaimer of Opinion

Also, SA 700 requires the auditor to clearly lay down management’s responsibility and auditor’s responsibility. This revised format has been made effective in respect of audits of financial statements for periods beginning on or after 1st April 2012. Considering the fact that SA700 is applicable to non-corporate entities also, ICAI had suggested certain changes vide its letter No. ICAI/DTC/2013-14/Rep-25 dated 7th February, 2014 to the Under Secretary (TPL-III) in Format of Form No. 3CB so as to
enable our members to comply with guidelines issued by its Council.

The suggested draft format of a clean report has been submitted to the Under Secretary (TPL-III), CBDT vide its letter No. ICAI/DTC/2013-14/Rep-25 dated 7th February, 2014. The modifications in the report i.e. qualification, adverse opinion, disclaimer of opinion, may be reported by the auditor accordingly.

Source- Pre-budget Memorandum 2014 on direct taxes by ICAI

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Category : Income Tax (25549)
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Tags : ICAI (2200) Statutory Audit (108)

6 responses to “ICAI suggestions on Applicability of SA -700 on form of audit reports”

  1. BSKRAO says:

    Whatever suggestion ICAI (Financials) place before the Govt., it seems to be in the interest of the Govt. But in reality, it results in complicating the law & goes in the financial interest of its members ONLY. This is how ICAI (Financials)keep the Govt. in DARK ROOM.

  2. B.S.K.RAO says:

    CERTIFIED PUBLIC ACCOUNTANTS ARE ALLOWED TO PRACTICE TAX LAW BY VIRTUE OF U.S.TREASURY CIRCULAR 230 ONLY IN UNITED STATES OF AMERICA. THEN WHY IN INDIA LIKE THIS. IE, MONOPOLY OF CAs OVER TAX LAW PRACTICE ? CAUSING STRICT HURDLE FOR VOLUNTARY COMPLIANCE

  3. B.S.K.RAO says:

    How to Recognize Unauthorized Practice of Law

    By Ron Klein

    There are several practice areas in which CPAs can find themselves interpreting laws for clients, thereby crossing the boundary between what is allowed and what is not allowed.

    The only areas where CPAs are allowed to interpret laws for clients are federal, state and local taxation, as long as the legal principles being interpreted do not extend beyond tax law.

    U.S. Treasury Circular 230 allows CPAs to represent tax clients’interests before the Internal Revenue Service, which means CPAs may need to: 1) analyze and interpret how tax laws apply to particular client fact patterns; and 2) consult with tax clients regarding the resulting analyses and interpretations. Many states have adopted Circular 230 as part of their own state regulations.

    Almost all states have statutes or regulations prohibiting the
    unauthorized practice of law (UPL). Some states, such as New Jersey, have strict interpretations of UPL, even when using incorporation services or prepared forms. Always check your own state laws before using such services and forms.

    CPAs should consult an attorney when a tax issue involves legal principles that extend beyond tax law, or when any other type of issue or engagement involves legal principles that need to be interpreted for clients. Clients will sometimes apply pressure on the CPA firm to provide legal services in order to avoid a fee from a law firm, but CPAs who yield to such pressure may find themselves being sued for UPL.

    Following are some guidelines for areas where CPAs need to consult an attorney:-

    •Legal principles extending beyond the practice of federal tax law; e.g., partnership taxation issues when the CPA is analyzing obligations created by the partnership agreement, agreements with creditors, and any side agreements among the parties.

    •Issues requiring interpretations of state or local law; e.g.,partnership taxation, real estate taxation, estate and gift taxation, and business valuation issues, especially when family limited partnerships (FLPs) or family limited liability companies (FLLCs) are used.

    •Issues presenting a mix of legal, tax and accounting questions; e.g., entity choices and classifications, as in limited liability companies (LLCs) and limited liability partnerships (LLPs), and estate and gift taxation.

    •Formation or liquidation of legal entities; e.g., corporations,
    partnerships, estates and trusts or both, or any entity that requires the drafting of organizational documents.

    •Agreements and documents for mergers, acquisitions, dissolutions, liquidations, employment, compensation, stock option plans or severance.

    •Any consulting services involving a legal component; e.g., compensation and benefits planning, and personal financial planning (PFP) when the formation of trusts or other estate planning or asset protection techniques are involve
    __________________________________________________________________________
    Ron Klein, J.D., CFE, is vice president of claims with Camico. Recipient of the 2002 Award for Outstanding Conference Speaker from the Education Foundation of the California Society of CPAs, Klein co-authored the CPA’s Guide to Loss Prevention Practices and CPA’s Guide to Effective Engagement Letters.

  4. rbmunotassociates says:

    Good work Mr. BSK Rao sir… keep it up

  5. B.S.K.RAO says:

    Practicing Law Without a License?
    By Michael A. Gould, CPA/ABV/CFF, ASA, CFE, CVA
    September 2, 2011

    As the lines of many professional services continue to blur, CPAs are often called upon to extend their roles into practice areas that bump dangerously close into another profession’s turf. The pressure to create “value- added” services has led CPAs to become facilitators for solving just about everything, from technology, capital requirements and real estate, to mergers and acquisitions, insurance and investments. However, when our role as “most trusted advisor” leads to performing services that many consider the practice of law, serious concerns arise. For example, it is not uncommon for CPAs to assist in the formation of new entities, such as corporations, partnerships and Limited Liability Companies (LLCs) using internet incorporation services or directly with the New Jersey Department of Treasury. Some CPA firms even employ an attorney who performs such legal services, as the drafting of wills and trusts.
    Are these services crossing the line? Is it wise to have an attorney on staff? By performing certain legal services for the client, do CPAs put themselves at risk, or are they merely redefining/expanding the role of the profession?

    Forming Corporations, Partnerships and LLCs
    When it comes to helping a client form or reform a legal entity, the law was modified on June 13, 2011 with the issuance of Opinion 47 from the Committee on the Unauthorized Practice of Law (“Committee”), appointed by the New Jersey Supreme Court. However, while a little gray, still is fairly well-defined on its position regarding CPA restrictions.

    Prior to Opinion 47:
    The Committee ruled in Opinion 2 (May 15, 1969) on the following question:
    “May an accountant, not a member of the bar of New Jersey, acting for another, prepare a Certificate of Incorporation for filing with the Secretary of State of New Jersey?” The opinion states:
    “It is the opinion of this committee that such action constitutes the unauthorized practice of law.” The opinion goes on to state, “The preparation of the corporate charter, by-laws and resolutions and related activities such as merging, consolidating and dissolving corporations, issuing corporate securities, increasing and decreasing capital stock all require expert legal skill and knowledge, and constitute the practice of law.”

    The answer was clear: CPAs should steer clear of the formation of new entity service, or risk being found practicing law without a license. In addition, using internet services providers for formation services, according to Opinion 2, also violated the New Jersey Supreme Court’s ruling. The Court’s Opinion 2 states:

    “The fact that the certificate of incorporation follows a prepared form available to the public generally will not mitigate the offense of unlawful practice, since the discretion and judgment exercised in determining the proper contents and the consequences thereof fall within the province of an attorney.”

    The Committee reiterated its Opinion 2 in Opinion 12 (January 4, 1973) when the same Supreme Court Committee was asked “May a corporation, engaged in the business of selling pension plans to professional organizations, offer, for a stated fee, payable to the corporation, to have all incorporation papers prepared by the corporation’s attorney and to complete and file with theInternal Revenue Service a qualified corporation trust agreement?”

    The committee’s response was definitive:
    “… it is clear that the offer of a corporation to form a corporation constitutes the unauthorized practice of law. The fact that the corporation may have the incorporation papers prepared by its attorney does not mitigate the offense, as the attorney would be acting for the corporation by which he was retained, not for the principals who were interested in the formation of the corporation.”

    This statement is of particular interest, as it infers that even a CPA firm with an attorney on staff — just as the in-house attorney of the pension plan service provider — would be improperly practicing law when forming a corporation for a client other than his employer.
    The Supreme Court’s findings under Opinion 2, from a strict reading, also state that dissolving a corporation for a client would be considered an unlawful practice of law.

    The Committee issued Opinion 40 on this topic —“Businesses and Individuals Providing Services to the Public in the Preparation and Filing of Paperwork Sold in ‘Do-It-Yourself’ kits,” issued on June 21, 2004. It is interesting to note that the committee explains that the opinion arose “… from multiple grievances received from sitting judges and from other persons who complained about kits, or were given services beyond the mere purchase of the kits, or who were provided with legal assistance or advice by lay persons or non-New Jersey admitted attorneys.” This opinion reinforces opinions 2 and 12 when it states:
    “Although non-lawyers who sell ‘do-it-yourself’ kits may help the purchaser by typing, transcribing, or translating, they are not permitted to counsel, advise, analyze, or otherwise help the purchaser complete the forms in the kits.”

    In a letter to the New Jersey Society of CPAs in October 2004, the committee referenced Opinion 40, making the following request:
    “It is our hope that you would undertake to acquaint your members with the Opinion’s holding. We want to avoid wherever possible having New Jersey Certified Public Accountants brought before our committee charged with the unauthorized practice of law.”

    New Rules based on Opinion 47 issued on June 13, 2011!
    Opinion 47 modifies and reaffirms certain portions of Opinion 2. This opinion was issued in response to an inquiry by a New Jersey lawyer requesting an opinion on non-lawyers drafting corporate documents. The lawyer stated that he frequently encounters “poorly drafted operating agreements prepared by accountants or other laypeople.” In “balancing the public interest” the Committee both reaffirmed and modified certain parts of Opinion 2.

    It is important to first state what Opinion 47 reaffirmed that constitutes the unlawful practice of law without a license. The opinion states:

    “The Committee hereby reaffirms this prior opinion [Opinion 2] in part: preparing corporate operating agreements, by-laws, resolutions, and similar legal documents is the practice of law and may only be performed by lawyers.”

    The Committee determined that these documents “set forth the internal procedures and rules for the corporation” or any other type of entity. Specifically, Opinion 47 states “Drafting such documents requires discretion and sound legal judgment to anticipate potential problems and protect the client. The legal expertise of a lawyer is required.”
    So it is still clear, preparing corporate operating agreements, by-laws, resolutions, and similar legal documents by non-lawyers, including CPAs, is the unlawful practice of law without a license. CPAs should stay away from drafting these documents.

    However, Opinion 47 gives accountants some relief to provide certain entity formation services. The Committee modified Opinion 2 by allowing non-lawyers to:

    “…present to customers prepared, fill-in-the-blank certificates of incorporation, certificates of formation, statements of qualification, and certificates of limited partnership (collectively referred to as “certificates”) and type, transcribe, or translate the customers’ information in the form documents. Nonlawyers, however, may not advise or counsel the customer as to the appropriate contents of the certificates.”

    In addition, Opinion 47 singles out CPAs for what appears to be some additional leeway when it states:

    “…accountants who are licensed (i.e., certified public accountants) may advise clients as to the appropriate contents of certificates provided the licensed accountants inform their clients that assistance of counsel in the drafting of such documents is advisable.”

    This provision is similar to modified Opinion 10, referenced below, that permits CPAs to prepare and file New Jersey inheritance tax returns as long as the client is notified, in writing and before the CPA commences work on the return, that a review of the return by an attorney may be desirable due to the possible application of legal principles related to the preparation of the inheritance tax return.

    The CPA can now provide entity creation services to their clients as long as he/she informs the client that the assistance of an attorney is advisable regarding the preparation of these documents. The CPA should continue to steer clear of preparing corporate operating agreements, by-laws, resolutions, and similar legal documents which the Committee considers the practice of law that can only be performed by lawyers.

    Attorneys Employed by a CPA Firm

    The court must have had some kind of vision of the professional world converging in the future, for as early as 1964, it set rather interesting ground rules into place for the cross-employment restrictions of Legal and CPA professionals. In Opinion 23 (January 9, 1964), the court was asked: “May a member of the Bar of New Jersey engage in the practice of law in this State simultaneously with the practice of public accounting?” In response, the court’s opinion states:

    “… we find that the dual practices of law and accounting … by lawyers would not violate the Cannons of Professional Ethics. Nor does it appear to us that any other rules of our Supreme Court would be violated by such dual practices.”

    While one would expect this finding would permit CPA firms to hire lawyers to serve in practice while at the same time permit law firms to employ attorneys who also hold CPA licenses to serve dual masters, the opinion, unfortunately, does not cover CPA firms who hire attorneys. The opinion specifically addresses lawyers practicing law in New Jersey who are also CPAs and practicing public accounting. If a CPA firm employs an attorney, in order for that attorney — assuming he or she is a member of the New Jersey bar — to perform and bill legal services for clients, he or she must do so under the banner of a New Jersey law firm, not the CPA firm.

    Inheritance Tax Returns
    While it would appear that our law firm colleagues hold the winning position with respect to dual-practice issues, there is one area where the NJSCPA successfully reclaimed a small square of turf involving tax returns.
    In its Opinion 10 (November 1972), the Committee on the Unauthorized Practice of Law ruled that “… the preparation of an inheritance tax return requires the application of a gamut of legal principles, and that its preparation by a non-lawyer, acting for another, would constitute the unauthorized practice of law.”

    However, in 1986, in the matter of the Application of New Jersey Society of Certified Public Accountants, 102.N.J. 231, 242 (1986), the Supreme Court modified the ruling to allow a limited exception that permits CPAs to prepare and file inheritance tax returns as long as the client is notified, in writing and before the CPA commences work on the return, that a review of the return by an attorney may be desirable due to the possible application of legal principles related to the preparation of the inheritance tax return.

    Conclusion
    The CPA is clearly at a disadvantage in regard to extending his or her practice into areas concerning legal matters, with the exception of entity creation services. CPAs should exercise caution and keep to our roles as trusted advisors, discussing options but referring the legal work to a qualified law firm. In the end, distancing yourself from offering legal services will likely yield a referral to your firm, rather than a fine or lawsuit for practicing law without a license.

  6. B.S.K.RAO says:

    TO,

    SRI.J.SARAVANAN,
    US(TPL-III)CBDT,
    NORTH BLOCK,
    NEW DELHI-110001

    HON’BLE SIR,

    FIRSTLY,I PRAY BEFORE CBDT TO PROVIDE SECTION WISE WRONG CLAIMS REQUIRED TO BE REPORTED IN TAX AUDIT REPORT UPLOADED TO E-FILING WEBSITE OF INCOME-TAX DEPTT. IN RESPECT OF RETURN FILED FOR ASST. YEAR 2013-14 AGAINST RTI FILED BY TAX ADVOCATES THROUGHOUT INDIA. THIS ALSO CONFIRMS TO E-FILING PROJECT AGREEMENT & OBJECTIVES OF TAX AUDIT. THEN ONLY CBDT SHOULD THINK ABOUT ABOVE SUGGESTION OF ICAI (FINANCIALS) TO MAKE INCOME-TAX LAW MUCH MORE COMPLICATED. MEANWHILE CBDT SHOULD KEEP IN MIND ITS OWN 14 TAX ACCOUNTING STANDARDS ON ONE HAND & THE MOTTO OF ICAI (FINANCIALS) TO PROVIDE FULL EMPLOYMENT TO ITS MEMBERS, TROUBLING ASSESSEES, GOVT. & PUBLIC AT LARGE WITHOUT SOCIAL RESPONSIBILITY

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